Approximately US$2.5 Billion of Debt Securities Affected
Toronto, August 30, 2016 -- Moody's Investors Service, ("Moody's") affirmed
Air Canada's B1 corporate family rating (CFR), B1-PD probability
of default rating, Ba3 first lien senior secured rating, B2
second lien senior secured rating, B3 unsecured notes rating and
SGL-2 speculative grade liquidity rating. Air Canada's 2013-1
and 2015-2 Pass Through Trust Certificates were also affirmed at
their respective ratings. The outlook for Air Canada and its Pass
Through Trust Certificates have been changed to positive from stable.
"The positive outlook reflects our expectation that Air Canada could
maintain leverage below 4x despite a large capital spend program and market
capacity additions," said Jamie Koutsoukis, Moody's
Vice President, Senior Analyst. "Air Canada's
ongoing cost improvement initiatives and continued lower jet fuel prices
support to the company's ability to maintain the improved credit
metrics achieved in 2015," she added.
Outlook Actions:
..Issuer: Air Canada
....Outlook, Changed To Positive From
Stable
..Issuer: Air Canada 2013-1 Pass Through Trusts
....Outlook, Changed To Positive From
Stable
..Issuer: Air Canada Series 2015-2 Pass Through
Trusts
....Outlook, Changed To Positive From
Stable
Affirmations:
..Issuer: Air Canada
.... Probability of Default Rating,
Affirmed B1-PD
.... Speculative Grade Liquidity Rating,
Affirmed SGL-2
.... Corporate Family Rating, Affirmed
B1
....Senior Secured Bank Credit Facility,
Affirmed Ba3(LGD3)
....Senior Secured Regular Bond/Debenture,
Affirmed B2(LGD5)
....Senior Secured Regular Bond/Debenture,
Affirmed Ba3(LGD3)
....Senior Unsecured Regular Bond/Debenture,
Affirmed B3(LGD5)
..Issuer: Air Canada 2013-1 Pass Through Trusts
....Backed Senior Secured Enhanced Equipment
Trust Nov 15, 2026, Affirmed A3
....Backed Senior Secured Enhanced Equipment
Trust Nov 15, 2022, Affirmed Ba1
....Backed Senior Secured Enhanced Equipment
Trust May 15, 2018, Affirmed Ba3
..Issuer: Air Canada Series 2015-2 Pass Through
Trusts
....Senior Secured Enhanced Equipment Trust
Jun 15, 2029, Affirmed A1
....Senior Secured Enhanced Equipment Trust
Jun 15, 2029, Affirmed A3
....Senior Secured Enhanced Equipment Trust
Jun 15, 2025, Affirmed Ba1
RATINGS RATIONALE
Air Canada's B1 corporate family rating (CFR) primarily reflects
its strong market position in the duopolistic Canadian market, our
expectation that adjusted debt/EBITDA will remain around 4x, aided
by low fuel prices and strong load factors even while rapidly increasing
capacity. This is offset by high (but improving) operating costs
as a legacy carrier and our expectation that its substantial capital commitments
will result in negative free cash flow generation over the next few years,
though this could be mitigated by sale leaseback transactions that are
planned by the airline. The rating also reflects foreign exchange
volatility, exposure to fuel costs and the risk of market capacity
additions exceeding demand.
The change in outlook of the EETCs accompanies the change in outlook of
Air Canada. EETC ratings are assigned by applying notching to an
issuer's CFR, factoring in protective features such as (1) the importance
of the aircraft collateral to the airline's network; (2) a legal
framework that provides timely access to collateral following an insolvency
where the airline no longer wants to use the aircraft; (3) liquidity
facilities that fund a number of interest payments following the rejection
of an EETC financing; and (4) the equity cushion.
Five Boeing B777-300ER delivered new between June 2013 and February
2014 secure the Series 2013-1 transaction. Two B777-300ERs
and three Boeing B787-9s delivered in 2015 secure the Series 2015-2
transaction.
Some pressure on the values of B777-300ERs relative to expectations
in 2013 has modestly lowered the equity cushion for the 2013-1
transaction versus Moody's original expectations, but not sufficiently
to cause the rating agency to reduce the notching relative to the CFR.
The ratings of the EETCs reflect Moody's belief that Air Canada would
retain the aircraft in each transaction under a reorganization scenario
because of their relatively young age and the importance of these models
to the long-haul network over the 12-year lives of each
transaction.
Any combination of future changes in the underlying credit quality or
ratings of Air Canada, unexpected material declines in the market
value of the aircraft and/or an unexpected significant reduction in the
size of Air Canada's long haul network could lead to changes to
the ratings of Air Canada's EETCs.
Air Canada's has good liquidity (SGL-2), supported by C$3.2
billion of cash and short-term investments at June 30, 2016
and a C$301 million unused committed revolver due September 2018.
These sources are more than sufficient to fund mandatory annual debt repayments
around C$230 million for the remainder of 2016 and C$690
million in 2017. We expect Air Canada's ongoing aircraft purchases
will contribute to about C$900 million of negative adjusted free
cash flow in the 18 months from June16. Air Canada has flexibility
to raise capital from asset sales to boost liquidity should the need arise.
The positive outlook balances our expectation that Air Canada could maintain
leverage below 4x against a large capital spend program (aircraft order
book will likely be funded largely with new debt), market capacity
additions and economic headwinds in Canada.
An upgrade could occur if Air Canada effectively executes its expansion
plans and cost reduction initiatives while sustaining adjusted Debt/EBITDA
below 4x and EBIT/Interest above 2.5x. Downward rating pressure
could occur if Air Canada sustains adjusted Debt/EBITDA above 5x and EBIT/Interest
towards 1.5x. Deterioration in liquidity could also cause
a downgrade.
The principal methodology used in rating Air Canada was Global Passenger
Airlines published in May 2012. The principal methodology used
in rating Air Canada 2013-1 Pass Through Trusts and Air Canada
Series 2015-2 Pass Through Trusts was Enhanced Equipment Trust
and Equipment Trust Certificates published in December 2015. Please
see the Ratings Methodologies page on www.moodys.com for
a copy of these methodologies.
Air Canada is the largest provider of scheduled airline passenger services
within, and to and from Canada. Revenue for the twelve months
ended March 31, 2015 was C$13.5 billion. The
company is headquartered in Saint-Laurent, Quebec,
Canada.
REGULATORY DISCLOSURES
For ratings issued on a program, series or category/class of debt,
this announcement provides certain regulatory disclosures in relation
to each rating of a subsequently issued bond or note of the same series
or category/class of debt or pursuant to a program for which the ratings
are derived exclusively from existing ratings in accordance with Moody's
rating practices. For ratings issued on a support provider,
this announcement provides certain regulatory disclosures in relation
to the credit rating action on the support provider and in relation to
each particular credit rating action for securities that derive their
credit ratings from the support provider's credit rating.
For provisional ratings, this announcement provides certain regulatory
disclosures in relation to the provisional rating assigned, and
in relation to a definitive rating that may be assigned subsequent to
the final issuance of the debt, in each case where the transaction
structure and terms have not changed prior to the assignment of the definitive
rating in a manner that would have affected the rating. For further
information please see the ratings tab on the issuer/entity page for the
respective issuer on www.moodys.com.
For any affected securities or rated entities receiving direct credit
support from the primary entity(ies) of this credit rating action,
and whose ratings may change as a result of this credit rating action,
the associated regulatory disclosures will be those of the guarantor entity.
Exceptions to this approach exist for the following disclosures,
if applicable to jurisdiction: Ancillary Services, Disclosure
to rated entity, Disclosure from rated entity.
The relevant office for each credit rating is identified in "Debt/deal
box" on the Ratings tab in the Debt/Deal List section of each issuer/entity
page of the Website.
The below contact information is provided for information purposes only.
Please see the ratings tab of the issuer page at www.moodys.com,
for each of the ratings covered, Moody's disclosures on the
lead analyst and the Moody's legal entity that has issued the ratings.
The rating has been disclosed to the rated entity or its designated agent(s)
and issued with no amendment resulting from that disclosure.
Moody's has not provided advisory services but may have provided
Ancillary or Other Permissible Service(s) to the rated entity, its
related third parties and/or the party that requested the rating within
the past two years (including during the most recently ended fiscal year).
Please see the special report "Ancillary or other permissible services
provided to entities rated by MIS's credit rating agency in Canada"
on the ratings disclosure page www.moodys.com/disclosures
on our website for further information.
Regulatory disclosures contained in this press release apply to the credit
rating and, if applicable, the related rating outlook or rating
review.
Please see www.moodys.com for any updates on changes to
the lead rating analyst and to the Moody's legal entity that has issued
the rating.
Please see the ratings tab on the issuer/entity page on www.moodys.com
for additional regulatory disclosures for each credit rating.
Jamie Koutsoukis
Vice President - Senior Analyst
Corporate Finance Group
Moody's Canada Inc.
70 York Street
Suite 1400
Toronto, ON M5J 1S9
Canada
(416) 214-1635
Donald S. Carter, CFA
MD - Corporate Finance
Corporate Finance Group
(416) 214-1635
Releasing Office:
Moody's Canada Inc.
70 York Street
Suite 1400
Toronto, ON M5J 1S9
Canada
(416) 214-1635
