Approximately $2.4 billion of debt securities affected
NOTE: On June 01, 2014, the press release was revised as follows: In the Regulatory Disclosures section, added the Canada Ancillary Disclosure as the fourth paragraph. Revised release follows.
Toronto, April 07, 2014 -- Moody's Investors Service affirmed Air Canada's B3 corporate family rating
(CFR), B3-PD probability of default rating, B1 first
lien senior secured rating, Caa1 second lien senior secured rating
and SGL-2 speculative grade liquidity rating. Moody's
also assigned a Caa2 rating to the company's US$300 million
proposed senior unsecured notes issue. Air Canada's 2013-1
Class A, Class B and Class C Pass Through Trust Certificates were
also affirmed at Baa2, Ba3, and B2, respectively.
The outlook for Air Canada and its Pass Through Trust Certificates have
been changed to positive from stable.
Affirmations:
..Issuer: Air Canada
.... Corporate Family Rating, Affirmed
B3
.... Probability of Default Rating,
Affirmed B3-PD
.... Speculative Grade Liquidity Rating,
Affirmed SGL-2
.... First Lien Senior Secured, Affirmed
B1 (LGD3, 32% from LGD2, 24%)
.... Second Lien Senior Secured, Affirmed
Caa1 (LGD 5, 75% from LGD 4, 58%)
..Issuer: Air Canada 2013-1 Pass Through Trusts
....Senior Secured Enhanced Equipment Trust
May 15, 2018, Affirmed B2
....Senior Secured Enhanced Equipment Trust
May 15, 2021, Affirmed Ba3
....Senior Secured Enhanced Equipment Trust
May 15, 2025, Affirmed Baa2
Assignments:
..Issuer: Air Canada
....Senior Unsecured Regular Bond/Debenture,
Assigned Caa2 (LGD5, 88%)
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
RATINGS RATIONALE
"The change in Air Canada's outlook to positive is underpinned
by the significant reduction in its underfunded pension position,
which has helped lower its adjusted financial leverage to around 6x",
said Darren Kirk, Vice President and Senior Credit Officer with
Moody's. "The company's improved balance sheet
may support a ratings upgrade in the next 12-18 months should we
gain confidence that benefits from Air Canada's fleet renewal (capacity
addition) plans and cost reduction initiatives will outweigh foreign exchange
headwinds and intensifying competitive pressures, resulting in additional
deleveraging", added Kirk.
Proceeds from the new notes issuance will increase Air Canada's
pro-forma cash position to about $2.5 billion.
While its pro-forma leverage will increase modestly (to 6.1x
from 5.9x including Moody's standard accounting adjustments for
leases and pension), it will also help Air Canada to maintain good
liquidity through at least 2014. Moody's expects Air Canada's significant
aircraft purchases will contribute to about $400 million of free
cash flow consumption in 2014 with additional cash requirements including
about $200 million of surplus pension contributions (in excess
of current service costs) and $374 million in current debt maturities.
Air Canada's liquidity arrangements also benefit from its backstop financing
arrangements for its committed aircraft expenditures (totaling $678
million in 2014) and its $100 million unused revolver.
Air Canada's B3 corporate family rating incorporates the company's
high financial leverage and Moody's expectation that foreign exchange
headwinds and significant capacity additions planned by Air Canada and
its primary domestic (and lower-cost) competitor will likely limit
near term earnings growth. The rating also considers the company's
high cost structure (and low operating margin) arising from its legacy
carrier status and Moody's expectation that Air Canada's annual
free cash flow will be modestly consumptive into the medium term as capital
expenditures remain elevated due to significant planned aircraft purchases.
Favorably, the rating reflects Air Canada's meaningful scale,
expected benefits from its cost improvement initiatives, relatively
favorable recent operating performance, leading market share of
domestic, trans-border and international routes in and out
of Canada, and benefits from its position in the Star Alliance network.
Air Canada's debt instrument ratings have been assigned pursuant
to Moody's loss-given-default (LGD) methodology.
Moody's previously applied a one notch down override to instrument
ratings suggested by the LGD methodology given the potential that the
underfunded pension amount (an unsecured obligation) would decline,
and the associated lift to the secured ratings would reduce. Given
the decline in Air Canada's pension position, Moody's
has now eliminated the override.
Moody's uses its estimates of current market value when assessing the
loan-to-value ("LTVs") of an enhanced equipment trust certificate
("EETC") financing. Moody's estimates the peak LTVs
of the A, B and C tranches at about 52%, 74%,
and 87%, respectively. The peak LTVs are expected
to occur at the first distribution date of May 15, 2014.
The EETC ratings also reflect Moody's opinion of the importance
of the five Boeing B777-300ER aircraft that collateralize the transaction
to the company's long-haul network strategy, the international
interests subject to the Cape Town Convention and the support of the Class
A and Class B liquidity facilities.
The positive ratings outlook reflects the potential that Air Canada's
rating may be upgraded over the next 12-18 months should Moody's
gain confidence that the company's international expansion plans
and cost reduction initiatives will support further earnings growth and
enable additional deleveraging.
An upgrade of Air Canada's CFR could occur if the company continues
to execute on its expansion plans and cost reduction initiatives providing
Moody's with confidence that Air Canada will maintain adjusted leverage
below 6x and cash above 15% of revenues.
Downward rating pressure on Air Canada's CFR could occur if Air
Canada's yields contract materially without an accompanying reduction
to costs, if Moody's expected Debt/ EBITDA to rise and be
sustained above 8x or should cash trend towards 10% of revenues.
The principal methodology used in this rating was the Global Passenger
Airlines published in May 2012 and Enhanced Equipment Trust and Equipment
Trust Certificates published in December 2010. Other methodologies
used include Loss Given Default for Speculative-Grade Non-Financial
Companies in the U.S., Canada and EMEA published in
June 2009. Please see the Credit Policy page on www.moodys.com
for a copy of these methodologies.
Headquartered in Saint-Laurent, Quebec, Air Canada
is the largest provider of scheduled passenger services in Canada.
Revenues for 2013 were approximately $12.4 billion.
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 rating action on the support provider and in relation to each particular
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 rating action, and
whose ratings may change as a result of this 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 rating has been disclosed to the rated entity or its designated agent(s)
and issued with no amendment resulting from that disclosure. Regulatory
disclosures contained in this press release apply to the credit rating
and, if applicable, the related rating outlook or rating review.
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.
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.
Darren M. Kirk
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
Moody's Changes Air Canada's Outlook to Positive; Rates New Notes Caa2
