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Global Credit Research - 02 Aug 2010
Ba2 rating assigned to planned new $750 first lien notes
New York, August 02, 2010 -- Moody's Investors Service affirmed its B2 Corporate Family and Probability
of Default ratings and all of its other debt ratings of Continental Airlines,
Inc. ("Continental") including on the Enhanced Equipment
Trust Certificates. Moody's upgraded its Speculative Grade
Liquidity rating of Continental to SGL-2 from SGL-3.
The ratings outlook is negative.
Moody's also assigned a Ba2 rating to the planned issuance by Continental
of $750 million of first lien senior secured notes due 2015 ("Notes").
The Notes will be guaranteed on a senior secured basis by Continental's
subsidiaries Air Micronesia, Inc. ("AMI") and
Continental Micronesia, Inc. ("CMI").
Certain route authorities between the U.S. and Japan and
China and the U.S. and London Heathrow, slots and
gates or facility access required to operate service under the certain
route authorities, and the assets and capital stock of AMI and CMI
serve as the collateral of the Notes.
"The affirmation of the B2 Corporate Family rating recognizes Continental's
improved operating performance, higher cash balance and stronger
credit metrics achieved since the end of 2009," said Moody's
Airline Analyst, Jonathan Root. "The affirmation also
signifies the potential for Moody's to maintain the B2 rating if
the proposed merger with UAL Corporation (B3 corporate family, on
review for upgrade) is completed under terms that enable the combined
entity to achieve the potential revenue and cost synergies that have been
identified," continued Root. However, the outlook
remains negative because of the industry's weak track record in
successfully executing large business combinations, the need to
negotiate new unified contracts for the respective labor groups that will
provide the merged company with a competitive cost structure and uncertainty
about the sustainability of the recent growth of demand, particularly
from corporate customers.
The upgrade of the Speculative Grade Liquidity rating to SGL-2
reflects the increase in the unrestricted cash, cash equivalents
and short-term investments ("Cash") balance to about
$3.5 billion at June 30, 2010 and anticipation that
Cash could remain above $3.2 billion through the seasonal
trough that typically occurs in the fourth calendar quarter. The
announced Note offering will provide a significant amount of new debt
capital, $350 million of which will refinance a credit facility
due in June 2011. The balance will be used for general corporate
purposes and reduces the extent to which additional capital may be needed
to meet other 2011 debt maturities.
The B2 Corporate Family Rating considers Continental's well established
business position serving business and leisure passengers, with
strong hubs in Houston, Texas; Newark, New Jersey;
and Cleveland, Ohio. Moody's estimates that credit
metrics in upcoming quarters are likely to remain indicative of the single-B
category, notwithstanding that it expects year-on-year
growth of airline operating metrics to slow because of more difficult
comparisons and the potential of a modest slowdown in demand if forecasts
of tepid global GDP growth are realized. The B2 rating also reflects
Moody's opinion that the average price of a barrel of oil is likely
to remain below $90 in upcoming quarters, which should prevent
the recurrence of the high-fuel price induced stress on liquidity
and credit metrics that took place in 2008 and 2009. Please see
page 6 of Moody's Industry Outlook for the Global Integrated Oil
industry published on July 28, 2010 available on moodys.com
for its current oil price assumptions. Continental maintains unit
cost and contribution margin per available seat mile measures (each not
stage length adjusted) that are competitive with its legacy carrier peers.
Importantly, Continental has continued to upgrade its fleet with
new aircraft purchases and has completed the addition of winglets to its
narrow-body aircraft, which should help to lower its fuel
We anticipate little upwards pressure on the ratings before the closing
of the merger. The ratings could be downgraded prior to the completion
of the merger if the cost of jet fuel was to significantly increase above
$2.60 per gallon or if Cash was to fall below $2.5
billion. The generation of negative free cash flow, Debt
to EBITDA that is sustained above 6.5 times or Funds from operations
+ interest to interest of below 2.0 times could also negatively
affect the ratings. Moody's could stabilize the outlook upon
the closing of the merger if it expects the company to have a labor cost
structure that is competitive with its U.S. peers and the
U.S. regulatory review does not require the carriers to
divest a significant number of routes or hubs in the U.S.
The inclusion of upstream and downstream guarantees of each other's
debt obligations could also positively affect ratings on certain instruments
as determined by Moody's Loss Given Default Rating Methodology.
The principal methodology used in rating Continental is Moody's Global
Passenger Airlines, published in March 2009 and available on www.moodys.com
in the Rating Methodologies sub-directory under the Research &
Ratings tab. Other methodologies and factors that may have been
considered in the process of rating Continental can also be found in the
Rating Methodologies sub-directory on Moody's website.
The last rating action on Continental was on May 3, 2010 when Moody's
affirmed the B2 Corporate Family rating and kept the ratings outlook at
..Issuer: Continental Airlines Finance Trust II
....Preferred Stock Preferred Stock,
Downgraded to LGD6, 95% from LGD6, 93%
..Issuer: Continental Airlines, Inc.
....Senior Unsecured Conv./Exch.
Bond/Debenture, Downgraded to LGD5, 74% from LGD5,
....Senior Unsecured Regular Bond/Debenture,
Downgraded to LGD5, 74% from LGD5, 71%
..Issuer: Continental Airlines, Inc.
....Speculative Grade Liquidity Rating,
Upgraded to SGL-2 from SGL-3
..Issuer: Continental Airlines, Inc.
....Senior Secured Regular Bond/Debenture,
Assigned Ba2, LGD2, 21%
Continental Airlines, Inc. based on Houston Texas,
is the world's fifth largest airline as measured by the number of
scheduled miles flown by revenue passengers in 2009.
Michael J. Mulvaney
MD - Corporate Finance
Corporate Finance Group
Moody's Investors Service
Vice President - Senior Analyst
Corporate Finance Group
Moody's Investors Service
Moody's Investors Service
Moody's affirms B2 CFR of Continental Airlines; outlook negative
250 Greenwich Street
New York, NY 10007
No Related Data.
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