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Rating Action:

Moody's affirms Delta Air Lines' Baa3 senior unsecured rating, assigns Baa1 senior secured rating to SkyMiles IP Ltd.; outlook negative

14 Sep 2020

New York, September 14, 2020 -- Moody's Investors Service ("Moody's") affirmed all of its debt ratings for Delta Air Lines, Inc. ("Delta"), including the Baa2 senior secured rating assigned to the company's term loan obligations and the Baa3 senior unsecured rating. The ratings outlook is negative.

Moody's also assigned Baa1 senior secured ratings to the planned new debt obligations of first-time issuer, SkyMiles IP Ltd. ("SMIP"), a newly-created indirect wholly-owned subsidiary of Delta. SMIP and Delta plan to arrange a senior secured term loan that will mature in 2027 and issue senior secured notes due in 2025 and in 2028. SMIP and Delta will be co-borrowers and co-issuers of these pari-passu obligations. The net proceeds of these financings will be loaned to Delta on an intercompany basis, which it will use for general corporate purposes, likely including the repayment of its $3 billion, 364-day term loan due in March 2021 and some or all of the about $3 billion drawn on its revolving credit facilities. Three additional new intermediate holding company subsidiaries of Delta that will be created to facilitate the transaction will guarantee the obligations on a joint and several senior secured basis. The ratings outlook for SMIP is also negative.

The obligations will be secured by Delta's SkyMiles program, including its current and future tangible and intangible assets, which includes all of its intellectual property and the license agreements between SMIP and its parent entities and Delta; the transaction's cash accounts; SkyMiles agreements with third parties including The American Express Company and the guarantees.

The affirmation of Delta's ratings considers its strong liquidity notwithstanding the broad and severe adverse impact of the coronavirus on the aviation industry, and air passenger demand in particular. Also supporting the ratings affirmations are the potential for Delta to substantially improve key credit metrics towards 2019 levels through 2023 if coronavirus vaccines are broadly available by the end of 2021.

The negative ratings outlooks reflect the potential for weaker passenger demand than Moody's estimates in its slower recovery case projections. Faster consumption of Delta's liquidity and a slower pace and scope of the improvement in the company's cash generation needed to fund future de-leveraging of the balance sheet would ensue.

The adverse impacts of the coronavirus pandemic on the global economy, oil prices and asset prices are sustaining a severe and extensive credit shock across many sectors, regions and markets. The combined credit effects of these developments are unprecedented. The passenger airline industry is one of the sectors most significantly affected by the shock given its exposure to travel restrictions and sensitivity of consumer demand to sentiment. Moody's regards the coronavirus pandemic as a social risk under its ESG framework, given the substantial implications for public health and safety.

LIQUIDITY

Delta maintains strong liquidity. The company reported $15.6 billion of cash and short-term investments at June 30, up from about $2.9 billion coming into 2020. However, the increased cash is entirely a function of new debt issuance and proceeds from aircraft sale/leaseback transactions, which, together, more than offset the company's cash burn since the onset of the coronavirus pandemic in February. Moody's anticipates that Delta will end 2020 with about $15 billion of cash following the closing of the loyalty program financing, based on its assumption that Delta will repay upwards of $6 billion of secured debt (364-day facility and revolver drawings) with the proceeds and after funding net cash burn through the end of the year. This amount of cash would provide cover for about 600 days, or until about July 2022, at an estimated current average daily burn rate of $20 million and an assumed cash cushion of $3 billion. With the sharp focus on expense management, increasing ticket sales will be most impactful to the trend in daily cash burn. The days cover cushion can be increased further should Delta raise additional secured debt with its remaining unencumbered assets -- mostly aircraft, engines and spare parts -- with value exceeding $10 billion, after the pay-off of the 364-day facility. Additionally, Moody's believes the convertible debt and equity markets, which some airlines (but not Delta) have already utilized, will remain open to Delta should it choose to further diversify its funding sources to support its capital position while suffering the impacts of the coronavirus.

RATINGS RATIONALE

Delta's Baa3 senior unsecured rating reflects its strong liquidity, which Moody's currently anticipates provides the foundation to sustain itself before vaccines that combat the coronavirus become available. The rating also contemplates that there will be a strong enough recovery in air passenger demand by 2023, which will lead to positive free cash flow generation, debt repayment and balance sheet strengthening. The expectation that Delta will recapture its strong business profile as the world's largest airline with leading, recurring free cash flows as a bonafide recovery of passenger demand takes hold also supports the Baa3 senior unsecured rating. Delta's business profile -- defined by its brand, global network, leading airline operating performance and operating partnership model -- should provide a solid foundation for eventual recovery from the coronavirus pandemic.

SMIP's Baa1 senior secured rating considers the importance of the SkyMiles co-brand program to Delta's franchise, operations and cash flows, which in Moody's view lowers the probability of default of the financing relative to that of Delta's other rated obligations -- both its Baa2 senior secured and Baa3 senior unsecured debt. Moody's expects the program's net cash flows will remain sufficient to meet the debt service obligations because of the recurring use of the co-branded charge and credit cards over the economic cycle, which will sustain purchases of miles by program partners, even if Delta's credit quality further weakens because of the coronavirus. In the event of a Chapter 11 reorganization by Delta, Moody's expects the company would quickly apply to the bankruptcy court to affirm the transaction's sub-license of intellectual property, as the transaction's terms require, resulting in no interruption in the program's cash flows. Without the sub-license remaining in place, Delta would not be able to use the program and related cash flows would cease.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS

Delta's ratings could be downgraded if Moody's expects i) its cash and short-term investments plus available revolvers (together "liquidity") to approach $10 billion before coronavirus vaccines are approved, ii) a lack of improvement in average daily net ticket revenues within the near-term, or iii) key financial metrics to not be restored once the virus recedes, specifically including if debt-to-EBITDA is sustained above 3.5x or funds from operations plus interest-to-interest is sustained below 6x beyond 2022. There will be no upwards pressure on the ratings until after passenger demand returns to pre-coronavirus levels. The ratings could be raised if Delta maintains liquidity above $7 billion after the recovery from the coronavirus is well on its way and improves its key credit metrics, including debt-to-EBITDA approaching 2.5x, funds from operations plus interest-to-interest above 8x and EBITDA margins near 20%.

There will be no upwards rating pressure on SMIPs' rating until after the coronavirus recedes and passenger demand across Delta's international and domestic networks is mostly restored to pre-coronavirus levels and the program's cash flows demonstrate resiliency if not growth. The ratings could be downgraded if Moody's downgrades its ratings of Delta, if program net revenues materially trail Moody's expectations or if SMIP is not able to maintain compliance with the financing's Peak Debt Service Coverage Ratio.

The principal methodologies used in rating Delta Air Lines, Inc., Clayton County Development Authority, GA, New York Transportation Develop. Corp., NY were Enhanced Equipment Trust and Equipment Trust Certificates published in July 2018 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1125852, and Passenger Airline Industry published in April 2018 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1091811. The principal methodology used in rating SkyMiles IP Ltd. was Business and Consumer Service Industry published in October 2016 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1037985. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of these methodologies.

Headquartered in Atlanta, Georgia, Delta Air Lines, Inc. and the Delta Connection carriers offered passenger air travel services to over 300 destinations in more than 50 countries and six continents in 2019. Revenue was $47 billion in 2019 but has declined to $34 billion in the last twelve months ended June 30, 2020 and could be below $15 billion for all of 2020.

SkyMiles IP Ltd. is a newly formed exempted company incorporated with limited liability under the laws of the Cayman Islands and an indirect wholly-owned subsidiary of Delta Air Lines, Inc. Program net cash flow was about $2.4 billion in 2019.

Assignments:

..Issuer: SkyMiles IP Ltd.

....Senior Secured Regular Bond/Debenture, Assigned Baa1

....Senior Secured Term Loan, Assigned Baa1

Affirmations:

..Issuer: Delta Air Lines, Inc.

....Senior Unsecured Shelf, Affirmed (P)Baa3

....Senior Secured Bank Credit Facility, Affirmed Baa1

....Senior Secured Bank Credit Facility, Affirmed Baa2

....Senior Secured Enhanced Equipment Trust, Affirmed A1

....Senior Secured Enhanced Equipment Trust, Affirmed A2

....Senior Secured Enhanced Equipment Trust , Affirmed A3

....Senior Secured Enhanced Equipment Trust, Affirmed Baa1

....Senior Secured Enhanced Equipment Trust, Affirmed Baa2

....Senior Secured Enhanced Equipment Trust, Affirmed Ba1

....Senior Secured Regular Bond/Debenture , Affirmed Baa2

....Senior Unsecured Regular Bond/Debenture, Affirmed Baa3

..Issuer: Delta Air Lines, Inc. (Old)

.... Senior Secured Enhanced Equipment Trust, Affirmed Baa1

....Underlying Senior Secured Enhanced Equipment Trust, Affirmed Baa1 (Assumed by Delta Air Lines, Inc.)

..Issuer: Northwest Airlines, Inc.

....Senior Secured Enhanced Equipment Trust, Affirmed Baa1

....Underlying Senior Secured Enhanced Equipment Trust, Affirmed Baa1 (Assumed by Delta Air Lines, Inc.)

..Issuer: Clayton County Development Authority, GA

....Senior Unsecured Revenue Bonds, Affirmed Baa3

..Issuer: New York Transportation Develop. Corp., NY

....Senior Unsecured Revenue Bonds, Affirmed Baa3

Outlook Actions:

..Issuer: Delta Air Lines, Inc.

....Outlook, Remains Negative

..Issuer: SkyMiles IP Ltd.

....Outlook, Assigned Negative

REGULATORY DISCLOSURES

For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security 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 ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure

These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

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.

Jonathan Root, CFA
Senior Vice President
Corporate Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Russell Solomon
Associate Managing Director
Corporate Finance Group
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

No Related Data.
© 2020 Moody's Corporation, Moody's Investors Service, Inc., Moody's Analytics, Inc. and/or their licensors and affiliates (collectively, "MOODY'S"). All rights reserved.

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