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Rating Action:

Moody's assigns B1 rating to IAG's proposed senior unsecured notes

18 Mar 2021

London, 18 March 2021 -- Moody's Investors Service, ("Moody's") has today assigned a B1 rating to the proposed senior unsecured notes of approximately €1 billion to be issued by International Consolidated Airlines Group, S.A. (IAG or the company -- Ba2 negative). The company's existing ratings are unchanged, including its Ba2 corporate family rating, its Ba2-PD probability of default rating and the B1 ratings of the company's €1 billion senior unsecured notes divided into €500 million series A bonds due 2023 and €500 million series B bonds due 2027. The outlook remains negative.

RATINGS RATIONALE

The current very low levels of flying activity, extensive travel restrictions and uncertainties over the timing and pace of a recovery in European air travel continue to weigh heavily on the ratings, which are focused on liquidity headroom and thereafter the potential for the company to recover its balance sheet metrics. Whilst vaccination programmes and reducing infection rates and hospitalisations provide prospects for a recovery, significant challenges remain in relation to the coordination of testing regimes across travel corridors and risks of new Covid variants driving continued travel restrictions. Whilst there is very low visibility on the shape of the recovery, prospects for a resumption of tourist flows in the later part of 2021 are stronger, and there is likely to be very strong latent demand in the event that travel restrictions are eased.

Although IAG's operating losses and cash burn remain substantial in the current environment, the company has been successful in optimising revenue generation through a focus on domestic and international routes that remain open and in particular where demand for visiting friends and family remains strong. In addition the company has exploited the supply shortages in air freight capacity to grow its cargo revenues, and retains further income streams from its maintenance activities and loyalty schemes. As a result the company generated revenues of around €1.3 billion in the fourth quarter of 2020, whilst operating capacity, as measured in available seat kilometres (ASK) was around 27% of 2019 levels. In the first quarter of 2021 IAG expects to operate around 20% of 2019 capacity which whilst reduced, is better than European point-to-point short haul airlines and continues to provide meaningful revenues.

Moody's forecasts that IAG's revenue passenger kilometres (RPKs) will be in the range of 20-30% of 2019 levels in 2021. This remains subject to high uncertainty and the key focus initially is on reducing cash burn over the course of 2021 and positioning for a recovery thereafter.

IAG's recovery will be supported by its scale, broad network and leading competitive positions, which are likely to be enhanced after the pandemic by the weakness or withdrawal of smaller competitors from certain routes. Moody's also expects the company to benefit from its substantial restructuring and cost reduction actions, significant proportion of which should be retained as air travel recovers. However, the company's focus on long haul and degree of exposure to business travel could result in a slower recovery from the crisis that the market as a whole. Moody's forecasts that IAG's leverage will reduce to around 4.5-5.0x on a Moody's adjusted-basis by 2023 on a material recovery in air traffic.

LIQUIDITY

IAG carries substantial liquidity of around €11.3 billion as of 31 December 2020, pro forma for the proposed issuance, and also adjusting for a GBP2 billion loan to British Airways, Plc ("British Airways", Ba2 negative) partially guaranteed by UK Export Finance which was expected to be drawn down by the end of February 2021. Liquidity comprises cash balances of €5.9 billion, undrawn general and secured financing of €2.2 billion, the aforementioned loan to British Airways and the proposed new issuance. IAG's near-term debt maturities include British Airways' €329 million Covid Commercial Finance Facility due in April 2021, British Airways' RCF of $1.38 billion expiring in June 2021, the repayment of IAG's €500 million convertible bond due in November 2022 and ongoing leasing obligations.

IAG estimates that its operating cash burn is currently around €185 million per week, before revenue, working capital, tax, debt amortisation and pension deficit payments. Moody's estimates that following the proposed debt issuance the company's liquidity will provide coverage of net cash burn, at current activity levels, through to around the second quarter of 2022.

STRUCTURAL CONSIDERATIONS

The proposed new senior unsecured notes are rated B1, in line with the company's existing €1 billion senior unsecured notes, and two notches below the corporate family rating. This reflects the substantial levels of senior secured and unsecured debt in the company's operating companies, which rank ahead of the debt at IAG holding company level.

ENVIRONMENTAL, SOCIAL AND GOVERNANCE CONSIDERATIONS

Moody's regards the coronavirus pandemic as a social risk under its ESG framework, given the substantial implications for public health and safety.

IAG has a strong corporate governance framework. It is incorporated in Spain, listed in Spain and on the London Stock Exchange and subject to both the Spanish Good Governance Code of Listed Companies and the UK Corporate Governance Code. During 2020 the company complied with almost all the applicable recommendations of these codes with minor exceptions as detailed in its 2020 annual report.

The company is targeting a 10 per cent improvement in fuel efficiency between 2019 and 2025, a 20 per cent reduction in net CO2 emissions by 2030, and net zero CO2 emissions by 2050.

OUTLOOK

The negative outlook reflects the continued uncertain prospects for the airline industry, with risks of extended disruption to travel causing further strain on the company's balance sheet and liquidity.

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

The ratings are unlikely to be upgraded in the short term. Positive rating pressure would not arise until the coronavirus pandemic is brought under control, travel restrictions are lifted, and passenger volumes return to more normal levels. At this point Moody's would evaluate the balance sheet and liquidity strength of the company and positive rating pressure would require evidence that the company is capable of substantially recovering its financial metrics within a 1-2 year time horizon.

Moody's could downgrade IAG if:

• There are expectations of deeper and longer declines in passenger volumes extending materially into the second half of 2021

• There are concerns over the adequacy of liquidity

• There are clear expectations that the company will not be able to maintain financial metrics compatible with a Ba2 rating following the coronavirus pandemic, in particular if:

- Gross adjusted leverage is not expected to reduce sustainably below 5x

- Reported operating profit margin were to fall substantially below 10%

- Retained cash flow to debt reduces towards 10%

PRINCIPAL METHODOLOGY

The principal methodology used in these ratings was Passenger Airline Industry published in April 2018 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1091811. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

COMPANY PROFILE

IAG was formed in January 2011 following the merger of British Airways and Iberia and manages five airline subsidiaries including British Airways, Iberia, Vueling, Aer Lingus and LEVEL, representing complementary brands and operating in distinct markets. IAG has minimal operations of its own other than its Global Business Services division, which incorporates the Group's centralised and back office functions, and Cargo. 2019 revenues and Moody's adjusted EBIT were €25.5 billion and €3.3 billion respectively.

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_1243406.

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.

Martin Robert Hallmark
Senior Vice President
Corporate Finance Group
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Richard Etheridge
Associate Managing Director
Corporate Finance Group
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Releasing Office:
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

No Related Data.
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