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Rating Action:

Moody's assigns Ba2 rating to AAdvantage Loyalty IP Ltd./American Airlines, Inc.'s new term loan and notes

08 Mar 2021

American Airlines Group's B2 corporate family rating also affirmed; outlook remains negative

New York, March 08, 2021 -- Moody's Investors Service ("Moody's") assigned Ba2 ratings of American Airlines, Inc.'s ("American") AAdvantage loyalty program financing announced earlier today. American and its co-borrower/co-issuer, newly-created, bankruptcy-remote Cayman Islands entity, AAdvantage Loyalty IP Ltd. ("Loyalty Co." and together with American, "co-issuers"), plan to raise at least $7.5 billion across a new senior secured term loan and new senior secured notes.

Moody's also affirmed its debt ratings of American Airlines Group Inc. ("Parent") and American, including the B2 corporate family rating ("CFR"), Ba3 senior secured and Caa1 senior unsecured ratings. Moody's ratings of American's enhanced equipment trust certificates and SGL-3 speculative grade liquidity rating are unchanged. The rating outlook is negative.

The new debt instruments will be secured on a pari passu first lien basis by the AAdvantage loyalty program ("Program"), including AAdvantage Agreements, substantially all Program cash receipts and cash accounts and Program intellectual property. American will also pledge its equity interests in its wholly-owned Cayman Islands intermediate holding company subsidiaries created as part of the transaction, AAdvantage Holdings 1, Ltd. and AAdvantage Holdings 2, Ltd. The Program licenses and sub-license that will be created to facilitate the transaction will also be part of the security package. These bankruptcy-remote entities, along with Parent, will guarantee the performance and obligations of the co-issuers.

American will receive the net proceeds of the new debt via intercompany loans from the new Cayman entities. It will use the proceeds for general corporate purposes, including the retirement of the $550 million secured loan from the US Treasury obtained pursuant to the Coronavirus Aid, Relief and Economic Security ("CARES") Act. This loan is presently secured by the AAdvantage program. American may also use some of the net proceeds for repayment of other debt.

The affirmation of the B2 CFR reflects the company's still sufficient liquidity twelve months into the coronavirus pandemic. The Payroll Support Program Extension ("PSP2") of the Consolidated Appropriations Act, 2021 enacted in late December 2020, provides about $3 billion, effectively funding the about $3 billion of cash burn for Q1 2021 to which American previously guided. Moody's expects liquidity of approximately $15 billion at the end of Q1. Anticipation of increasing travel demand in upcoming months to levels that will significantly reduce daily cash burn further supports today's ratings affirmations.

The negative outlook considers Moody's opinion that the timing of the start of a bonafide and sustained recovery of passenger demand remains uncertain, notwithstanding the increasing vaccination volumes in and outside the US.

RATINGS RATIONALE

The B2 CFR reflects the strain of the coronavirus on American because of its increased financial leverage heading into 2020, the related higher debt service burden compared to those of its closest US peers and its larger size. However, the company has raised sufficient amounts of capital during the pandemic to mitigate liquidity risk, well into 2022. The company has raised approximately $2.5 billion of new equity so far, or $3.5 billion including the unsecured convertible notes issued in June 2020. With the most recent At-the-Market equity offering for $1.1 billion announced January 29th, additional new equity could come into the capital structure, if needed.

American's scale and competitive position as the world's second largest airline based on revenue in 2019 currently mitigates downwards rating pressure. It's larger domestic network than those of Delta Air Lines, Inc. or United Airlines Holdings, Inc. will drive quicker gains in traffic during the early stages of the recovery in passenger demand through 2021. Moody's expects American and its oneworld partner, British Airways, Plc to retain their lead between New York and London Heathrow as international travel ramps up with a few months lag versus US domestic and regional travel demand. With the B2 CFR, Moody's also recognizes that notwithstanding its size, American has, for years, sustained an inferior operating margin relative to the industry, which has constrained its operating cash flow.

The Ba2 rating assigned to the AAdvantage loyalty financing reflects the importance of the Program to American's franchise, operations and cash flows. In Moody's opinion, this lowers the probability of default of the financing relative to that of American's other senior secured obligations rated Ba3. Moody's expects that the program's cash flows will remain sufficient to meet the transaction's debt service obligations because of the recurring use of the co-branded credit cards over the economic cycle. This will sustain purchases of miles by program partners, even if American's credit quality further weakens. In the event of a Chapter 11 reorganization by American, Moody's expects that 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. This would result in no interruption in the program's cash flows. Without the sub-license remaining in place, American would not be able to use the program and related cash flows would cease. Such a scenario would greatly diminish the company's cash flows, straining its then current operations and reorganization value.

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

The ratings could be downgraded if American's bookings do not begin to materially increase by mid-2021, from the recent trough in January and February 2021. Moody's expectation of cash and revolver availability falling below $8 billion after exhausting remaining alternate sources of liquidity could also lead to a downgrade. The inability to strengthen its financial profile through 2023 would also pressure the B2 CFR. For example, debt-to-EBITDA sustained above 6.5x, funds from operations plus interest-to-interest remains below 2.5x, or EBIT margin remains below 7.5%.

There will be no upwards pressure on the ratings until after passenger demand and revenues substantially increase to near pre-coronavirus levels. Stronger credit metrics, including EBITDA margins above 14%, debt-to-EBITDA approaching 5x and funds from operations plus interest-to-interest above 3.25x could support an upgrade.

LIST OF AFFECTED RATINGS:

..Issuer: AAdvantage Loyalty IP Ltd.

Assignments:

....Senior Secured Bank Credit Facility, Assigned Ba2 (LGD2)

....BACKED Senior Secured Regular Bond/Debenture, Assigned Ba2 (LGD2)

Outlook Actions:

....Outlook, Assigned Negative

..Issuer: American Airlines Group Inc.

Affirmations:

.... LT Corporate Family Rating, Affirmed B2

.... Probability of Default Rating, Affirmed B2-PD

....BACKED Senior Unsecured Regular Bond/Debenture, Affirmed Caa1 (LGD5)

Outlook Actions:

....Outlook, Remains Negative

..Issuer: American Airlines, Inc.

Affirmations:

....BACKED Senior Secured Bank Credit Facility, Affirmed Ba3 (LGD3)

....BACKED Senior Secured Regular Bond/Debenture, Affirmed Ba3 (LGD3)

....Senior Secured Bank Credit Facility, Affirmed Ba3 (LGD3)

Outlook Actions:

....Outlook, Remains Negative

..Issuer: Pennsylvania Economic Dev. Fin. Auth.

Affirmations:

....Senior Unsecured Revenue Bonds, Affirmed Caa1 (LGD5)

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

American Airlines Group Inc. (NASDAQ: AAL) is the holding company for American Airlines, Inc. Together with regional partners, operating as American Eagle, the airlines operated an average of nearly 6,800 flights per day to more than 365 destinations in 61 countries before the coronavirus pandemic. The company reported $17.3 billion of revenue for 2020, down from $45.8 billion for 2019.

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.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the UK and is endorsed by Moody's Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK 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

Peter H. Abdill, CFA
MD - Corporate Finance
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.
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