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Rating Action:

Moody's changes LifeMiles' outlook to negative; affirms Ba2 ratings

14 Mar 2018

New York, March 14, 2018 -- Moody's Investors Service (Moody's) changed today LifeMiles, Ltd.'s (LifeMiles) ratings outlook to negative from stable. At the same time, Moody's affirmed LifeMiles' Ba2 corporate family and its senior secured ratings.

In July 2017 LifeMiles closed a 5-year $300 million senior secured term loan, which is now being upsized by an additional $65 million add-on. The term loan is secured by a first priority interest in all tangible and intangible assets of LifeMiles and the guarantors. Furthermore, it is jointly guaranteed by LifeMiles and each of its existing and newly acquired or created wholly-owned subsidiaries. The term loan amortizes 10% of its original balance on quarterly installments. In addition, the loan agreement includes a mandatory prepayment clause that commits a percentage of the company's free cash flow to the payment of principal.

The company will use the proceeds of the $65 million add-on to upstream dividends to its shareholders Avianca Holdings, S.A. (Avianca, unrated) and Advent Intl. (unrated), which have a 70% and 30%, respectively, stake on LifeMiles.

Issuer: LifeMiles LTD

Affirmations:

Corporate Family Rating, Affirmed Ba2

Senior Secured Bank Credit Facility, Affirmed Ba2

Outlook Actions:

Outlook, Changed To Negative From Stable

RATINGS RATIONALE

The change in LifeMiles´s outlook to negative from stable reflects the amendment to the term loan agreement by which the ring fencing mechanisms that prioritize debt repayment are lifted during 2018. Accordingly, the company will temporarily suspend the use of its excess cash flow to pay down debt during 2018. Starting in 2019, the prepayment provision returns to effect, with excess cash flows directed to make prepayments to the loan. We consider that the mandatory use of excess cash flow for debt repayment is a key credit consideration for LifeMiles, as it reduces the risks of aggressive cash distributions to shareholders.

LifeMiles' Ba2 ratings reflect its strong credit metrics, good liquidity and our assumption that an adequate ring fencing mechanism that prioritizes debt repayment will remain in place over the medium term. The rating also incorporates LifeMiles' strong business model being the sole operator of Avianca's frequent flyer program, its diversified and sticky base of commercial partners that support members and co-brand credit card growth. Also reflected in the rating are the potential benefits to the company's growth plan from positive economic dynamics and market fundamentals in its largest markets. On the other hand, LifeMiles´ ratings consider the risk of additional up streaming of cash flows to shareholders, being in the form of dividends or anticipated purchases of airline tickets.

The rating of the term loan considers its secured position within the capital structure of the company. The Corporate Family Rating is at the same level of the senior secured rating given that it is the only debt in the company's balance sheet.

While the scheduled amortization for LifeMiles' term loan will remain unchanged, the proposed amendment temporarily weakens the structure of the instrument as it slows down its repayment. Furthermore, it raises concerns about potential waiver requests to the mandatory prepayment clause in the future. Still, LifeMiles has strong credit metrics for its rating category. Pro-forma for the incremental $65 million add-on, we estimate adj. debt/EBITDA will be 2.7 times in 2017. Considering the scheduled amortization of the term loan and that the cash sweep restarts in 2019, we estimate LifeMiles' adj. debt/EBITDA will reach 2.4 times by year-end 2018, decline to around 1.6 times by year-end 2019, and remain below 1 time in 2020.

LifeMiles' largest contributors to gross billings are financial partners, which include credit card co-brands, miles conversion and other (51%) and airlines (30%), being Avianca its largest customer (adding around 27% to gross billings). Around 80% of accrued miles are redeemed and from this amount 93% are redeemed into air tickets. The 7% balance is redeemed into hotel nights, merchandise and other rewards. LifeMiles benefit from Avianca's leading market position in Colombia and Central America. In Peru, Avianca is the 3rd. largest carrier with a 11.4% domestic market share in 2017; following Latam Airlines (59.1% share) and Peruvian Airlines (14.6% share). Going forward, the Association of Air Transport in Colombia estimates that air traffic demand will continue growing in Colombia with an estimated total number of travelers of 52 million in 2018; up from 31 million in 2016.

The company's diversified and sticky base of commercial partners support its members and co-brand credit card growth. LifeMiles has over 320 commercial partnerships that allow its members to accrue and redeem miles for different products and services such as airline tickets, hotels, rental cars, etc. As of December 31, 2017, it has over 7.8 million members, and more than 657,000 co-branded credit cards. Its number of members have grown steadily at a 9.3% CAGR in the last five years and we forecast they will grow at a 7%-8% per year in 2018-2021. LifeMiles' largest market is Colombia where it generates 50% of its gross billings. Moody's forecast Colombian economy to grow by 2.5% in 2018 and 3.0% in 2019.

The negative outlook could be stabilized if the company is able to reduce its leverage in 2018, resuming an accelerated debt repayment in 2019 from its free cash flow as detailed in the term loan agreement.

The ratings could be upgraded if the company were to materially increase its size, while maintaining strong credit metrics with adj. debt/EBITDA lower than 2.0 times. An upgrade would also require strong ring fencing provisions limiting cash upstream to shareholders, as well as the maintenance of adequate liquidity and profitability.

The ratings could be downgraded if the company's profitability or credit metrics worsen with adj. debt/EBITDA above 3.0 times. A deterioration on the company's liquidity or profitability, or a change in the company's financial policy leading to excessive cash distribution to shareholders can lead to a downgrade. Also, further or repetitive amendments to the loan agreement such that the mandatory prepayment provisions are waived or cancelled and that excess cash flow is not used to pay down debt could also result in a downgrade.

LifeMiles has good liquidity. The company has minimum cash requirements to cover six months of rewards plus its quarterly debt service. In addition, LifeMiles benefits from a $20 million committed revolving credit facility due 2022 that is fully available. LifeMiles only debt is the term loan, which amortizes based upon a debt amortization equivalent to 10% of the initial principal amount payable on a quarterly basis.

LifeMiles, Ltd. is a coalition loyalty program and the solely operator of Avianca's frequent flyer program. LifeMiles has over 320 commercial partnerships that allow its members to accrue and redeem miles for different products and services such as airline tickets, hotels, and rental cars amongst others. LifeMiles is 70% owned by Avianca Holdings, S.A. and 30% owned by Advent Intl. LifeMiles reported gross billings of $307.6 million in 2017.

The principal methodology used in these ratings was Business and Consumer Service Industry published in October 2016. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

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 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.

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

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.

Alonso Sanchez
Vice President - Senior Analyst
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