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Rating Action:

Moody's downgrades Air Canada's CFR to Ba2; Outlook Negative

28 May 2020

Approximately CAD 2.4 billion of rated debt

NOTE: On June 2, 2020, the press release was corrected as follows: “Air Canada Series 2020-1 Pass Through Trusts” was added to the list of deals in the second sentence of the methodology paragraph and the second sentence of the eleventh paragraph of the REGULATORY DISCLOSURES section. Revised release follows.

Toronto, May 28, 2020 -- Moody's Investors Service, ("Moody's") has downgraded Air Canada's Corporate Family Rating (CFR) to Ba2 from Ba1, Probability of Default rating to Ba2-PD from Ba1-PD, first lien senior secured rating to Ba1 from Baa3, senior unsecured notes rating to Ba3 from Ba2 and Speculative Grade Liquidity rating to SGL-3 from SGL-2. Moody's also downgraded its ratings on each of the company's enhanced equipment trust certificates by one notch, in line with the one notch downgrade of the corporate family rating. Please see the end of this press release for the detailed list of rating actions taken today. The ratings outlook is negative.

This rating action concludes the review process initiated on 18 March 2020.

The spread of the coronavirus outbreak, the deteriorating global economic outlook, low oil prices, and asset price declines 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 to consumer demand and sentiment. Moody's regards the coronavirus outbreak as a social risk under its ESG framework, given the substantial implications for public health and safety. Today's downgrade of Air Canada's ratings balances the company's adequate liquidity against the breadth and severity of the coronavirus shock and the uncertain trend in passenger demand that will extend well into 2021.

Outlook Actions:

..Issuer: Air Canada

....Outlook, Changed To Negative From Rating Under Review

..Issuer: Air Canada 2013-1 Pass Through Trusts

....Outlook, Changed To Negative From Rating Under Review

..Issuer: Air Canada Series 2015-2 Pass Through Trusts

....Outlook, Changed To Negative From Rating Under Review

..Issuer: Air Canada Series 2017-1 Pass Through Trusts

....Outlook, Changed To Negative From Rating Under Review

..Issuer: Air Canada Series 2020-1 Pass Through Trusts

....Outlook, Changed To Negative From Rating Under Review

Downgrades:

..Issuer: Air Canada

.... Corporate Family Rating, Downgraded to Ba2 from Ba1

.... Probability of Default Rating, Downgraded to Ba2-PD from Ba1-PD

.... Speculative Grade Liquidity Rating, Downgraded to SGL-3 from SGL-2

....Senior Secured 1st Lien Revolving Credit Facility, Downgraded to Ba1 (LGD2) from Baa3 (LGD2)

....Senior Secured 1st Lien Term Loan B, Downgraded to Ba1 (LGD2) from Baa3 (LGD2)

....Senior Secured 1st Lien Global Notes, Downgraded to Ba1 (LGD2) from Baa3 (LGD2)

....Gtd Senior Unsecured Global Notes, Downgraded to Ba3 (LGD5) from Ba2 (LGD5)

Downgrades:

..Issuer: Air Canada 2013-1 Pass Through Trusts

....Senior Secured Enhanced Equipment Trust Class A, Downgraded to Baa3 from Baa2

....Senior Secured Enhanced Equipment Trust Class B, Downgraded to Ba3 from Ba2

..Issuer: Air Canada Series 2015-2 Pass Through Trusts

....Senior Secured Enhanced Equipment Trust Class AA, Downgraded to A2 from A1

....Senior Secured Enhanced Equipment Trust Class A, Downgraded to Baa1 from A3

....Senior Secured Enhanced Equipment Trust Class B, Downgraded to Baa3 from Baa2

..Issuer: Air Canada Series 2017-1 Pass Through Trusts

....Senior Secured Enhanced Equipment Trust Class AA, Downgraded to A2 from A1

....Senior Secured Enhanced Equipment Trust Class A, Downgraded to Baa1 from A3

....Senior Secured Enhanced Equipment Trust Class B, Downgraded to Baa3 from Baa2

..Issuer: Air Canada Series 2020-1 Pass Through Trusts

....Senior Secured Enhanced Equipment Trust Class C, Downgraded to Ba2 from Ba1

RATINGS RATIONALE

Air Canada's (Ba2 negative) credit benefits from its leading position in the duopolistic Canadian market, falling fuel costs and liquidity we deem supportive through this difficult market. It is constrained by the severe drop in passenger demand and uncertainty regarding the length and impact of current market conditions.

The rating action reflects the almost complete grounding of the company's fleet in the second quarter of 2020, and the expectation that passengers' return to air travel is likely to be slow. Moody's expects the coronavirus pandemic to significantly curtail Canadian domestic and global demand for air travel well into 2021. Air Canada's capacity will be 85 to 90% lower in Q2/20 (compared to the previous year) and about 75% lower in Q3, with an assumption that it will take at least three years to recover to 2019 levels of revenue and capacity. As well, Air Canada is planning to retire 79 aircraft over the next few years, including 14 E190s immediately (which are being replaced with the A220). The company said their cash burn was CAD22 million per day in March due to the sudden decline in demand and higher refund activity. Expected cash burn through the remainder of 2020 is expected to improve relative to what was reported in March but will still be high. These conditions will lead to significant cash consumption in 2020, weaken Air Canada's liquidity profile and increase leverage. The risk of a more challenging downside scenario remains high and the severity and duration of the pandemic and travel restrictions also remain highly uncertain, particularly given the threat of an increase in the number of infections as social distancing practices ease.

Air Canada is currently focusing on managing its way through this very volatile market environment by reducing costs as much as possible and by shoring up its liquidity profile. The company is targeting a CAD1.05 billion reduction in costs and capex for the year (65% capex / 35% operating costs). As well, Air Canada believes that, excluding fuel and depreciation and amortization expenses, approximately 50 percent of its operating expenses are variable in nature and has no current outstanding fuel hedge positions.

The airline sector currently accounts for about 2% of global carbon emissions with 65% of its emissions coming from international flights. Canada (and as a result Air Canada) is one of the 70 countries that have voluntarily elected to early adopt the International Civil Aviation Organization's (ICAO) Carbon Offsetting and Reduction Scheme for International Aviation (CORSIA), which targets capping carbon emissions at 2020 levels and requires purchases of offsets for airlines' that exceed their targets.

Air Canada has adequate liquidity (SGL-3), supported by CAD9.1 billion of sources against CAD6.3 billion of uses. The company's sources are 1) CAD6.1 billion of cash and short-term investments at March 31, 2020, 2) US$600 (CAD829 equiv.) million received from a 364-day term loan secured by aircraft and spare engine that was concluded in April, 3)CAD788 million from bridge financing also concluded in April for 18 Airbus A220 aircraft which may be used for general corporate purposes and which Air Canada expects to replace with longer-term secured financing arrangements later in 2020 with the same lender, 4) Air Canada's May 26th announcement that it has commenced a marketed public offering of shares for gross proceeds of approximately CAD500 million, 5) a concurrent marketed private placement of convertible senior unsecured notes for gross proceeds of US$400 million and 6) about US$300 million from its Series 2020-1 Class C EETC issued on March 27th. Air Canada's unencumbered asset pool (excluding the value of Aeroplan and Air Canada Vacations) amounts to approximately $2.6 billion as of March 31, 2020.

Uses include 1) our expectation of approximately CAD2.2 billion of negative free cash flow through the next four quarters, 2) mandatory debt and lease repayments (including repayments of the two April bridge financings) of about CAD2.8 billion over the next 4 quarters and 3) minimum cash reserves required by Air Canada's contractual covenants which we estimate to be about CAD1.3 billion.

Air Canada has debt covenants, which are loan-to-security value measures in nature, which we expect the company will remain in compliance with.

The negative outlook reflects risks of more challenging downside scenarios and that the timing of passenger's return to air travel is uncertain and could be slower than we currently expect. The negative outlook also reflects the expected cash burn of Air Canada and potential that liquidity usage could be in excess of expectations.

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

The ratings could be downgraded if Moody's believes the impacts of the coronavirus will lead to a steeper and longer decline in passenger demand and weaker credit metrics. This would include expectations that Air Canada will not be able to restore its financial profile once the virus recedes, including debt-to-EBITDA below 4x and funds from operations plus interest-to-interest sustained above 4x.

There will be no upwards pressure on ratings until after passenger demand returns to pre-coronavirus levels, and key credit metrics improve, with debt-to-EBITDA towards 3x and funds from operations plus interest-to-interest above 6x.

Moody's rates nine tranches of enhanced equipment trust certificates (EETCs) across four Air Canada EETC transactions, Series 2013-1, Series 2015-2, Series 2017-1 and Series 2020-1. The downgrades maintain the notching of each tranche relative to the corporate family rating. Moody's believes the aircraft models that comprise the collateral of each transaction will remain important to Air Canada's network, once the coronavirus recedes. The respective loan-to-value of each tranche supports the respective rating assignments.

The 2013-1 transaction is secured by five 777-300ERs. The 2015-2 transaction is secured by two 777-300ERs and three 787-9s. The 2017-1 transaction is secured by nine 737 MAX 8s and four 787-9s. Moody's anticipates that the 737 MAX will return to service in a timeframe that will not lead to undue pressure on its market value. The Series 2020-1 issued on May 27th has only a Class C tranche and is secured by the 27 aircraft across the company's Series 2015-1 (unrated), 2015-2 and 2017-1 EETCs.

Changes in EETC ratings can result from any combination of changes in the underlying credit quality or ratings of the company, Moody's opinion of the importance of the aircraft collateral to the operations and/or its estimates of current and projected aircraft market values, which will affect estimates of loan-to-value. Near-term updates to Moody's estimates of aircraft market values that reduce the respective equity cushion could lead to further downgrades.

The principal methodology used in rating Air Canada was Passenger Airline Industry published in April 2018 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1091811. The principal methodologies used in rating Air Canada 2013-1 Pass Through Trusts, Air Canada Series 2015-2 Pass Through Trusts, Air Canada Series 2017-1 Pass Through Trusts and Air Canada Series 2020-1 Pass Through Trusts were Passenger Airline Industry published in April 2018 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1091811, and Enhanced Equipment Trust and Equipment Trust Certificates published in July 2018 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1125852. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of these methodologies.

Air Canada is the largest provider of scheduled airline passenger services within, and to and from Canada. Revenue in 2019 was CAD19.1 billion. The company is headquartered in Saint-Laurent, Quebec, Canada.

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.

At least one ESG consideration was material to the credit rating action(s) announced and described above.

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 below contact information is provided for information purposes only. Please see the ratings tab of the issuer page at www.moodys.com, for each of the ratings covered, Moody's disclosures on the lead rating analyst and the Moody's legal entity that has issued the ratings.

The person who approved Air Canada credit ratings is Donald S. Carter, CFA, MD - Corporate Finance, Corporate Finance Group, JOURNALISTS: 1 212 553 0376, Client Service: 1 212 553 1653. The person who approved Air Canada 2013-1 Pass Through Trusts, Air Canada Series 2015-2 Pass Through Trusts, Air Canada Series 2017-1 Pass Through Trusts and Air Canada Series 2020-1 Pass Through Trusts credit ratings is Russell Solomon, Associate Managing Director, Corporate Finance Group, JOURNALISTS: 1 212 553 0376, Client Service: 1 212 553 1653.

The relevant office for each credit rating is identified in "Debt/deal box" on the Ratings tab in the Debt/Deal List section of each issuer/entity page of the website.

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.

Jamie Koutsoukis
Vice President - Senior Analyst
Corporate Finance Group
Moody's Canada Inc.
70 York Street
Suite 1400
Toronto, ON M5J 1S9
Canada
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Donald S. Carter, CFA
MD - Corporate Finance
Corporate Finance Group
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Releasing Office:
Moody's Canada Inc.
70 York Street
Suite 1400
Toronto, ON M5J 1S9
Canada
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

No Related Data.
© 2021 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.

CREDIT RATINGS ISSUED BY MOODY'S CREDIT RATINGS AFFILIATES ARE THEIR CURRENT OPINIONS OF THE RELATIVE FUTURE CREDIT RISK OF ENTITIES, CREDIT COMMITMENTS, OR DEBT OR DEBT-LIKE SECURITIES, AND MATERIALS, PRODUCTS, SERVICES AND INFORMATION PUBLISHED BY MOODY’S (COLLECTIVELY, “PUBLICATIONS”) MAY INCLUDE SUCH CURRENT OPINIONS. MOODY’S DEFINES CREDIT RISK AS THE RISK THAT AN ENTITY MAY NOT MEET ITS CONTRACTUAL FINANCIAL OBLIGATIONS AS THEY COME DUE AND ANY ESTIMATED FINANCIAL LOSS IN THE EVENT OF DEFAULT OR IMPAIRMENT. SEE APPLICABLE MOODY’S RATING SYMBOLS AND DEFINITIONS PUBLICATION FOR INFORMATION ON THE TYPES OF CONTRACTUAL FINANCIAL OBLIGATIONS ADDRESSED BY MOODY’S CREDIT RATINGS. CREDIT RATINGS DO NOT ADDRESS ANY OTHER RISK, INCLUDING BUT NOT LIMITED TO: LIQUIDITY RISK, MARKET VALUE RISK, OR PRICE VOLATILITY. CREDIT RATINGS, NON-CREDIT ASSESSMENTS (“ASSESSMENTS”), AND OTHER OPINIONS INCLUDED IN MOODY’S PUBLICATIONS ARE NOT STATEMENTS OF CURRENT OR HISTORICAL FACT. MOODY’S PUBLICATIONS MAY ALSO INCLUDE QUANTITATIVE MODEL-BASED ESTIMATES OF CREDIT RISK AND RELATED OPINIONS OR COMMENTARY PUBLISHED BY MOODY’S ANALYTICS, INC. AND/OR ITS AFFILIATES. MOODY’S CREDIT RATINGS, ASSESSMENTS, OTHER OPINIONS AND PUBLICATIONS DO NOT CONSTITUTE OR PROVIDE INVESTMENT OR FINANCIAL ADVICE, AND MOODY’S CREDIT RATINGS, ASSESSMENTS, OTHER OPINIONS AND PUBLICATIONS ARE NOT AND DO NOT PROVIDE RECOMMENDATIONS TO PURCHASE, SELL, OR HOLD PARTICULAR SECURITIES. MOODY’S CREDIT RATINGS, ASSESSMENTS, OTHER OPINIONS AND PUBLICATIONS DO NOT COMMENT ON THE SUITABILITY OF AN INVESTMENT FOR ANY PARTICULAR INVESTOR. MOODY’S ISSUES ITS CREDIT RATINGS, ASSESSMENTS AND OTHER OPINIONS AND PUBLISHES ITS PUBLICATIONS WITH THE EXPECTATION AND UNDERSTANDING THAT EACH INVESTOR WILL, WITH DUE CARE, MAKE ITS OWN STUDY AND EVALUATION OF EACH SECURITY THAT IS UNDER CONSIDERATION FOR PURCHASE, HOLDING, OR SALE.

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