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
