New York, May 26, 2020 -- Moody's Investors Service, (Moody's) has downgraded LATAM Airlines
Group S.A (LATAM)'s corporate family rating to Ca from B1.
The outlook is negative. This concludes the review initiated on
17 March 2020. The Baa2 rating on LATAM Pass Through Trust 2015-1A
and Ba1 rating on LATAM Pass Through Trust 2015-1B are unchanged
and remain on review for downgrade. Subsequent to today's actions,
LATAM's CFR will be withdrawn shortly following the filing for Chapter
11. Please refer to Moody's withdrawal policy on moodys.com.
Downgrades:
..Issuer: LATAM Airlines Group S.A (LATAM)
.... Corporate Family Rating, Downgraded
to Ca from B1
Ratings unchanged:
..Issuer: LATAM Pass Through Trust 2015-1A
....Senior Secured Enhanced Equipment Trust,
Baa2 on review for downgrade
..Issuer: LATAM Pass Through Trust 2015-1B
....Senior Secured Enhanced Equipment Trust,
Ba1 on review for downgrade
Outlook Actions:
..Issuer: LATAM Airlines Group S.A (LATAM)
....Outlook, Changed To Negative From
Ratings Under Review
Outlooks unchanged:
..Issuer: LATAM Pass Through Trust 2015-1A
....Outlook, unchanged Ratings Under
Review
..Issuer: LATAM Pass Through Trust 2015-1B
....Outlook, unchanged Ratings Under
Review
RATINGS RATIONALE
The downgrade to Ca reflects LATAM's announcement that the company
and its affiliates in Chile, Peru, Colombia, Ecuador
and the United States have filed for voluntary protection under the U.S.
Chapter 11 financial reorganization process and our view that losses to
existing unsecured creditors could be higher than 70%. LATAM's
affiliates in Argentina, Brazil and Paraguay are not included in
the filing. The rating action concludes the review initiated on
March 17, 2020.
The rapid and widening spread of the coronavirus outbreak, deteriorating
global economic outlook, falling oil prices, and asset price
declines are creating a severe and extensive credit shock across many
sectors, regions and markets. The combined credit effects
of these developments are unprecedented. The passenger airline
sector has been one of the sectors most significantly affected by the
shock given its exposure to travel restrictions and sensitivity to consumer
demand and sentiment. More specifically, the weaknesses in
LATAM's credit profile have left it vulnerable to shifts in market sentiment
in these unprecedented operating conditions and LATAM remains vulnerable
to the outbreak continuing to spread. Today's action reflects the
impact on LATAM of the breadth and severity of the shock, and the
broad deterioration in credit quality it has triggered. We regard
the coronavirus outbreak as a social risk under our ESG framework,
given the substantial implications for public health and safety.
The Chapter 11 filing is a result of a sharper decline in passenger traffic
than initially anticipated and a slower recovery that will prevent passenger
demand from reaching 2019 levels before 2023. The International
Air Travel Association's (IATA) latest scenario analysis forecasts a decline
in global passenger numbers of around 24% for the full year 2020
while 2019 levels will not be exceeded until 2023. Since the outbreak
of coronavirus LATAM has been experiencing a significant cash burn,
leading to a weakening liquidity profile and a significantly higher leverage.
With the Chapter 11 financial reorganization LATAM expects to resize its
operations and reorganize its capital structure to the new demand environment,
remaining operational as conditions permit throughout the process.
Moody's base case assumptions are that the coronavirus pandemic will lead
to a period of severe cuts in passenger traffic for 2020 with partial
or full flight cancellations and aircraft groundings, with all regions
affected globally. The base case assumes a gradual recovery in
passenger volumes starting in the third quarter. However,
there are high risks of more challenging downside scenarios and the severity
and duration of the pandemic and travel restrictions is uncertain.
Moody's analysis assumes a reduction of around 60 % in LATAM's
passenger traffic for the full year 2020 and a 40% reduction for
2021, with volumes recovering to 2019 levels only by 2023.
Moreover, the economic slowdown in Latin American economies coupled
with increased risk aversion globally is driving the sharp devaluation
in local currencies in the region. Accordingly, LATAM is
particularly exposed to the depreciation of both the Brazilian Real and
the Chilean Peso, which together comprise about 40% of the
company's revenues. This effect is only partially mitigated by
the important reduction in fuel prices.
Moody's anticipates that the airline industry will require continued and
further support from regulators, national governments and labor
representatives to alleviate pressures on slot allocations, provide
indirect or direct financial support and manage airlines' cost bases.
Although there is nothing concrete yet, the Brazilian government
announced that it is considering measures to support the airlines operating
in Brazil including, but not limited to long term credit lines and
working capital lines to be provided by state owned banks as well as allowing
the companies to defer tax payments.
LIQUIDITY
LATAM's liquidity is weak in light of the challenges ahead.
LATAM had around U$1.3 billion in cash at the date of the
Chapter 11 filing. The company has secured the financial support
of shareholders, including the Cueto and Amaro families, which
have lasting ties to LATAM, and Qatar Airways, to provide
up to U$900 million in debtor-in-possession (DIP)
financing. We expect that losses for existing unsecured creditors
could be higher than 70%.
The negative outlook reflects Moody's view of a more prolonged recovery
to the airline industry and LATAM's limited financial flexibility.
Subsequent to today's actions, LATAM's CFR will be withdrawn shortly
following the filing for Chapter 11. Please refer to Moody's withdrawal
policy on moodys.com.
Changes in the 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.
PRINCIPAL METHODOLOGY
The principal methodology used in this rating 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
LATAM Airlines Group S.A (LATAM) is a Chile-based airline
holding company formed by the business combination of LAN Airlines S.A.
of Chile and TAM S.A. (TAM) of Brazil in June 2012.
LATAM is the largest airline group in South America, with a local
presence for domestic passenger services in six countries (Brazil,
Chile, Peru, Ecuador, Argentina and Colombia).
The company also provides intraregional and international passenger services
and has a cargo operation that is carried out using belly space on passenger
flights and dedicated freighter service. In 2019, LATAM generated
$10 billion in net revenue and carried more than 74 million passengers
and 904,000 tons of cargo.
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 rating has been disclosed to the rated entity or its designated agent(s)
and issued with no amendment resulting from that disclosure.
This rating is 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.
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.
Marcos Schmidt
VP - Senior Credit Officer
Corporate Finance Group
Moody's America Latina Ltda.
Avenida Nacoes Unidas, 12.551
16th Floor, Room 1601
Sao Paulo, SP 04578-903
Brazil
JOURNALISTS: 0 800 891 2518
Client Service: 1 212 553 1653
Marianna Waltz, CFA
MD - Corporate Finance
Corporate Finance Group
JOURNALISTS: 0 800 891 2518
Client Service: 1 212 553 1653
Releasing Office:
Moody's Investors Service, Inc.
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