New York, May 28, 2020 -- Moody's Investors Service ("Moody's") downgraded its ratings of the Enhanced
Equipment Trust Certificates ("EETCs") of LATAM Airlines Group,
S.A. ("LATAM"), LATAM Pass Through Certificates,
Series 2015-1: Class A issued by LATAM Pass Through Trust
2015-1A to B3 from Baa2 and Class B issued by LATAM Pass Through
Trust 2015-1B to Ca from Ba1 (together, the "Certificates").
The corporate family rating of LATAM was downgraded to Ca on May 26th
following its filing for reorganization under Chapter 11 of the US Bankruptcy
Code earlier that day and was withdrawn subsequently. The ratings
outlook on the EETC issuers and the EETC ratings is negative. Today's
actions conclude the review for downgrade initiated on March 17,
2020 and continued on May 6, 2020. The company rejected the
Certificates in its bankruptcy filing.
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.
Passenger demand is currently down by more than 90% across most
of the world, excluding a few countries in Asia. Moody's
regards the coronavirus outbreak as a social risk under its ESG framework,
given the substantial implications for public health and safety.
Price (aircraft value) discovery in the market is currently scant as few
transactions are taking place, providing limited content for aircraft
appraisers to provide reliable estimates of aircraft market values.
The current circumstances will cause some to promote steep haircuts to
pre-coronavirus aircraft values.
On its surface, the rejection of the EETC transaction by LATAM,
which was unexpected, is a stark indicator of the market disruptive
impact of the coronavirus crisis on airlines' need for aircraft,
at least in the near term. It is also a likely an example of how
airlines that choose to reorganize may use the current environment to
gain leverage in negotiations with lenders and aircraft owners given the
current limited demand for aircraft. Values realized in upcoming
months if aircraft are sold could trail current expectations, even
for more attractive models that would otherwise be in demand if not for
the coronavirus, like the A321-200s, 787-9s
and A350-900s that comprise the collateral for the LATAM EETC.
The aircraft have an average age of 4.9 years. The wide-bodies
are the most fuel-efficient in the fleet. The 787-9s
are powered by the Rolls Royce Trent 1000 engine, which has had
durability issues that have reduced the on-wing time versus the
design specifications. This has negatively impacted the utilization
of the company's 787s, as has been the case for all Rolls-powered
787s, increasing costs and adversely impacting this model's
market value.
The negative outlook considers the relationship between expected loss
and the resolution of the rejection of the EETCs, including whether
the controlling party will repossess and look to sell the aircraft or
renegotiate the EETC's payment terms in order to not have to repossess
and sell the aircraft in this anemic market. The negative outlook
also captures the current high uncertainty of aircraft values.
Downgrades:
..Issuer: LATAM Pass Through Trust 2015-1A
....Senior Secured Enhanced Equipment Trust,
Downgraded to B3 from Baa2
..Issuer: LATAM Pass Through Trust 2015-1B
....Senior Secured Enhanced Equipment Trust,
Downgraded to Ca from Ba1
Outlook Actions:
..Issuer: LATAM Pass Through Trust 2015-1A
....Outlook, Changed To Negative From
Rating Under Review
..Issuer: LATAM Pass Through Trust 2015-1B
....Outlook, Changed To Negative From
Rating Under Review
RATINGS RATIONALE
The B3 rating assigned to the Class A certificates reflects the increased
risk because of the rejection of the transaction and the potential for
a negotiated change to the transaction's payment terms or a repossession
and subsequent delay in monetizing the aircraft because of current paucity
of demand for aircraft. The Ca rating on the Class B certificates
reflects the likelihood of a less than full recovery given the rejection
of the transaction, current market conditions, and the potential
for payment terms to be renegotiated in lieu of repossession. Moody's
had assumed equity cushions of about 35% and 25% before
priority claims when it previously downgraded the ratings on May 6th,
reflecting the following valuation assumptions for aircraft: $37
million for the 2015 vintage A321-200s, $98 million
for the 2015 787-9s, and $101 million for the 2015
vintage A350-900s. The timing of monetization of the aircraft
or renegotiation of terms relative to a recovery in passenger demand will
impact the ultimate recovery of the obligations.
A default on the rated certificates is defined as non-payment of
scheduled interest or non-payment of remaining principal at the
legal final maturity dates (August 15, 2029 for the Class A,
and August 15, 2025 for the Class B). The separate 21-month
liquidity facilities will now be utilized to fund interest payments,
including the May 15, 2020 installment that LATAM did not make when
due, absent the company curing the missed payment.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
Changes in the ratings of the LATAM EETCs can result from declines in
Moody's estimates of aircraft values and/or the company curing the
missed payment and agreeing to observe the original payment schedule going
forward.
The methodologies used in these ratings were Enhanced Equipment Trust
and Equipment Trust Certificates published in July 2018 and available
at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1125852,
and 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 these methodologies.
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.
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Jonathan Root, CFA
Senior Vice President
Corporate Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
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Russell Solomon
Associate Managing Director
Corporate Finance Group
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