New York, April 15, 2020 -- Moody's Investors Service, (Moody's) today downgraded
to B3 from B1 LifeMiles Ltd.´s corporate family and senior
secured ratings. The outlook is negative
LifeMiles' downgrade to B3 reflects its exposure to the weak credit
profile of its controlling shareholder Avianca Holdings, S.A.
(Avianca). Accordingly, following the closure of Colombia's
international air space to passenger travel, that grounded almost
Avianca's entire air fleet on March 27, Avianca announced
that it has temporarily deferred payments on some long-term leases
and on principal payments on certain loans. The downgrade also
incorporates our expectation that LifeMiles operation will be temporarily
hurt by the global spread of coronavirus affecting consumer spending,
traveling and economic growth.
The rating of the term loan takes into consideration its secured position
within the capital structure of the company and the existence of a mandatory
prepayment clause that obliges the use of a percentage of excess cash
to pay down the term loan. This clause partly offsets the risk
of cash leakage at LifeMiles before fulfilling its debt payment obligations.
LifeMiles' solid corporate governance framework, particularly Advent
International's strong minority shareholder rights, also mitigates
the risk of a potential cash leakage before the payment of debt obligations.
In addition, LifeMiles liquidity policy of maintaining a minimum
cash balance equivalent to six months of rewards plus two quarters of
debt service also mitigates this risk.
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 air passenger travel
sector has been one of the sectors most significantly affected by the
shock given its sensitivity to consumer demand and sentiment. More
specifically, the exposure of LifeMiles to air travel and overall
consumer spending has left it vulnerable to shifts in market sentiment
in these unprecedented operating conditions and LifeMiles remains vulnerable
to the outbreak continuing to spread. Still, LifeMiles adequate
credit metrics and liquidity provide it with some cushion to withstand
temporary volatility. We regard the coronavirus outbreak as a social
risk under our ESG framework, given the substantial implications
for public health and safety.
LifeMiles' B3 ratings also incorporates its adequate liquidity and solid
business model being the sole operator of Avianca's frequent flyer program,
its diversified and sticky base of commercial partners and co-brand
credit card growth. 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 capital structure.
LifeMiles has a strong business model that leverages third-party
commercial partnerships (including co-branded credit card agreements
with the largest banks in its core markets), but its single largest
contributor to gross billings are miles sold to Avianca and its air partners,
accounting for 32% of gross billings. As such, Avianca's
operating problems combined with the effects of coronavirus hurting consumer
spending and air travel also hampers LifeMiles' operation. Nonetheless,
we note that lower air travel significantly decreases redemption costs,
which represent over 80% of LifeMiles' cash costs and operating
expenses. Moody's estimates that, absent additional indebtedness,
for example to finance dividend payments, LifeMiles' debt/EBITDA,
as adjusted by Moody's, will reach close to 4.5 times by
LifeMiles has adequate liquidity. The company cash and cash equivalents
of $108 million as of December 31, 2019 (including $31
million of advance payment of reward seats) can cover 1.6x its
short-term debt. LifeMiles has posted negative free cash
flow (defined as cash from operations minus dividends and capex) in 2017,
2018 and in 2019 resulting from the high dividend payout. We expect
the company will limit its dividend payout in 2020, at least while
the coronavirus impact persists, to further strengthen its cash
LifeMiles' largest contributors to gross billings are its financial partners,
which include credit card cobrands (47%) and airlines (32%),
being Avianca its largest customer, responsible for approximately
27% of gross billings. Around 80% of accrued miles
are redeemed, with 90% being redeemed into air tickets.
The 10% balance is redeemed into hotel nights, merchandise
and other rewards. LifeMiles benefit from Avianca's leading market
position in Colombia and Central America.
LifeMiles has around 9.7 million members, more than 100 mileage
agreements with financial institutions, and more than 723,000
co-branded credit cards. LifeMiles' largest market is Colombia
where it generates 52% of its gross billings. It also operates
in Peru, Costa Rica, El Salvador, Honduras, Guatemala,
and the US; each of which contributes with less than 10% to
gross billings. Moody's forecasts the Colombian economy will grow
by a modest 0.5% in 2020.
The negative outlook reflects our view that the company´s operation
and credit metrics can be further affected from weak credit profile of
Avianca and the overall impact of coronavirus and weak economic conditions
in LifeMiles territories of operation.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATING
An upgrade would require an improvement in Avianca's credit profile and
maintaining ring-fencing provisions that limit cash upstream to
shareholders, as well as the maintenance of adequate liquidity and
profitability. Quantitatively, an upgrade would require LifeMiles
to maintain its adjusted debt/EBITDA lower than 4.0 times on a
The ratings could be downgraded if the company's profitability or credit
metrics worsen, with adjusted debt/EBITDA remaining above 5.0
times. A deterioration in 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,
any further weakening on Avianca's credit profile or repetitive amendments
to the loan agreement such that the mandatory prepayment provisions are
waived or canceled, and excess cash flow is not used to pay down
debt could result in a downgrade.
The principal methodology used in these ratings was Business and Consumer
Service Industry published in October 2016 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1037985.
Alternatively, please see the Rating Methodologies page on www.moodys.com
for a copy of this methodology.
LifeMiles Ltd. is a coalition loyalty program and the solely operator
of Avianca's frequent flyer program. LifeMiles has 586 active 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 $334 million in 2019.
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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Vice President - Senior Analyst
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