New York, May 20, 2020 -- Moody's Investors Service (Moody's) downgraded to Caa1 from
B3 the senior secured and corporate family rating of LifeMiles Ltd.
The outlook is negative.
LifeMiles' downgrade to Caa1 reflects its exposure to the weak credit
profile of its controlling shareholder Avianca Holdings, S.A.
(Avianca) which announced that it has filed for Chapter 11 protection
on May 10. The Caa1 rating also incorporates our expectation that
LifeMiles' operation will be temporarily hurt by the global spread
of coronavirus affecting consumer spending, traveling and economic
LifeMiles' ratings continue to consider its diversified and sticky base
of commercial partners and co-brand credit card growth, and
strong market position in its territories of operation. The corporate
family rating is at the same level as the senior secured rating given
that it is the only debt in the company's capital structure.
Moody's will continue to monitor the developments regarding Avianca's
Chapter 11 filing and its effects on LifeMiles' operation as well
as the ongoing impact of the coronavirus outbreak, lower economic
growth and weak consumer sentiment on LifeMiles' operation and credit
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. We regard the coronavirus
outbreak as a social risk under our ESG framework, given the substantial
implications for public health and safety.
LifeMiles' gross billings have been affected by the reduction in
air travel since late March when most of Avianca's air fleet was
grounded following the closure of Colombia's air space to passenger
travel. Nonetheless, lower air travel significantly decreases
redemption costs, which represent over 80% of LifeMiles'
cash costs and operating expenses. LifeMiles' largest contributors
to gross billings are its financial partners, which include credit
card cobrands (49%) and airlines (29%), being Avianca
its largest customer, responsible for approximately 26% of
gross billings. As such, Avianca's financial and operating
difficulties combined with the effects of coronavirus hurting consumer
spending and air travel have hampered LifeMiles' operation.
LifeMiles' cash and cash equivalents of $128 million as of
March 31, 2020 can cover 2.6x its short-term debt.
LifeMiles has posted positive free cash flow over the twelve months ended
March 31, 2020 as it has reduced substantially its dividend payout.
Nevertheless, the company's liquidity position in the coming
quarters will be affected by weaker revenue and be highly dependent on
the level of dividends paid. Moody's expects that the company
will continue to moderate its dividend payout in 2020, at least
while the coronavirus impact persists, to preserve its cash position.
The negative outlook reflects our view that the company´s operation
and credit metrics can be further affected by the weak credit profile
of Avianca and its Chapter 11 filing. It also reflects the downside
risks related to 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 RATINGS
An upgrade of LifeMiles' ratings would require an improvement in
Avianca's credit profile while maintaining its ability to continue operating
as a going concern during the Chapter 11 process or once is finalized.
An upgrade would also require LifeMiles to maintain ring-fencing
provisions that limit cash upstream to shareholders, as well as
an adequate liquidity and profitability. Quantitatively,
an upgrade would require LifeMiles to maintain its adjusted debt/EBITDA
lower than 5.0 times on a sustained basis.
LifeMiles' ratings could be downgraded if the company's liquidity
deteriorates in particular, through excessive cash distribution
to shareholders, or if Avianca's credit profile during or after
the Chapter 11 process further deteriorates. 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
also 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 over 600 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 $328 million over the twelve
months ended March 31, 2020.
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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