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Rating Action:

Moody's downgrades TAP SA's CFR to Caa2, outlook negative

23 Jun 2020

Frankfurt am Main, June 23, 2020 -- Moody's Investors Service, ("Moody's") has today downgraded the Corporate Family and Probability of Default rating of TRANSPORTES AEREOS PORTUGUESES, S.A. (TAP) to Caa2 from Caa1 and to Caa2-PD from Caa1-PD respectively. Concurrently Moody's has also downgraded TAP's Baseline Credit Assessment (BCA) to caa3 from caa2 and the €375 million senior unsecured notes to Caa2 from Caa1. The outlook on the ratings remains negative.

Today's rating actions reflect:

• The increasing duration and severity of the coronavirus outbreak

• Moody's expectation that the airline industry will remain deeply constrained in 2020 and 2021 and will not recover 2019 passenger volumes until 2023 at the earliest

• The levered capital structure of TAP and hence weak positioning in its rating categories prior to the outbreak of the coronavirus

• The temporary liquidity relief offered by the €1.2 billion 6-month loan offered by the Portuguese government under the European Commission's Rescue & Restructuring support framework

• The implementation risk of the restructuring programme that TAP needs to develop and get approved by the European Commission under the Rescue & Restructuring framework over the next six months

• The company's strategic importance to the Portuguese economy and expectation of its continued support

• Uncertainties regarding the execution of longer term equity recapitalization needs

RATINGS RATIONALE

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. Today's action reflects the impact on TAP of the breadth and severity of the shock, and the broad deterioration in credit quality it has triggered.

While TAP was impacted later than other European carriers by the coronavirus outbreak due to its absence of exposure to and from China and Asia Pacific and other regions , it had in the meantime to reduce capacity meaningfully as the virus moved to the west and we do not expect a material increase from those levels over the next few weeks.

Moody's expects flight activity to resume over Q3 and Q4 of 2020, but remaining severely depressed, with domestic flights recovering earlier and a slower return for international and long haul flights. TAP has a high share of long haul traffic but is less exposed to business travel than some of its peers.

The International Air Transport Association (IATA) currently forecasts that 2020 global passenger numbers will be 48% down year-on-year, with 2021 volumes around 30% below 2019, and only recovering to 2019 levels by 2023. Given high levels of uncertainty of the trajectory of the pandemic there are a wide range of possible outcomes and Moody's credit assessment considers deeper downside scenarios incorporating the risks of a slower recovery. In particular Moody's considers that 2021 is likely to remain a severely depressed year for the industry, with continued travel restrictions, health screening and social distancing, consumer concerns over travel, a weak economic environment and threats of further coronavirus outbreaks. This is likely to be partially mitigated by better preparedness by governments and healthcare systems, international coordination, pent-up consumer demand and the economic importance of resuming air travel. The timing and profile of a recovery beyond 2021 also remains highly uncertain.

TAP entered the coronavirus crisis with a levered capital structure with the rating at the time factoring some further deleveraging. TAP's gross leverage as measured by Moody's adjusted debt/EBITDA stood at 6.8x for the fiscal year ended 31st December 2019 leaving little cushion against the severe market downturn induced by the coronavirus outbreak.

On 10 June 2020, TAP announced that it has received temporary liquidity relief through the obtention of a €1.2 billion 6-month loan from the Portuguese government under the European Commission's Rescue & Restructuring support framework. This loan will provide TAP with sufficient liquidity to develop and negotiate a restructuring plan with all necessary stakeholders over the next six months with a view to have this restructuring plan approved by the European Commission.

We view the implementation risk of the restructuring programme as high due to the materiality of the measures required to ensure the long term sustainability of TAP's business model and the large number of stakeholders that need to be involved . We also cannot exclude at this stage that the restructuring programme will not include a restructuring of TAP's debt including its rated debt. Failure to develop a restructuring plan that can be supported and approved by all stakeholders and the European Commission would most likely lead to further negative rating migration.

TAP's rating continue to be supported by the strategic importance of its network to the Portuguese economy as envisaged by the liquidity support that the Portuguese government has given to TAP. However, in addition we see the need of additional equity to support a sufficient capitalization of the capital structure.

LIQUIDITY

TAP had €426 million of cash & marketable securities on balance sheet as per 31st December 2019 or approximately 13% of 2019 revenue.

The provision of a €1.2 billion 6-month loan by the Portuguese government will provide TAP sufficient liquidity over the next 6 months to negotiate a restructuring plan that can be supported by all stakeholders and approved by the European Commission. Absent this liquidity injection from the Portuguese government, we estimate that TAP's liquidity would be insufficient to remain operational beyond a couple of weeks.

ENVIRONMENTAL, SOCIAL AND GOVERNANCE CONSIDERATIONS

Moody's regards the coronavirus outbreak as a social risk under its ESG framework, given the substantial implications for public health and safety.

TAP's relatively recent fleet and focus on narrow body aircrafts translates into a good fuel efficiency and lower CO2 footprint than some of its peers.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS

We do not see any positive rating pressure on the current rating during the time that TAP is negotiating its restructuring programme. A successful implementation of a comprehensive restructuring plan leading to a stabilization of TAP's credit and liquidity profile and ensuring the long term solvency of the issuer could lead to positive rating pressure.

The ratings of TAP could be lowered further if the issuer fails to develop and get approved a comprehensive restructuring plan within the next 6 months.

PRINCIPAL METHODOLOGY

The methodologies used in these ratings were Passenger Airline Industry published in April 2018 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1091811, and Government-Related Issuers Methodology published in February 2020 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1186207. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of these methodologies.

COMPANY PROFILE

Headquartered in Lisbon, Portugal, TRANSPORTES AEREOS PORTUGUESES, S.A. (TAP) is a small sized Portuguese network carrier. TAP is a member of the Star Alliance since 2005 and operates on average 400 flights per day to 38 countries and 95 airports. In 2019, TAP transported 17 million passengers and reported €3.3 billion of revenue. As of December 2019 the company's fleet was composed of 106 aircrafts, of which 24 Airbus wide-bodies, 60 Airbus narrow-bodies and 21 regional planes (ATR and Embraer).

TAP is owned by TAP S.G.P.S., which was privatized in 2015 and was previously fully owned by the Portuguese Government through Parpublica-Participacoes Publicas (SGPS), SA (Parpublica, Baa3 positive). After its privatization, TAP S.G.P.S. became majority owned by a consortium, Atlantic Gateway, which currently holds 90% of the economic interests and 45% of the voting rights. Parpublica has reduced its stake in the company to 5% of economic interest, but kept 50% of voting rights. The remaining 5% are mainly owned by TAP's employees.

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.

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.

Stanislas Duquesnoy
Senior Vice President
Corporate Finance Group
Moody's Deutschland GmbH
An der Welle 5
Frankfurt am Main 60322
Germany
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Christian Hendker, CFA
Associate Managing Director
Corporate Finance Group
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Releasing Office:
Moody's Deutschland GmbH
An der Welle 5
Frankfurt am Main 60322
Germany
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

No Related Data.
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