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
