Toronto, March 18, 2020 -- Moody's Investors Service, ("Moody's") has
placed the ratings of Air Canada and its Pass Through Trust Certificates
under review for downgrade, including its Ba1 Corporate Family Rating
(CFR), Ba1- PD Probability of Default rating, Baa3
first lien senior secured rating and Ba2 senior unsecured rating.
The company's Speculative Grade Liquidity rating remains unchanged at
SGL-2. Moody's rates eight tranches of enhanced equipment
trust certificates (EETCs) across three Air Canada EETC transactions,
Series 2013-1, Series 2015-2 and Series 2017-1.
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 Air Canada of the breadth and severity of the shock, and the
broad deterioration in credit quality it has triggered.
In its review, Moody's will consider (i) the sufficiency of the
company's liquidity profile, which is substantial with about CAD6
billion of cash and short-term investments currently on hand;
(ii) Air Canada's ability to aggressively reduce expenses and capital
investments to reduce cash outflows as new booking levels recede;
(iii) evolving market conditions, including demand patterns and
responsive additional capacity cuts; (iv) the potential for and types
of support the Canadian government might provide; and (v) the potential
to restore its credit metrics and a stronger cash buffer in a timely manner
following the coronavirus.
On Review for Downgrade:
..Issuer: Air Canada
.... Corporate Family Rating, Placed
on Review for Downgrade, currently Ba1
.... Probability of Default Rating,
Placed on Review for Downgrade, currently Ba1-PD
....Senior Secured First Lien Term Loan,
Placed on Review for Downgrade, currently Baa3 (LGD2)
....Senior Secured First Lien Revolving Credit
Facility, Placed on Review for Downgrade, currently Baa3 (LGD2)
....Senior Secured Regular Bond/Debenture,
Placed on Review for Downgrade, currently Baa3 (LGD2)
....Senior Unsecured Regular Bond/Debenture,
Placed on Review for Downgrade, currently Ba2 (LGD5)
..Issuer: Air Canada 2013-1 Pass Through Trusts
....Senior Secured Enhanced Equipment Trust
Series 2013-1 Class A, Placed on Review for Downgrade,
currently A3
....Senior Secured Enhanced Equipment Trust
Series 2013-1 Class B, Placed on Review for Downgrade,
currently Baa2
..Issuer: Air Canada Series 2015-2 Pass Through
Trusts
....Senior Secured Enhanced Equipment Trust
Series 2015-2 Class A, Placed on Review for Downgrade,
currently A1
....Senior Secured Enhanced Equipment Trust
Series 2015-2 Class AA, Placed on Review for Downgrade,
currently Aa2
....Senior Secured Enhanced Equipment Trust
Series 2015-2 Class B, Placed on Review for Downgrade,
currently Baa1
..Issuer: Air Canada Series 2017-1 Pass Through
Trusts
....Senior Secured Enhanced Equipment Trust
Series 2017-1 Class A, Placed on Review for Downgrade,
currently A1
....Senior Secured Enhanced Equipment Trust
Series 2017-1 Class AA, Placed on Review for Downgrade,
currently Aa2
....Senior Secured Enhanced Equipment Trust
Series 2017-1 Class B, Placed on Review for Downgrade,
currently Baa1
Outlook Actions:
..Issuer: Air Canada
....Outlook, Changed To Rating Under
Review From Stable
..Issuer: Air Canada 2013-1 Pass Through Trusts
....Outlook, Changed To Rating Under
Review From Stable
..Issuer: Air Canada Series 2015-2 Pass Through
Trusts
....Outlook, Changed To Rating Under
Review From Stable
..Issuer: Air Canada Series 2017-1 Pass Through
Trusts
....Outlook, Changed To Rating Under
Review From Stable
LIQUIDITY
Air Canada has good liquidity (SGL-2), supported by CAD6.0
billion of cash and short-term investments and an undrawn CAD200
million committed revolver. These sources are sufficient to fund
our expectation at this time of about CAD500 million of negative free
cash flow and mandatory annual debt and lease repayments of CAD 1.2
billion in 2020. Air Canada also has 89 unencumbered aircraft (almost
half of its fleet) which could be used to raise capital should the need
arise.
RATINGS RATIONALE
The rating action was prompted by the very sharp decline in passenger
traffic since the outbreak of coronavirus started during January 2020,
which will result in a significant negative free cash flow in 2020,
a weakening liquidity profile and a significantly higher leverage.
From a regionally contained outbreak the virus has rapidly spread to many
different regions severely denting air travel. The International
Air Travel Association's (IATA) latest scenario analysis forecasts
a decline in passenger numbers of between 11% and 19% for
the full year 2020.
Moody's base case assumptions are that the coronavirus pandemic
will lead to a period of severe cuts in passenger traffic over at least
the next three months with partial or full flight cancellations and aircraft
groundings, with all regions affected globally. The base
case assumes there is a gradual recovery in passenger volumes starting
in the third quarter. However there are high risks of more challenging
downside scenarios and the severity and duration of the pandemic and travel
restrictions is uncertain.
Air Canada has cut capacity, postponed launches and extended the
temporary suspension of numerous routes. For the second quarter
of 2020, Air Canada expects, on average, system ASM
capacity to decline by approximately 50% versus the comparable
period in 2019. Air Canada is currently focusing on managing its
way through this very volatile market environment by reducing costs as
much as possible and by shoring up its liquidity profile. Air Canada
believes that, excluding fuel and depreciation and amortization
expenses, approximately 50 percent of its operating expenses are
variable in nature and has no current outstanding fuel hedge positions.
Air Canada's (Ba1 RUR down) credit benefits from its leading position
in the duopolistic Canadian market, falling fuel costs and liquidity
we deem supportive through this difficult market. It is constrained
by the severe drop in passenger demand and uncertainty regarding the length
and impact of current market conditions.
The airline sector currently accounts for about 2% of global carbon
emissions with 65% of its emissions coming from international flights.
Canada (and as a result Air Canada) is one of the 70 countries that have
voluntarily elected to early adopt the International Civil Aviation Organization's
(ICAO) Carbon Offsetting and Reduction Scheme for International Aviation
(CORSIA), which targets capping carbon emissions at 2020 levels
and requires purchases of offsets for airlines' that exceed their targets.
We expect that fuel expense will increase for carbon offset costs incurred
from 2021.
The review of the EETC ratings accompanies the placement on review for
downgrade of the corporate family rating. Moody's assigns ratings
to EETCs by notching above an airline's corporate family rating,
based on certain legal protections, its opinion of the importance
of the aircraft collateral to the airline's network, whether there
is a liquidity facility, its estimates of the size of the projected
equity cushion, and each Classes' position in the waterfall.
Moody's estimates the peak LTVs of the Class AA tranches at about 42%,
at about 60% for the Class As and about 74% and 80%
for the Class Cs across the three outstanding transactions.
Changes in the EETC ratings can result from any combination of changes
in the underlying credit quality or ratings of the company, Moody's
opinion of the importance of the aircraft collateral to the operations
and/or its estimates of current and projected aircraft market values,
which will affect estimates of loan-to-value.
The principal methodology used in rating Air Canada was Passenger Airline
Industry published in April 2018. The principal methodologies used
in rating Air Canada 2013-1 Pass Through Trusts, Air Canada
Series 2015-2 Pass Through Trusts and Air Canada Series 2017-1
Pass Through Trusts were Passenger Airline Industry published in April
2018 and Enhanced Equipment Trust and Equipment Trust Certificates published
in July 2018. Please see the Rating Methodologies page on www.moodys.com
for a copy of these methodologies.
Air Canada is the largest provider of scheduled airline passenger services
within, and to and from Canada. Revenue in 2019 was CAD19.1
billion. The company is headquartered in Saint-Laurent,
Quebec, Canada.
REGULATORY DISCLOSURES
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.
Regulatory disclosures contained in this press release apply to the credit
rating and, if applicable, the related rating outlook or rating
review.
The below contact information is provided for information purposes only.
Please see the ratings tab of the issuer page at www.moodys.com,
for each of the ratings covered, Moody's disclosures on the
lead rating analyst and the Moody's legal entity that has issued
the ratings.
The person who approved Air Canada credit ratings is Donald S.
Carter, CFA, MD - Corporate Finance, Corporate
Finance Group, JOURNALISTS: 1 212 553 0376, Client Service:
1 212 553 1653. The person who approved Air Canada 2013-1
Pass Through Trusts, Air Canada Series 2015-2 Pass Through
Trusts, Air Canada Series 2017-1 Pass Through Trusts credit
ratings is Russell Solomon, Associate Managing Director, Corporate
Finance Group, JOURNALISTS: 1 212 553 0376, Client Service:
1 212 553 1653.
The relevant office for each credit rating is identified in "Debt/deal
box" on the Ratings tab in the Debt/Deal List section of each issuer/entity
page of the website.
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.
Jamie Koutsoukis
Vice President - Senior Analyst
Corporate Finance Group
Moody's Canada Inc.
70 York Street
Suite 1400
Toronto, ON M5J 1S9
Canada
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653
Donald S. Carter, CFA
MD - Corporate Finance
Corporate Finance Group
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653
Releasing Office:
Moody's Canada Inc.
70 York Street
Suite 1400
Toronto, ON M5J 1S9
Canada
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653
