Approximately $2.0 billion of newly rated debt
Toronto, July 19, 2021 -- Moody's Investors Service, ("Moody's") has assigned a Ba2 rating
to Air Canada's proposed $2.0 billion senior secured term
loan B due in 2028 and has upgraded Air Canada's Speculative Grade
Liquidity rating to SGL-2 from SGL-3. At the same
time Moody's has affirmed Air Canada's Ba3 Corporate Family
Rating (CFR), and Ba3-PD Probability of Default rating.
Moody's also affirmed its ratings on Air Canada Series 2013-1 Pass
Through Trusts, Air Canada Series 2015-2 Pass Through Trusts,
Air Canada Series 2017-1 Pass Through Trusts, and Air Canada
Series 2020-1 Pass Through Trusts (together "EETCs").
Please see the end of this press release for the detailed list of rating
actions taken today. The ratings outlook remains negative.
Air Canada's existing first lien senior secured ratings remain unchanged
at Ba1 and are expected to be repaid with proceeds from the proposed issuance.
The Ba1 ratings will be withdrawn at that time. The proceeds of
this offering will be used to refinance existing debt and for general
corporate purposes, including the repayment of a $600 million
senior secured revolving credit facility due in 2023, $580
million term loan B due in 2023, CAD200 million senior secured first
lien notes due in 2023, and CAD840 million senior secured second
lien notes maturing in 2024.
"The rating affirmation reflects Moody's view that the proposed
loan issuance improves Air Canada's liquidity. While the
transaction will modestly increase leverage, this is somewhat mitigated
by our expectation for a near-term improvement in air travel demand"
said Aziz Al Sammarai, Moody's Analyst. "Moody's
expects Canadian demand for air travel to improve as a result of increasing
vaccination rates and easing of government travel restrictions."
he added.
The affirmation of Air Canada's CFR reflects Moody's expectation
that Canadian domestic and global demand for air travel will begin to
improve in the second half of 2021. Moody's assumes that
third quarter of 2021 capacity measured by available seat miles will be
approximately 35%-40% of third quarter 2019 capacity
before improving to 50% of 2019 capacity in fourth quarter 2021.
Moody's expects cash burn to average between CAD11 million and CAD13
million per day in the third quarter of 2021 with the level of burn expected
to improve in the fourth quarter of 2021, though the airline will
remain cash consumptive in 2021. Moreover, the affirmation
reflects the improved vaccination rates. As of 9 July 2021,
about 68% of Canadian population had received at least one approved
dose of the COVID-19 vaccine, while about 36% of the
population are fully vaccinated.
The proposed Ba2 term loan B will be secured on pari passu basis by first
priority liens on all of the company's international routes,
slots, and gates and is one notch above the company's Ba3 CFR based
on the application of Moody's Loss Given Default for Speculative-Grade
Companies methodology. During 2020 and 2021, Air Canada supplemented
its liquidity position by raising additional debt including unsecured
convertible debt (unrated) which, combined with other unsecured
obligations, provides loss absorption cushion to the first lien
obligations.
RATINGS RATIONALE
Air Canada (Ba3 negative) benefits from 1) good liquidity over the next
year, and 2) its leading position in the duopolistic Canadian market,
which will provide a solid foundation for eventual recovery from the coronavirus
pandemic. The company is constrained by 1) elevated adjusted debt
(expected to be about CAD17 billion in 2021 pro forma for the proposed
new debt raise) in part due to recent borrowings to support liquidity,
2) continued weak passenger demand when compared to 2019 levels due to
the coronavirus pandemic and related significant cash flow consumption,
and 3) uncertainty regarding the timing of a recovery in demand for air
passenger travel, especially on international routes, which
is an important portion of Air Canada's business.
Air Canada has good liquidity (SGL-2) over the next twelve months
through March of 2022, supported by about CAD14.1 billion
of sources against CAD5.9 billion of uses. Pro forma for
the proposed new debt raise, the company's sources include cash
and short-term investments of about CAD9.2 billion at March
31, 2021. Air Canada will have two committed credit facilities;
a fully available $600 million credit facility due in 2025 and
a fully drawn CAD200 million credit facility due in 2023. Additionally,
Moody's expects Air Canada to have about CAD4.2 billion of
available committed government of Canada facilities over the next 4 quarters.
Government of Canada facilities consist of 1) a fully available CAD1.5
billion of secured revolving credit facility 2) CAD2.475 billion
of unsecured non-revolving credit facility due in 2026, and
3) our expectation of CAD200 million available under CAD1.4 billion
unsecured credit facility that supports customer refunds due in 2028.
Uses include 1) approximately CAD3 billion of negative free cash flow
including estimated customer refunds, 2) mandatory debt and lease
repayments of about CAD1.6 billion and 3) minimum cash reserves
required by Air Canada's contractual covenants of about CAD1.3
billion. Possible additional liquidity could be provided by Air
Canada's unencumbered asset pool (excluding the value of Aeroplan and
Air Canada Vacations) which amounts to approximately CAD2.3 billion
at close. Air Canada has debt covenants, which are loan-to-security
value measures in nature, with which Moody's expects the company
will remain in compliance.
The affirmations of the EETCs reflect Moody's view that these ratings
remain appropriate considering its estimates of loan-to-value
for each of the transactions. Moody's believes the aircraft models
that comprise the collateral across these transactions will remain important
to Air Canada's post-coronavirus network, which supports
Moody's expectation that the company would likely affirm these transactions
if it were to reorganize under Canadian bankruptcy and insolvency law.
Air Canada has continued to meet its debt service commitments on all of
its EETCs and other debt financings throughout the pandemic, notwithstanding
the more than 90% decline in its passenger volumes for the first
12 to 14 months of the pandemic. The Government of Canada and or
the Country's provincial governments have maintained some of the
strictest requirements for international and domestic travel globally.
Increasing vaccination rates in Canada will lead to further loosening
of restrictions, which will increase passenger demand --
first domestic, then international -- creating demand
for more flights and the return of more aircraft to service. The
aircraft collateral are 777-300ERs (2013-1), 777-300ERs
and 787-9s (2015-2) and 737 MAX and 787-9s (2017-1).
The 787s and 737 MAXes are the most fuel efficient in the fleet;
the 777-300ERs have high seating density, and are used mainly
on long haul flights to Europe and Asia.
The negative outlook reflects the potential for a prolonged recovery in
domestic and international air travel demand, which could limit
any meaningful improvement in the company's average daily cash burn
and its ability to generate earnings and cash flows needed to strengthen
the credit metrics in the next 18-24 months.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
The ratings could be downgraded if 1) the pace of recovery of passenger
demand is slower than Moody's expects, 2) liquidity deteriorates,
3) adjusted debt/EBITDA is likely to be sustained above 4.5x beyond
2023 (negative EBITDA expected in 2021), or 4) funds from operations
plus interest-to-interest is likely to be sustained less
than 4.5x beyond 2023 (negative 1.8x expected in 2021).
The ratings could be upgraded if 1) liquidity strengthens, 2) adjusted
debt-to-EBITDA is likely to be sustained less than 3.5x,
and 3) funds from operations plus interest-to-interest is
likely to exceed 5x.
Changes in EETC ratings can result from any changes in the underlying
credit quality or ratings of the company or Moody's opinion of the importance
of the aircraft collateral to the operations. Changes in estimates
of current and projected aircraft market values, which will affect
estimates of loan-to-value, could also result in a
change to EETC ratings.
The principal methodology used in rating Air Canada was Passenger Airline
Industry published in April 2018 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1091811.
The principal methodologies used in rating Air Canada 2013-1 Pass
Through Trusts, Air Canada Series 2015-2 Pass Through Trusts,
Air Canada Series 2017-1 Pass Through Trusts and Air Canada Series
2020-1 Pass Through Trusts were Passenger Airline Industry published
in April 2018 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1091811,
and Enhanced Equipment Trust and Equipment Trust Certificates published
in July 2018 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1125852.
Alternatively, 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 2020 was CAD5.8
billion. The company is headquartered in Saint-Laurent,
Quebec, Canada.
Upgrades:
..Issuer: Air Canada
.... Speculative Grade Liquidity Rating,
Upgraded to SGL-2 from SGL-3
Assignments:
..Issuer: Air Canada
....Senior Secured Bank Credit Facility,
Assigned Ba2 (LGD3)
Affirmations:
..Issuer: Air Canada
.... Corporate Family Rating, Affirmed
Ba3
.... Probability of Default Rating,
Affirmed Ba3-PD
..Issuer: Air Canada 2013-1 Pass Through Trusts
....Senior Secured Enhanced Equipment Trust,
Affirmed Baa3
..Issuer: Air Canada Series 2015-2 Pass Through
Trusts
....Senior Secured Enhanced Equipment Trust
Class AA, Affirmed A3
....Senior Secured Enhanced Equipment Trust
Class B, Affirmed Ba1
....Senior Secured Enhanced Equipment Trust
Class A, Affirmed Baa2
..Issuer: Air Canada Series 2017-1 Pass Through
Trusts
....Senior Secured Enhanced Equipment Trust
Class AA, Affirmed A3
....Senior Secured Enhanced Equipment Trust
Class B, Affirmed Ba1
....Senior Secured Enhanced Equipment Trust
Class A, Affirmed Baa2
..Issuer: Air Canada Series 2020-1 Pass Through
Trusts
....Senior Secured Enhanced Equipment Trust,
Affirmed Ba3
Outlook Actions:
..Issuer: Air Canada
....Outlook, Remains Negative
..Issuer: Air Canada 2013-1 Pass Through Trusts
....Outlook, Remains Negative
..Issuer: Air Canada Series 2015-2 Pass Through
Trusts
....Outlook, Remains Negative
..Issuer: Air Canada Series 2017-1 Pass Through
Trusts
....Outlook, Remains Negative
..Issuer: Air Canada Series 2020-1 Pass Through
Trusts
....Outlook, Remains Negative
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 http://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1288435.
The Global Scale Credit Rating on this Credit Rating Announcement was
issued by one of Moody's affiliates outside the EU and is endorsed
by Moody's Deutschland GmbH, An der Welle 5, Frankfurt
am Main 60322, Germany, in accordance with Art.4 paragraph
3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies.
Further information on the EU endorsement status and on the Moody's
office that issued the credit rating is available on www.moodys.com.
The Global Scale Credit Rating on this Credit Rating Announcement was
issued by one of Moody's affiliates outside the UK and is endorsed
by Moody's Investors Service Limited, One Canada Square,
Canary Wharf, London E14 5FA under the law applicable to credit
rating agencies in the UK. Further information on the UK endorsement
status and on the Moody's office that issued the credit rating is
available on www.moodys.com.
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 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.
Abdelaziz Al Sammarai
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
