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Rating Action:

Moody's upgrades Air Canada to B3; stable outlook

27 Nov 2013

Approximately $2.1 billion of debt securities affected

Toronto, November 27, 2013 -- Moody's Investors Service upgraded Air Canada's corporate family rating (CFR) to B3 from Caa1, probability of default rating to B3-PD from Caa1-PD, first lien senior secured rating to B1 from B2 and second lien senior secured rating to Caa1 from Caa2. The company's speculative grade liquidity rating was raised to SGL-2 from SGL-3. The ratings on Air Canada's 2013-1 Class A, Class B and Class C Pass Through Trust Certificates were upgraded by one notch to Baa2, Ba3, and B2, respectively. The rating outlook has been changed to stable from positive.

Issuer: Air Canada

.Corporate Family Rating to B3 from Caa1

.Probability of Default Rating to B3-PD from Caa1-PD

....US$100M 1st Lien Senior Secured Revolver due 2017 to B1, LGD2, 24% from B2, LGD2, 24%

....US$300M 1st Lien Senior Secured TLB due 2019 to B1 LGD2, 24% from B2, LGD2, 24%

....US$400M 1st Lien Senior Secured Notes due 2019 to B1 LGD2, 24% from B2, LGD2, 24%

.C$300M 1st Lien Senior Secured Notes 2019, to B1, LGD2, 24% from B2, LGD2, 24%

.US$300M 2nd Lien Senior Secured Notes due 2020, to Caa1 LGD4, 58% from Caa2, LGD4, 58%

.Speculative Grade Liquidity Rating to SGL-2 from SGL-3

.Outlook to Stable from Positive

Issuer: Air Canada 2013-1 Pass Through Trusts

....US $424M Senior Secured Enhanced Equipment Trust, A Tranche to Baa2 from Baa3

....US $182M Senior Secured Enhanced Equipment Trust, B Tranche to Ba3 from B1

....US $108M Senior Secured Enhanced Equipment Trust, C Tranche to B2 from B3

.Outlook to Stable from Positive

RATINGS RATIONALE

"The upgrade of Air Canada's ratings is driven by its strong operating performance over the past few quarters", said Darren Kirk, Vice President and Senior Credit Officer with Moody's. "The company has demonstrated solid load factors, good yield management and significant cost reduction measures while pressures from its considerable pension burden have eased. This has given us increased confidence that Air Canada will sustain its adjusted Debt/ EBITDA below 7x and that it will maintain good liquidity through the next couple of years", Kirk added.

Air Canada's B3 corporate family rating incorporates the company's elevated financial leverage, growing competition from lower-cost carriers, and Moody's expectation that the significant capacity additions planned by Air Canada and its primary domestic competitor will inhibit near term earnings growth. The rating also considers the company's very high cost structure arising from its legacy carrier status and Moody's expectation that Air Canada's annual free cash flow will be modestly consumptive into the medium term as significant wide-body aircraft purchases cause capital expenditures to remain elevated. Favorably, the rating reflects Air Canada's meaningful scale, leading market share of domestic, trans-border and international routes in and out of Canada and benefits from its position in the Star Alliance network.

The upgrade of Air Canada's liquidity rating is driven by Moody's expectation that Air Canada's operating cash flows will mostly cover increasing capital expenditures through 2014, enabling cash balances to remain in excess of $2 billion through this timeframe. Moody's expects Air Canada will end 2013 with about $2.2 billion of cash which is more than sufficient to fund approximately $150 million of expected cash consumption in 2014, about $175 million in excess pension contributions and $300 million in debt repayment obligations. External liquidity sources include about $650 million in committed funding for aircraft purchases in 2014 (including an estimated $500 million from Boeing as a backstop for 787 purchases) and a $100 million unused revolver. The liquidity rating also captures Air Canada's minimum cash balance requirement in its primary credit card agreement, and the fact that nearly all of its existing assets are already pledged.

Air Canada's senior secured instrument ratings have been assigned pursuant to Moody's loss-given-default (LGD) methodology. That methodology indicates the first lien senior secured debt and second lien senior secured debt would normally be rated Ba3 and B3 respectively. Moody's has applied a one notch override down to this outcome. The override considers that rising discount rates and the implementation of recent pension amendments may results in a reduction to the underfunded pension burden (about $3 billion on an accounting basis at year end 2012) which would reduce the lift to the instrument ratings.

Moody's uses its estimates of current market value when assessing the loan-to-value ("LTVs") of an enhanced equipment trust certificate ("EETC") financing. Moody's estimates the peak LTVs of the A, B and C tranches at about 52%, 74%, and 87%, respectively. The peak LTVs are expected to occur at the first distribution date of May 15, 2014.The EETC ratings also reflect Moody's opinion of the importance of the five Boeing B777-300ER aircraft that collateralize the transaction to the company's long-haul network strategy, the international interests subject to the Cape Town Convention and the support of the Class A and Class B liquidity facilities.

The stable ratings outlook reflects Moody's expectation that Air Canada's earnings and debt levels will remain relatively flat through 2015 such that its leverage remains between 6.5-7x.

An upgrade of Air Canada's CFR could occur if adjusted leverage is sustained below 6x and cash is maintained above 15% of revenues. Downward rating pressure on Air Canada's CFR could occur if Debt/ EBITDA is forecast to rise above 8x or should cash trend towards 10% of revenues.

The principal methodology used in this rating was the Global Passenger Airline Industry Methodology published in May 2012. Other methodologies used include Loss Given Default for Speculative-Grade Non-Financial Companies in the U.S., Canada and EMEA published in June 2009. Please see the Credit Policy page on www.moodys.com for a copy of these methodologies.

The principal methodology used in this rating was the Air Canada 2013-1 Pass Through Trusts was the Enhanced Equipment Trust and Equipment Trust Certificates Methodology published in December 2010 and the Global Passenger Airlines Industry Methodology published in May 2012. Please see the Credit Policy page on www.moodys.com for a copy of these methodologies.

Headquartered in Saint-Laurent, Quebec, Air Canada is the largest provider of scheduled passenger services in Canada. Revenues for 2012 were approximately $12 billion.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt 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 rating action on the support provider and in relation to each particular 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 rating action, and whose ratings may change as a result of this 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 rating has 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.

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.

Darren M. Kirk
VP - Senior Credit Officer
Corporate Finance Group
Moody's Canada Inc.
70 York Street
Suite 1400
Toronto, ON M5J 1S9
Canada
(416) 214-1635

Donald S. Carter, CFA
MD - Corporate Finance
Corporate Finance Group
(416) 214-1635

Releasing Office:
Moody's Canada Inc.
70 York Street
Suite 1400
Toronto, ON M5J 1S9
Canada
(416) 214-1635

Moody's upgrades Air Canada to B3; stable outlook
No Related Data.
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