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
