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Rating Action:

Moody's upgrades Air Canada's CFR to B1; outlook is stable

29 Jun 2015

Approximately US$2.6 billion of debt rated

Toronto, June 29, 2015 -- Moody's Investors Service upgraded Air Canada's corporate family rating (CFR) to B1 from B2, probability of default rating to B1-PD from B2-PD, second lien secured notes rating to B2 from B3, unsecured notes rating to B3 from Caa1, and confirmed the Ba3 rating on the first lien secured credit facilities and first lien secured notes. Moody's also upgraded the ratings on Air Canada's 2013-1 Class A, Class B and Class C Pass Through Trust Certificates by one notch each to A3, Ba1, and Ba3 respectively. Air Canada's speculative grade liquidity rating was affirmed at SGL-2. The rating outlooks for Air Canada and the Air Canada Pass Through Trust Certificates are stable. This action concludes a review for upgrade initiated on June 15, 2015.

"The upgrade of the CFR reflects the reduction in adjusted debt due to changes in Moody's approach for capitalizing operating leases and expectations that lower jet fuel prices and favorable demand will sustain Air Canada's good financial performance through the next 12 to 18 months despite foreign exchange headwinds and competitive pressures," said Peter Adu, Moody's lead analyst for Air Canada. The updated approach for standard adjustments for operating leases is explained in the cross-sector rating methodology Financial Statement Adjustments in the Analysis of Non-Financial Corporations, published on June 15, 2015.

The Ba3 rating on Air Canada's first lien senior secured credit facilities and first lien secured notes was confirmed, despite the one notch upgrade of the CFR, because of the considerable increase in first lien secured debt (aircraft financing) in the capital structure compared to when these instruments were initially rated. As well, improvement in Air Canada's pension underfunding removes loss absorption capacity provided to the first lien secured debt.

Ratings Upgraded:

Issuer: Air Canada

Corporate Family Rating, to B1 from B2

Probability of Default Rating, to B1-PD from B2-PD

US$300 million 2nd lien senior secured notes due 2020, to B2 (LGD5) from B3 (LGD4)

US$400 million senior unsecured notes due 2021, to B3 (LGD5) from Caa1 (LGD5)

Issuer: Air Canada 2013-1 Pass Through Trusts

US$425 million Class A senior secured Enhanced Equipment Trust May 15, 2025, to A3 from Baa1

US$182 million Class B senior secured Enhanced Equipment Trust May 15, 2021, to Ba1 from Ba2

US$108 million Class C senior secured Enhanced Equipment Trust May 15, 2018, to Ba3 from B1

Ratings Confirmed:

Issuer: Air Canada

US$210 million 1st lien senior secured bank credit facility due 2018, to Ba3 (LGD3) from Ba3 (LGD2)

US$300 million 1st lien senior secured bank term loan B due 2019, to Ba3 (LGD3) from Ba3 (LGD2)

C$300 million 1st lien senior secured notes due 2019, to Ba3 (LGD3) from Ba3 (LGD2)

US$400 million 1st lien senior secured notes due 2019, to Ba3 (LGD3) from Ba3 (LGD2)

Rating Affirmed:

Issuer: Air Canada

Speculative Grade Liquidity Rating, SGL-2

Outlook:

Issuers: Air Canada and Air Canada 2013-1 Pass Through Trusts

Changed To Stable From Under Review

RATINGS RATIONALE

Air Canada's B1 CFR primarily reflects its high cost structure, competitive pressures, exposure to economic cycles and foreign exchange fluctuations, and execution risks with its expansion plans but mitigated by its meaningful scale, good market positions, and benefits from its position in the Star Alliance network. The rating also reflects expectations that its substantial capital commitments will result in negative free cash flow generation over the next few years. The rating considers that lower jet fuel prices, favorable demand for travel, and ongoing cost improvement initiatives will enable leverage (adjusted Debt/EBITDA) to be sustained around 4x through the next 12 to 18 months.

Moody's uses estimates of current market value when assessing the loan-to-value (LTV) of an enhanced equipment trust certificate (EETC) financing. Moody's estimates the peak LTVs of the A, B and C tranches at about 53%, 75%, and 90%, respectively. The A3, Ba1 and Ba3 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, and the support of the Class A and Class B liquidity facilities.

Air Canada's has good liquidity (SGL-2), supported by C$2.9 billion of cash and short-term investments at March 31, 2015 and a US$210 million unused committed revolver due September 2018. These sources are more than sufficient to fund mandatory annual debt repayments around C$500 million for 2015 and 2016. Moody's expects Air Canada's ongoing aircraft purchases will contribute to about C$800 million of negative free cash flow in 2015/16. Air Canada has flexibility to raise capital from asset sales to boost liquidity should the need arise.

The stable ratings outlook reflects expectations that Air Canada will maintain credit metrics appropriate for the B1 CFR as it implements its capacity expansion plans.

An upgrade could occur if Air Canada effectively executes its expansion plans and cost reduction initiatives while sustaining adjusted Debt/EBITDA below 4x and EBIT/Interest above 2.5x. Downward rating pressure could occur if Air Canada sustains adjusted Debt/EBITDA above 5x and EBIT/Interest towards 1.5x. Deterioration in liquidity could also cause a downgrade.

The methodologies used in these ratings were Global Passenger Airlines published in May 2012, and Enhanced Equipment Trust And Equipment Trust Certificates published in December 2010. 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.

Air Canada is the largest provider of scheduled airline passenger services to and from Canada. Revenue for the twelve months ended March 31, 2015 was C$13.5 billion. The company is headquartered in Saint-Laurent, Quebec, Canada.

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.

Moody's has not provided advisory services but may have provided Ancillary or Other Permissible Service(s) to the rated entity, its related third parties and/or the party that requested the rating within the past two years (including during the most recently ended fiscal year). Please see the special report "Ancillary or other permissible services provided to entities rated by MIS's credit rating agency in Canada" on the ratings disclosure page www.moodys.com/disclosures on our website for further information

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.

Peter Adu, CFA
Analyst
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's CFR to B1; outlook is stable
No Related Data.
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