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
