Toronto, September 24, 2019 -- Moody's Investors Service ("Moody's") upgraded
Air Canada's Corporate Family Rating (CFR) to Ba1 from Ba2, Probability
of Default rating to Ba1-PD from Ba2-PD, first lien
senior secured rating to Baa3 from Ba1 and senior unsecured rating to
Ba2 from Ba3. The company's Speculative Grade Liquidity rating
remains unchanged at SGL-2. Moody's rates eight tranches
of enhanced equipment trust certificates (EETCs) across three Air Canada
EETC transactions, Series 2013-1, Series 2015-2
and Series 2017-1. Moody's upgraded all eight of the tranches
by one notch. The outlooks for Air Canada and its Pass Through
Trust Certificates remain stable.
"The upgrade reflects Air Canada's stronger financial profile,
whereby the company has continued to reduce leverage and has strengthened
its flexibility with the acquisition of the Aeroplan program and increased
the number of unencumbered planes it owns," said Jamie Koutsoukis,
Moody's Vice President, Senior Analyst.
Upgrades:
..Issuer: Air Canada
.... Corporate Family Rating, Upgraded
to Ba1 from Ba2
.... Probability of Default Rating,
Upgraded to Ba1-PD from Ba2-PD
....Senior Secured Bank Credit Facility,
Upgraded to Baa3 (LGD2) from Ba1 (LGD2)
....Senior Secured Regular Bond/Debenture,
Upgraded to Baa3 (LGD2) from Ba1 (LGD2)
....Senior Unsecured Regular Bond/Debenture,
Upgraded to Ba2 (LGD5) from Ba3 (LGD5)
..Issuer: Air Canada 2013-1 Pass Through Trusts
....Senior Secured Enhanced Equipment Trust
CI. A, Upgraded to A3 from Baa1
....Senior Secured Enhanced Equipment Trust
CI. B, Upgraded to Baa2 from Baa3
..Issuer: Air Canada Series 2015-2 Pass Through
Trusts
....Senior Secured Enhanced Equipment Trust
CI. A, Upgraded to A1 from A2
....Senior Secured Enhanced Equipment Trust
CI. AA, Upgraded to Aa2 from Aa3
....Senior Secured Enhanced Equipment Trust
CI. B, Upgraded to Baa1 from Baa2
..Issuer: Air Canada Series 2017-1 Pass Through
Trusts
....Senior Secured Enhanced Equipment Trust
CI. A, Upgraded to A1 from A2
....Senior Secured Enhanced Equipment Trust
CI. AA, Upgraded to Aa2 from Aa3
....Senior Secured Enhanced Equipment Trust
CI. B, Upgraded to Baa1 from Baa2
Outlook Actions:
..Issuer: Air Canada
....Outlook, Remains Stable
..Issuer: Air Canada 2013-1 Pass Through Trusts
....Outlook, Remains Stable
..Issuer: Air Canada Series 2015-2 Pass Through
Trusts
....Outlook, Remains Stable
..Issuer: Air Canada Series 2017-1 Pass Through
Trusts
....Outlook, Remains Stable
RATINGS RATIONALE
Air Canada's Ba1 rating benefits from 1) its leading position in
the duopolistic Canadian market, 2) Moody's expectation that adjusted
debt/EBITDA will approach 2.5x by the end of 2020, 3) an
expected reduction in capacity growth as Air Canada shifts from wide-body
additions to mainline narrow-body fleet replacement over the medium
term (available seat miles (ASM) increased 9.5% in 2018),and
4) good liquidity with expectations of ongoing free cash flow.
Air Canada is constrained by 1) the risk of market capacity additions
exceeding demand and its international network facing sustained competitive
pressure, 2) foreign exchange volatility, 3) exposure to fuel
costs, 4) uncertainty regarding the 737 MAX grounding.
The airline sector currently accounts for about 2% of global carbon
emissions with 65% of its emissions coming from international flights.
Canada (and as a result Air Canada) is one of the 70 countries that have
voluntarily elected to early adopt the International Civil Aviation Organization's
(ICAO) Carbon Offsetting and Reduction Scheme for International Aviation
(CORSIA), which targets capping carbon emissions at 2020 levels
and requires purchases of offsets for airlines' that exceed their
targets. We expect that fuel expense will increase for carbon offset
costs incurred from 2021.
Air Canada's management has made it a priority to position itself to be
more resilient to economic downturns through the strengthening of its
financial profile. Air Canada has a stated leverage policy (net
debt to trailing 12-month EBITDA) of no more than 1.2x and
management has a strong track record regarding its adherence to its stated
financial policies.
Air Canada has good liquidity (SGL-2), supported by CAD6.0
billion of cash and short-term investments at June 30, 2019
and a US$600 million unused revolving credit facility due in 2023.
We also expect Air Canada to generate about CAD200 million of positive
free cash flow in the next four quarters. These sources are more
than sufficient to fund mandatory annual debt and lease repayments of
CAD523 million for the remainder of 2019 and CAD1.2 billion in
2020. Air Canada has flexibility to raise capital from asset sales
to boost liquidity should the need arise, and this will improve
further with the company's plan to increase the number of aircraft
that are unencumbered.
Moody's rates eight tranches of enhanced equipment trust certificates
(EETCs) across three Air Canada EETC transactions, Series 2013-1,
Series 2015-2 and Series 2017-1. Moody's upgraded
the rating of each of these tranches by one notch, in line with
the one-notch upgrade of the Corporate Family rating. The
upgrades consider the improvement in the credit quality of Air Canada
and Moody's belief of the importance of the aircraft models that
comprise the collateral of each transaction to Air Canada's network.
The respective loan-to-value of each tranche supports the
respective rating assignments. Moody's projects future values
of the 737 MAX, the 777-300ER and the 787-9 using
annual rates of decline on a straight line basis of 4%, 6%
and 5%, respectively and a 1% annual inflation rate.
The 2013-1 transaction is secured by five 777-300ERs.
The 6% annual rate of decline implies a 16-year life for
this model, which results in a conservative loan-to-value.
Moody's estimates the peak LTVs of the Class A (rated A3) and Class
B (rated Baa2) at about 75% and 87%, respectively,
which occur within six months of the final scheduled payment dates of
May 15, 2025 and May 15, 2021.
The 2015-2 transaction is secured by two 777-300ERs and
three 787-9s. Moody's estimates the peak LTVs of the
Class AA (rated Aa2), Class A (rated A1) and Class B (rated Baa1)
at about 45%, 65% and 75%, respectively.
These too occur near the scheduled final payment dates of December 15,
2027 for the Class AA and Class A and December 15, 2023 for the
Class B.
The 2017-1 transaction is secured by nine 737 MAX 8s and four 787-9s.
Moody's anticipates that the 737 MAX will return to service in a
timeframe that will not lead to undue pressure on its market value.
Moody's estimates the peak LTVs of the Class AA (rated Aa2),
Class A (rated A1) and Class B (rated Baa1) at about 40%,
56% and 69%, respectively. These occur at the
front end of the remaining amortization for each tranche. The scheduled
final payment dates are January 15, 2030 for the Class AA and Class
A and January 15, 2026 for the Class B.
The ratings of the EETCs reflect Moody's belief that Air Canada would
retain the aircraft in each transaction under a reorganization scenario
because of the importance of these models to the fleet strategy and the
long-haul network over the remaining lives of each transaction,
their relatively young ages and fuel efficiency. Any combination
of future changes in the underlying credit quality or ratings of Air Canada,
unexpected material declines in the current or projected market value
of the aircraft and/or an unexpected significant reduction in the size
of Air Canada's long haul network could lead to further changes to the
ratings of Air Canada's EETCs.
The stable outlooks reflect Moody's expectation that Air Canada will maintain
its competitive position and maintain leverage at or below 3x as it spends
on its aircraft replacement program. It also incorporates Moody's
view that Air Canada will continue to make strengthening its financial
position over shareholder returns a priority.
An upgrade could occur if Air Canada is able to reduce and sustain adjusted
leverage below 2.5x (3.1x LTM Jun 2019) , and (FFO
+ Interest Expense) / Interest remains above 8x (9.1x LTM
Jun 2019). Air Canada would additionally need to demonstrate its
ability to maintain an EBIT margin above 10% through a downturn
in the market (9% LTM Jun 2019). An upgrade would also require
that the company continue to generate positive free cash flow as it proceeds
with its new narrow body fleet purchases.
Downward rating pressure could occur if Air Canada's adjusted debt/EBITDA
is sustained above 3.5 x and (FFO + Interest Expense) / Interest
falls towards 6x (Adjusted debt/EBITDA was 3.1x, (FFO +
Interest Expense) / Interest was 9.1x LTM Jun 2019). Deterioration
in EBIT margins below 7% ( 9% LTM Jun 2019) could also cause
a downgrade.
The principal methodology used in rating Air Canada was Passenger Airline
Industry published April 2018. The principal methodologies used
in rating Air Canada 2013-1 Pass Through Trusts, Air Canada
Series 2015-2 Pass Through Trusts and Air Canada Series 2017-1
Pass Through Trusts were Passenger Airline Industry published in April
2018 and Enhanced Equipment Trust and Equipment Trust Certificates published
in July 2018. 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 2018 was CAD18.1
billion. The company is headquartered in Saint-Laurent,
Quebec, Canada.
REGULATORY DISCLOSURES
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.
Regulatory disclosures contained in this press release apply to the credit
rating and, if applicable, the related rating outlook or rating
review.
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 person who approved Air Canada credit ratings is Donald S.
Carter, CFA, MD - Corporate Finance, Corporate
Finance Group, JOURNALISTS: 1 212 553 0376, Client Service:
1 212 553 1653. The person who approved Air Canada 2013-1
Pass Through Trusts, Air Canada Series 2015-2 Pass Through
Trusts, Air Canada Series 2017-1 Pass Through Trusts credit
ratings is Russell Solomon, Associate Managing Director, Corporate
Finance Group, JOURNALISTS: 1 212 553 0376, Client Service:
1 212 553 1653.
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.
Jamie Koutsoukis
Vice President - Senior 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
