NOTE: On June 15, 2018, the press release was corrected as follows: In the Regulatory Disclosures section, the following was added as the sixth paragraph: “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 Series 2015-2 Pass Through Trusts, Air Canada Series 2017-1 Pass Through Trusts, Air Canada 2013-1 Pass Through Trusts credit ratings is Robert Jankowitz, MD - Corporate Finance, Corporate Finance Group, JOURNALISTS: 1 212 553 0376, Client Service: 1 212 553 1653.” Revised release follows.
NOTE: On May 31, 2018, the press release was corrected as follows: In the first sentence of the methodology paragraph, the principal methodology was changed to Passenger Airline Industry published April 2018. Revised release follows.
Toronto, May 29, 2018 -- Moody's Investors Service ("Moody's") upgraded
Air Canada's corporate family rating (CFR) to Ba2 from Ba3, probability
of default rating to Ba2-PD from Ba3-PD, first lien
senior secured rating to Ba1 from Ba2 and senior unsecured rating to Ba3
from B2. The company's speculative grade liquidity rating was affirmed
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 affirmed five of the tranches, downgraded one and
upgraded two. The outlooks for Air Canada and its Pass Through
Trust Certificates remain stable.
"The upgrade reflects Air Canada's continued reduction of leverage
and its commitment to further debt reduction" said Jamie Koutsoukis,
Moody's Vice President, Senior Analyst.
Upgrades:
..Issuer: Air Canada
.... Probability of Default Rating,
Upgraded to Ba2-PD from Ba3-PD
.... Corporate Family Rating, Upgraded
to Ba2 from Ba3
....Senior Secured Bank Credit Facility,
Upgraded to Ba1 (LGD2) from Ba2 (LGD3)
....Senior Secured Regular Bond/Debenture,
Upgraded to Ba1 (LGD2) from Ba2 (LGD3)
....Senior Unsecured Regular Bond/Debenture,
Upgraded to Ba3 (LGD5) from B2 (LGD5)
..Issuer: Air Canada Series 2015-2 Pass Through
Trusts
....Senior Secured Enhanced Equipment Trust,
Cl. B, Upgraded to Baa2 from Baa3
..Issuer: Air Canada Series 2017-1 Pass Through
Trusts
....Senior Secured Enhanced Equipment Trust,
Cl. B, Upgraded to Baa2 from Baa3
Downgrades:
..Issuer: Air Canada 2013-1 Pass Through Trusts
....Senior Secured Enhanced Equipment Trust,
Cl. A, Downgraded to Baa1 from A2
Outlook Actions:
..Issuer: Air Canada
....Outlook, Remains Stable
Outlook Actions:
..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
Affirmations:
..Issuer: Air Canada
.... Speculative Grade Liquidity Rating,
Affirmed SGL-2
..Issuer: Air Canada 2013-1 Pass Through Trusts
....Senior Secured Enhanced Equipment Trust,
Cl. B, Affirmed Baa3
..Issuer: Air Canada Series 2015-2 Pass Through
Trusts
....Senior Secured Enhanced Equipment Trust,
Cl.A, Affirmed A2
....Senior Secured Enhanced Equipment Trust,
Cl. AA, Affirmed Aa3
..Issuer: Air Canada Series 2017-1 Pass Through
Trusts
....Senior Secured Enhanced Equipment Trust,
Cl. A, Affirmed A2
....Senior Secured Enhanced Equipment Trust,
Cl. AA, Affirmed Aa3
RATINGS RATIONALE
Air Canada's Ba2 corporate family rating (CFR) benefits from its strong
market position in the duopolistic Canadian market, Moody's expectation
that adjusted debt/EBITDA will remain near 3.5x, its declining
cost structure (CASM excluding fuel of CAD 11.6 cents in 2017)
which has become competitive with some of its North American peers,
and an expected reduction in capacity growth as Air Canada shifts from
wide-body growth to mainline narrow-body fleet replacement
over the medium term (Available seat miles increased 11.6%
in 2017). Rating constraints include foreign exchange volatility,
exposure to fuel costs and the risk of market capacity additions exceeding
demand.
Air Canada has good liquidity (SGL-2), supported by CAD4.5
billion of cash and short-term investments at March 31, 2018
and a US$300 million unused revolving credit facility due in 2021.
We also expect Air Canada to generate about CAD 200 million of positive
free cash flow in each of 2018 and 2019. These sources are more
than sufficient to fund mandatory annual debt and lease repayments of
CAD 445 million for the remainder of 2018 and CAD 531 million in 2019.
Air Canada has flexibility to raise capital from asset sales to boost
liquidity should the need arise.
The stable outlook reflects Moody's expectation that Air Canada will maintain
leverage near 3.5x as it spends on its aircraft replacement program
and the market continues to see capacity additions.
An upgrade could occur if Air Canada is able to reduce and sustain adjusted
leverage towards 3x, and (FFO + Interest Expense) / Interest
remains above 6x. (adjusted debt/EBITDA was 3.5x and (FFO
+ Interest Expense) / Interest was 6.1x LTM Mar 2018).
Downward rating pressure could occur if Air Canada's adjusted debt/EBITDA
moves above 4x and (FFO + Interest Expense) / Interest falls towards
4x. Deterioration in liquidity or margins could also cause a downgrade.
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 affirmed
five of the tranches, downgraded one and upgraded two. The
composition of the collateral and Moody's varying estimates of loans-to-value
across the three transactions resulted in different rating actions on
the various tranches relative to the one-notch upgrade of the Corporate
Family rating. EETC ratings also consider that the weight of the
corporate credit and of the collateral attributes shifts over Moody's
corporate rating scale; generally, the higher the corporate
rating, the less weight in the collateral.
The downgrade of the Class A rating of Series 2013-1 to Baa1 from
A2 reflects Moody's projection of significantly smaller equity cushions
over the remaining life of this transaction relative to its prior expectations,
based on applying a steeper annual depreciation rate for Boeing B777-300ERs
than it had used in the past. Specifically, Moody's
is now using a 6% annual rate of decline for wide-body aircraft
models except the B787 and A350 families, for which it now uses
5% rates of decline in value. Having only B777s in the collateral
for Series 2013-1 results in the largest erosion of the equity
cushion. Moody's now estimates the peak LTVs over the remaining
lives of the Class A and Class B tranches at about 79% and 86%,
respectively, both of which occur at the respective maturity dates.
The LTV curves are now upward sloping, eroding equity cushion with
the passage of time. The sharper decline in values Moody's
now applies are based on observations of trends in values supplied by
various industry sources including appraisers.
The upgrades of the Class B tranches of Series 2015-2 and Series
2017-1 to Baa2 from Baa3 are in step with the upgrade of the Corporate
Family rating. The peak LTVs of these two tranches of about 75%
and about 70%, respectively provide greater equity cushion
than does the Class B of Series 2013-1. These curves remain
downward sloping, building equity cushion with the passage of time.
Moody's considers that the mix of collateral of the two later transactions,
including 787-9s wide-bodies in Series 2015-2 and
only B737 MAX 8 narrow-bodies and 787-9s in Series 2017-1,
makes them relatively stronger than the Series 2013-1 transaction.
The affirmations of the Class AA ratings of Aa3 for Series 2015-2
and 2017-1 reflect that these are the strongest ratings for senior
most EETC tranches for non-investment grade rated airlines.
The affirmations of the Class A tranches for Series 2015-2 and
Series 2017-1 consider the relative estimated peak LTV differentials
within and across the three transactions.
Five Boeing B777-300ERs delivered new between June 2013 and February
2014 secure the Series 2013-1 transaction. Two B777-300ERs
and three Boeing B787-9s delivered in 2015 secure the Series 2015-2
transaction. Nine Boeing B737MAX-8 and four B787-9s
collateralize the Series 2017-1 transaction.
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 12-year lives of each transaction
and their relatively young ages. 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 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 December 2015. 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 2017 was C$16.3
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 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.
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.
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
analyst and the Moody's legal entity that has issued the ratings.
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.
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
