New York, February 11, 2016 -- Moody's Investors Service upgraded most of its debt ratings of Delta Air
Lines, Inc. ("Delta"), including the Senior
Unsecured to Baa3 from Ba3, Senior Secured assigned to the company's
corporate debt obligations to Baa2 from Baa3. Moody's also
upgraded most of the company's enhanced equipment trust certificates
and the term loan secured by aircraft. Moody's withdrew the
Ba2 Corporate Family, Ba2-PD Probability of Default and SGL-1
Speculative Grade Liquidity ratings. The rating outlook is stable.
RATINGS RATIONALE
"The upgrade of the senior unsecured rating to Baa3 is based on
the expectation of continued debt reduction, building on the significant
de-leveraging of the balance sheet that Delta has achieved since
2009, as well as ongoing stability in Delta's operations which
we believe will enable Delta to continue to handle the industry's
volatility," said Moody's Senior Credit Officer,
Jonathan Root. "We believe that Delta will continue to effectively
manage its network and operations, and build on the capital-efficient
growth strategy to sustain a competitive operating margin with free cash
flow that leads the industry and compares favorably to other companies
rated investment grade," continued Root.
The strategy of all US airlines to pursue acceptable returns on invested
capital, the current low global oil prices and steady passenger
demand, both domestically and abroad have without doubt contributed
to improved credit for many airlines. However, in Moody's
view airlines that have not reduced their debt burden as Delta has,
are unlikely to sustain the currently strong credit metrics without the
benefit of low fuel prices, especially in an environment likely
to have fare as well as labor cost pressures.
The upgrade of the senior unsecured rating to Baa3 recognizes the stronger
credit metrics that Delta has achieved and especially the expectation
that metrics will further improve in 2016 as an even lower cost of fuel
and operational efficiency help to offset expected pressure on revenues
from lower fares.
Moody's projects year end 2016 to be somewhat stronger, with
an EBITDA margin of about 29%, Debt to EBITDA of about 2.2
times and EBIT to Interest of about 6.0 times, and free cash
flow in excess of $6.0 billion for the year, all on
a Moody's adjusted basis. These metrics compare favorably
to other companies in the Baa rating category, providing the financial
cushion expected for the rating level.
The upgrade of the senior unsecured rating to investment grade anticipates
that Delta will continue to:
• reduce funded debt annually, from the about $8.3
billion at 31 December 2015 and $12.8 billion at 31 December
2012, to achieve its stated net debt target of $4.0
billion by 2020
• prioritize achieving its targeted return on invested capital (currently
in the 20% to 25% range), which means it will reduce
capacity during periods of sustained weak demand or if sustained high
fuel prices are not offset by higher fares
• reduce funded debt by at least $500 million per year,
and
• use a majority of free cash flow to repurchase shares, as
long as free cash flow is greater than $1.5 billion
• contribute approximately $1 billion per year to its pension
plans, which are frozen
Moody's also expects that there will be no meaningful changes to
the company's strategy following the upcoming transition in the
executive suite that Delta announced on 3 February 2016, especially
with the pending CEO change.
Upward movement of the ratings is unlikely before 2018, at the earliest.
Sustained Debt to EBITDA of about 2.5 times, Funds from Operations
+ Interest to Interest of about 7.0 times, an EBITDA
margin near 20% and steady free cash flow of at least $1.5
billion per year could support an upgrade at or after that time.
The ratings could be downgraded if Delta was to de-emphasize the
current return on invested capital strategy, if it sustained unrestricted
cash below $2.5 billion or free liquidity (cash plus revolver
availability with no required representation of no material adverse changes
upon drawings) below $4.5 billion or used debt to repurchase
shares. Sustained metrics such as an EBITDA margin of about 15%,
Debt to EBITDA of more than 3.3 times or FFO + Interest to
Interest of below 5.0 times could also lead to a negative rating
action.
The actions on the aircraft enhanced equipment trust certificates (14
upgrades and 3 affirmations) consider the benefits of the improved corporate
credit profile, and Moody's view of the relative attractiveness
of each transactions' collateral including the number, age
profile and types of aircraft, whether a transaction is cross-defaulted
and cross-collateralized and the equity cushions, each a
consideration that influences the relative likelihood of disaffirmation
of each EETC during bankruptcy.
Changes in Delta's Corporate Family rating, in Moody's
opinion of the importance of particular aircraft models to its network,
or in Moody's estimates of aircraft market values, which will
affect estimates of loan-to-value can result in changes
to EETC ratings.
With an industry-leading global network, Delta and the Delta
Connection carriers offer service to 328 destinations in 57 countries
on six continents. Headquartered in Atlanta, Delta employs
nearly 80,000 employees worldwide and operates a mainline fleet
of more than 800 aircraft. The company reported $40.7
billion of revenue in 2015.
Upgrades:
..Issuer: Clayton County Development Authority,
GA
....Senior Unsecured Revenue Bonds,
Upgraded to Baa3 from Ba3 (LGD4)
..Issuer: Delta Air Lines, Inc.
....Senior Secured Bank Credit Facility due
Oct 18, 2017, Upgraded to Baa2 from Baa3 (LGD2)
....Senior Secured Bank Credit Facility due
Sep 30, 2019, Upgraded to Baa1 from Baa2
....Senior Secured Bank Credit Facility due
Aug 24, 2022, Upgraded to Baa2 from Baa3 (LGD2)
....Senior Secured Bank Credit Facility due
Aug 24, 2020, Upgraded to Baa2 from Baa3 (LGD2)
....Senior Secured Bank Credit Facility due
Oct 18, 2018, Upgraded to Baa2 from Baa3 (LGD2)
....Senior Secured Bank Credit Facility due
Apr 18, 2016, Upgraded to Baa2 from Baa3 (LGD2)
....Senior Secured Enhanced Equipment Trust
Series 2010-2A Nov 23, 2019, Upgraded to A1 from A2
....Senior Secured Enhanced Equipment Trust
Series 2011-1 Cl. A Apr 15, 2019, Upgraded to
A1 from A2
....Senior Secured Enhanced Equipment Trust
Series 2010-1 Cl.A Jul 2, 2018, Upgraded to
A1 from A2
....Senior Secured Enhanced Equipment Trust
Series 2012-1 Cl. A May 7, 2020, Upgraded to
A2 from A3
....Senior Secured Enhanced Equipment Trust
Series 2009-1A Dec 17, 2019, Upgraded to A1 from A2
....Senior Secured Enhanced Equipment Trust
Series 2015-1 Cl. AA Jan 30, 2029, Upgraded
to Aa2 from Aa3
....Senior Secured Enhanced Equipment Trust
Series 2009-1B Dec 17, 2016, Upgraded to Baa1 from
Baa2
....Senior Secured Enhanced Equipment Trust
Series 2015-1 Cl. B Jan 30, 2025, Upgraded to
Baa1 from Baa2
....Senior Secured Enhanced Equipment Trust
Series 2012-1 Cl. B May 7, 2019, Upgraded to
Baa2 from Baa3
....Senior Secured Enhanced Equipment Trust
Series 2007-1 Cl. B Aug 10, 2022 Upgraded to Baa2
from Baa3
..Issuer: Northwest Airlines, Inc.
....Senior Secured Enhanced Equipment Trust
Series 2007-1 Cl. A Nov 1, 2019, Upgraded to
A2 from A3
....Senior Secured Enhanced Equipment Trust
Series 2000-1 Cl. G Apr 1, 2021, Upgraded to
Baa1 from Ba1
....Senior Secured Enhanced Equipment Trust
Series 2000-1 Cl. G (underlying) Apr 1, 2021,
Upgraded to Baa1 from Ba1
....Senior Secured Enhanced Equipment Trust
Series 2007-1 Cl. B Nov 1, 2017, Upgraded to
Baa1 from Baa2
Affirmations:
..Issuer: Delta Air Lines, Inc.
....Senior Secured Enhanced Equipment Trust
Series 2007-1 Cl. A Aug 10, 2022, Affirmed A3
....Senior Secured Enhanced Equipment Trust
Series 2015-1 Cl. A Jan 30, 2029, Affirmed A1
..Issuer: Delta Air Lines, Inc. (Old)
....Senior Secured Enhanced Equipment Trust
Series 2002-1 Cl. G-1 Jul 2, 2024, Affirmed
Baa1
....Senior Secured Enhanced Equipment Trust
Series 2002-1 Cl. G-1 (underlying) Jul 2, 2024,
Affirmed Baa1
..Issuer: Northwest Airlines, Inc.
....Senior Secured Enhanced Equipment Trust
Series 2002-1 Cl. G-2 Nov 20, 2021, Affirmed
Baa1
....Senior Secured Enhanced Equipment Trust
Series 2002-1 Cl. G-2 (underlying) Nov 20,
2021, Affirmed Baa1
Withdrawals:
..Issuer: Delta Air Lines, Inc.
.... Probability of Default Rating,
Withdrawn , previously rated Ba2-PD
.... Speculative Grade Liquidity Rating,
Withdrawn , previously rated SGL-1
.... Corporate Family Rating (Local Currency),
Withdrawn , previously rated Ba2
Outlook Actions:
..Issuer: Delta Air Lines, Inc.
....Outlook, Changed To Stable From
Positive
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 2015. Please see the Ratings
Methodologies page on www.moodys.com for a copy of these
methodologies.
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.
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.
Jonathan Root
VP - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
Robert Jankowitz
MD - Corporate Finance
Corporate Finance Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
Moody's upgrades Delta Air Line's ratings, senior unsecured to Baa3; stable outlook