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Rating Action:

Moody's upgrades United Continental Holdings: CFR to Ba3, outlook positive

15 Jun 2015

New York, June 15, 2015 -- Moody's Investors Service upgraded most ratings of United Continental Holdings, Inc. ("UAL"), including the Corporate Family Rating to Ba3 from B1, Senior Secured rating assigned to corporate obligations to Ba1 (LGD2) from Ba2 (LGD2), Senior Unsecured to B1 (LGD5) from B3 (LGD5) and most of the Enhanced Equipment Trust Certificate ("EETC") ratings. The Speculative Grade Liquidity Rating is affirmed at SGL-1. The rating outlook is positive.

RATINGS RATIONALE

"The upgrade to Ba3 considers the improvements in metrics so far in 2015 with more to come as Moody's expects the cost of Brent oil for the remainder of this year to remain well below its 2014 average of about $100 per barrel," said Senior Credit Officer, Jonathan Root. "Notwithstanding the current pressure on unit revenues in the US domestic market, markedly lower costs of jet fuel will more than outweigh the uninspiring trend in passenger revenue per available seat mile (PRASM), resulting in strong growth in earnings and free cash flow," continued Root. The upgrade also considers UAL's demonstrated reduction of funded debt from pre-payments, including the $600 million aggregate of 6% notes due 2026 and 2028 recently paid off and its continuing focus on controlling non-fuel unit costs to support operating cash flow. Moody's anticipates Debt to EBITDA of about 3.5 times and FFO + Interest to Interest of about 5.5 times at year end and more than $2.5 billion of free cash flow in 2015. Metrics at these levels could support a higher Corporate Family rating. However, exposure to US domestic and global macro-economic trends, uncertainty of the duration and magnitude of the recent pressure on fares and the potential for increased returns to shareholders could temper the progress of the recently improving credit profile.

The positive outlook anticipates that UAL will continue to reduce funded debt to reduce its financial risk, as 2015's industry "fuel dividend" continues in 2016, supporting free cash flow generation. Profits and credit metrics should remain about steady in 2016 even with an expected increase in the price of fuel, and not likely face meaningful downwards pressure before the average price of Brent exceeds $90 per barrel. This assumes that industry fare levels would rise with step-ups in the cost of fuel. "If so, noticeably higher fuel prices should reduce pressure on PRASM for the industry, particularly if certain discount carriers slow capacity growth and ease aggressive pricing, which have been the main source of pressure on fares in 2015," said Root.

The upgrades of the senior secured and senior unsecured ratings follow the upgrade of the CFR. The combination of lower expected loss at the Ba rating category, and a modest decline in the contribution of senior secured obligations to total obligations in Moody's Loss Given Default waterfall result in the second notch of uplift of the unsecured rating. This reduction in the percent of senior secured obligations enhances recoveries of unsecured obligations under LGD's liability-based approach to estimating enterprise value following a default.

The SGL-1 rating reflects Moody's view that UCH will continue to maintain very good liquidity. Moody's anticipates about $4.5 billion of cash at year end, level with the amount coming into the year. The $1.35 billion revolver will remain undrawn and, according to United, the fair market value of unencumbered assets will exceed $7 billion.

Of the 20 A-tranche EETCs outstanding, 12 have been upgraded by one notch in step with the upgrade of the Corporate Family rating and the remainder have been affirmed. Of the 14 B-tranches outstanding, nine have been upgraded and five affirmed. The rating on the CAL 2013-3 C tranche was upgraded one notch. The majority of tranches that were not upgraded are from transactions that are not cross-defaulted or cross-collateralized and are secured by some of the older aircraft in the company's fleet. The rating actions on the EETCs also consider our estimates of loans-to-value (LTVs), of the alignment of these LTVs with our EETC notching grids found in our EETC rating methodology published in 2010 and of the relative attractiveness or demand for particular models and or vintages under a reorganization scenario.

An upgrade of the ratings could occur if credit metrics remain steady in 2016, with Debt to EBITDA remaining below 4.0 times, EBIT to Interest above 3.0 times, free cash flow in excess of $500 million and EBITDA margin of about 20% or a combination thereof. Continued progress on controlling non-fuel expenses, further reductions of funded debt and sustaining liquidity in line with the company's published target of about $5 billion to $6 billion will be an important consideration in a potential upgrade. The positive outlook could be removed and or the ratings downgraded if UCH is unable to maintain its EBITDA margin above 15% or if unrestricted cash and short-term investments fell below $2.5 billion or aggregate liquidity (cash and availability on revolving credit facilities) was sustained below $4.0 billion. The expectation of negative free cash flow, Debt to EBITDA approaching 5.5 times or EBIT to Interest that approaches 2.0 times could also lead to a downgrade. The inability to raise fares when the cost of Brent meaningfully increases from recent levels in the low- to mid-$60 per barrel range or if industry domestic fares experience a sustained decline because of growth of low or ultra-low cost airlines that aggressively price their product could also lead to a negative rating action. These factors would likely pressure earnings and free cash flow generation, leading metrics to weaker levels. Disproportionately higher returns to shareholders than reduction of debt could also lead to a negative rating action.

Changes in UAL'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.

The principal methodology used in these ratings was Global Passenger Airlines published in May 2012. 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.

United Continental Holdings, Inc. is the holding company for United Airlines, Inc. ("United"). United and United Express operate an average of 5,000 flights a day to 373 airports across six continents. The company reported $38.9 billion of revenue in 2014.

Upgrades:

..Issuer: Cleveland (City of) OH

....Senior Unsecured Revenue Bonds, Upgraded to B1 from B3

..Issuer: Denver (City & County of) CO

....Senior Unsecured Revenue Bonds, Upgraded to B1 from B3

..Issuer: Harris County Industrial Dev Corp, TX

....Senior Unsecured Revenue Bonds, Upgraded to B1 from B3

..Issuer: Hawaii Department of Transportation

....Senior Unsecured Revenue Bonds, Upgraded to B1 from B3

..Issuer: Houston (City of) TX

....Senior Unsecured Revenue Bonds, Upgraded to B1 from B3

..Issuer: New Jersey Economic Development Authority

....Senior Unsecured Revenue Bonds, Upgraded to B1 from B3

..Issuer: Port Authority of New York and New Jersey

....Revenue Bonds, Upgraded to B1 from B3

..Issuer: United Air Lines, Inc.

....Senior Secured Enhanced Equipment Trust Series 2009-2A, Upgraded to A3 from Baa2

....Senior Secured Enhanced Equipment Trust 2009-2B, Upgraded to Baa3 from Ba2

....Senior Secured Pass-Through Series 2007-1B, Upgraded to Ba3 from B1

....Senior Secured Enhanced Equipment Trust Series 2009-1A, Upgraded to A3 from Baa1

..Issuer: United Airlines, Inc.

....Senior Secured Bank Credit Facilities, Upgraded to Ba1 (LGD2) from Ba2 (LGD2)

....Senior Secured Enhanced Equipment Trust Series 2012-1A, Upgraded to A3 from Baa1

....Senior Secured Enhanced Equipment Trust Series 2010-1A, Upgraded to A3 from Baa1

....Senior Secured Enhanced Equipment Trust Series 2012-2A, Upgraded to A3 from Baa1

....Senior Secured Enhanced Equipment Trust Series 2012-3C, Upgraded to Ba2 from Ba3

....Senior Secured Enhanced Equipment Trust Series 2003-ERJ1 A, Upgraded to Ba2 from Ba3

....Senior Secured Enhanced Equipment Trust Series 1999-2B, Upgraded to Baa3 from Ba1

....Senior Secured Enhanced Equipment Trust Series 2010-1B, Upgraded to Baa3 from Ba1

....Senior Secured Enhanced Equipment Trust Series 2012-1B, Upgraded to Baa3 from Ba1

....Senior Secured Enhanced Equipment Trust Series 2000-1B, Upgraded to Baa3 from Ba1

....Senior Secured Enhanced Equipment TrustSeries 2012-2B, Upgraded to Baa3 from Ba1

....Senior Secured Enhanced Equipment Trust Series 1997-4B, Upgraded to Baa3 from Ba1

....Senior Secured Enhanced Equipment Trust Series 2009-2B, Upgraded to Baa3 from Ba1

....Senior Secured Enhanced Equipment Trust Series 1998-3 A-1, Upgraded to Baa1 from Baa2

....Senior Secured Equipment Trust 2007-1A, Upgraded to A3 from Baa1

....Senior Secured Equipment Trust Series 2005-ERJ1 A, Upgraded to Ba2 from Ba3

....Senior Secured Equipment Trust Series 2009-2A, Upgraded to A3 from Baa1

....Senior Secured Equipment Trust Series 2004-ERJ1 A, Upgraded to Ba2 from Ba3

..Issuer: United Continental Holdings, Inc.

.... Probability of Default Rating, Upgraded to Ba3-PD from B1-PD

.... Corporate Family Rating, Upgraded to Ba3 from B1

....Senior Unsecured Regular Bond/Debentures, Upgraded to B1 (LGD5) from B3 (LGD5)

Affirmations:

..Issuer: United Air Lines, Inc.

....Senior Secured Pass-Through Series 2007-1A, Affirmed Ba1

...Issuer: United Airlines, Inc.

....Senior Secured Enhanced Equipment Trust Series 1999-1B, Affirmed Ba1

....Senior Secured Enhanced Equipment Trust Series 2000-2B, Affirmed Ba2

....Senior Secured Enhanced Equipment Trust Series 1997-4A, Affirmed Baa1

....Senior Secured Enhanced Equipment Trust Series 2000-1A, Affirmed Baa1

....Senior Secured Enhanced Equipment Trust Series 2001-1B, Affirmed Baa3

....Senior Secured Enhanced Equipment Trust Series 1998-1A, Affirmed Baa1

....Senior Secured Enhanced Equipment Trust Series 2001-1A, Affirmed Baa1

....Senior Secured Enhanced Equipment Trust Series 1998-1B, Affirmed Baa3

....Senior Secured Enhanced Equipment Trust Series 2000-2A, Affirmed Baa2

....Senior Secured Enhanced Equipment Trust Series 1999-2A, Affirmed Baa1

....Senior Secured Enhanced Equipment Trust 1999-1A, Affirmed Baa2

....Senior Secured Enhanced Equipment Trust Series 1999-2A (underlying), Affirmed Baa1

....Senior Secured Equipment Trust Series 2007-1B, Affirmed Ba2

..Issuer: United Continental Holdings, Inc.

.... Speculative Grade Liquidity Rating, Affirmed SGL-1

Outlook Actions:

..Issuer: United Airlines, Inc.

....Outlook, Remains Positive

..Issuer: United Continental Holdings, Inc.

....Outlook, Remains Positive

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 following information supplements Disclosure 10 ("Information Relating to Conflicts of Interest as required by Paragraph (a)(1)(ii)(J) of SEC Rule 17g-7") in the regulatory disclosures made at the ratings tab on the issuer/entity page on www.moodys.com for each credit rating as indicated:

Moody's was not paid for services other than determining a credit rating in the most recently ended fiscal year by the person(s) that paid Moody's to determine this credit rating.

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 United Continental Holdings: CFR to Ba3, outlook positive
No Related Data.
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