OREANDA-NEWS. Fitch Downgrades GOL's IDR to 'RD', Unsecured Notes to 'C/RR5'; Rates New Secured Notes 'CC/RR3' New York Fitch Ratings has downgraded Gol Linhas Aereas Inteligentes S. A.'s (GOL) Long-Term Foreign and Local Currency Issuer Default Ratings (IDRs) to 'RD' from 'C'. Fitch has also downgraded GOL and its fully owned subsidiaries' unsecured notes to 'C/RR5'. In addition, Fitch has assigned new ratings to GOL's new secured notes - resulting from the debt exchange offering - of 'CC/RR3'. A full list of ratings actions follows at the end of this press release.

The downgrades follow the conclusion of GOL's debt exchange offering. According to Fitch's methodology, the offering imposed a material reduction in terms vis-a-vis the original terms of unsecured notes.

After a short period of time, Fitch will re-rate GOL's IDRs and issuance debt ratings and raises them to a performing level, which usually is still in the low speculative grade. The developments in GOL's ongoing negotiations with other main stakeholders will be key factors to be incorporated in the re-rated process.

Collateralization and Subordination Incorporated in Debt Recovery:

The Recovery Rating (RR) of 'RR3' for the new secured notes reflects above-average recovery prospects in an event of default. These notes are secured by collateral that has been valued at USD222.7 million, representing a principal coverage ratio of over 3 to 1. Fitch recovery analysis for the secured new notes resulted in higher values but it has been capped at 'RR3' considering that some jurisdiction's issues could affect the recovery prospects. The 'RR5' for the senior unsecured notes reflects below average recovery prospects in an event of default.

KEY RATING DRIVERS

GOL's capital structure continues to be weak. Only 22% of bondholders agreed to the exchange on July 1, 2016. The level of debt reduction resulting from the bond exchange was estimated at only USD101 million.

Fitch's base case scenario shows a continued deterioration in the company's capacity to cover its interest expenses and rents related to operating leases. GOL is expected to reach a negative free cash flow (FCF) margin of about 15% in 2016 and its interest coverage ratio is expected to decline to 0.5x from 0.7x during the LTM ended March 31, 2016.

GOL ended March 2016 with an adjusted debt level of BRL16.8 billion, equivalent to USD5.2 billion. GOL's adjusted gross leverage, measured as total adjusted debt/EBITDAR, remained high at 11x as of March 31, 2016. During the LTM the company generated EBITDAR of BRL1.5 billion. The company's adjusted gross leverage post bond exchange is estimated at 10.8x.

Brazil's adverse macroeconomic scenario should result in declining levels of transported passengers and yields for the industry during 2016. Domestic traffic is anticipated to decline by 8% to 12% during 2016 as demand fundamentals and corporate activity remain weak.

RATING SENSITIVITIES

The completion of the bond exchange offer has led to a downgrade of the Long-Term Foreign and Local Currency IDRs to 'RD'. A positive rating action may follow after Fitch completes the assessment of the company's credit profile post completion of its bond exchange and considering potential outcome of GOL's ongoing negotiations with other stakeholders.

LIQUIDITY

Fitch's rating case incorporates the impact of several factors in critical areas such as net revenues, cost expenses and capex on GOL's 2016 FCF generation and consequently in its liquidity position. Under current conditions the company is expected to struggle to cover its interest expenses.

GOL's readily available cash, measured as total cash plus marketable securities, was BRL1.4 billion as of March 31, 2016, down from BRL2.2 billion as of Sept. 30, 2015. GOL's short-term debt was BRL837 million as of March 31, 2016.

Without the reversal in GOL's negative FCF trend and absent extraordinary measures to enhance the capital structure, Fitch expects substantial deterioration in GOL's liquidity during 2016 and default risk will remain elevated.

FULL LIST OF RATING ACTIONS

Fitch has taken the following ratings:

Gol Linhas Aereas Inteligentes S. A. (GOL):

--Long-Term Foreign and Local Currency Issuer Default Ratings (IDRs) downgraded to 'RD' from 'C';

--Long-term national rating downgraded to 'RD(bra)' from 'C(bra)';

--USD200 million perpetual bonds affirmed at 'C/RR5'.

VRG Linhas Aereas S. A. (VRG):

--Long-Term Foreign and Local Currency IDRs downgraded to 'RD' from 'C;

--Long-term national rating downgraded to 'RD(bra)' from 'C(bra)'.

GOL Finance, a company incorporated with limited liability in the Cayman Islands:

--USD225 million of senior unsecured notes due 2017 downgraded to 'C/RR5' from 'CC/RR3';

--USD300 million of senior unsecured notes due 2020 affirmed at 'C', the recovery ratings were revised for this debt issuance to 'RR5' from 'RR4'.

GOL LuxCo S. A.:

--USD200 million of senior unsecured notes due 2023 affirmed at 'C', the recovery ratings were revised for this debt issuance to 'RR5' from 'RR4';

--USD325 million of senior unsecured notes due 2022 affirmed at 'C', the recovery ratings were revised for this debt issuance to 'RR5' from 'RR4';

Fitch has also assigned new ratings to the new secured notes issued by GOL LuxCo S. A. through the company's recent bond issuance as follows:

--USD14.1 million of senior secured notes due 2018 rated 'CC/RR3';

--USD41.3 million of senior secured notes due 2021 rated 'CC/RR3';

--USD18.1 million of senior secured notes due 2028 rated 'CC/RR3'.