OREANDA-NEWS. Fitch Ratings has upgraded Gol Linhas Aereas Inteligentes S. A.'s (GOL) Long-Term Foreign - and Local-Currency Issuer Default Ratings (IDRs) to 'CC' from 'RD' and its National Scale rating to 'CC(bra)' from 'RD(bra)'. Fitch has also upgraded GOL's fully owned subsidiaries' secured notes from CC/RR3 to CCC-/RR3 and affirmed GOL's fully owned subsidiaries' unsecured bond ratings at C/RR5. A full list of ratings actions follows at the end of this press release.

The rating actions reflect Fitch's reassessment of GOL's IDRs and issuance debt ratings incorporating the company's credit quality following its recently executed debt exchange offer. The ratings reflect the company's continued high leverage and weak cash flow relative to debt obligations.

GOL's financial and operational strategy included the execution of the following actions: the debt exchange offer with a 21% acceptance, the refinancing of its debt with Brazilian banks reducing principal payments during 2016 - 2017 and obtaining waivers until Dec. 31 2016, reducing the scale of its operations by returning approximately 15% of its total number of aircraft and reducing its total consolidated capacity with a target of 6% to 8% decrease during 2016. Also, the company has negotiated an agreement to postpone aircraft delivery with the aim to materially reduce total capital expenditures (capex) during 2016.

Although recent developments provide some relief to the company regarding financial flexibility, Fitch sees only the potential for a limited recovery in the company's operational performance during the next 12 months given Brazil's weak economic environment. GOL's liquidity deterioration - driven mainly by continued weak operational performance - continues to be a key concern.

The 'RR3' Recovery Rating (RR) 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 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

Demand Decline Continues

Brazil's total domestic traffic is anticipated to decline by 8% to 12% during 2016 as demand fundamentals and corporate activity remain weak. In this environment, GOL's total number of transported passengers decreased by 22% and 16% during the second quarter and the first half of 2016 (1H 2016), respectively, when compared to the same periods last year.

Fitch's base case considers that GOL's total transported passengers will decline by approximately 15% during 2016. The strengthening of the Brazilian real against the U. S. dollar, which occurred in recent months, is a positive for the company's operations, as GOL generates approximately 90% of its revenues in Brazilian reals, while around 60% of its total costs and 80% of its total debt are denominated in U. S. dollars.

Capacity Adjustments and Fleet Size Reduction Incorporated

During 1H 2016, GOL managed to reduce its total capacity, measured as available seat kilometers (ASK), by approximately 7.5%, closing this period with 23 billion of ASK. The company's capacity reductions in the domestic and international segments were 6.3% and 15.6%, respectively. For 2016, Fitch expects the company to reduce its total capacity - in the domestic and international segments combined - by 6% to 8%.

GOL has also reduced its flight route network to focus on profitability. In conjunction with these measures, the company is reducing the number of operational aircraft. The company expects to return at least 20 aircraft during 2016 - 15 aircraft already returned by the end of June 2016 - closing the year with a total fleet of 124 aircraft, 84 of those under operational leases and the remaining balance under financial leases.

Negative 2016 EBIT Margin, High Leverage

Fitch expects GOL to reach negative EBIT margin, around -2%, in 2016. Fitch's 2016 base case for GOL considers a 15% decline in total transported passengers, an increase in yields in the 7% to 10% range helped by the reduction in capacity, and total non-fuel cask around BRL 14.2 cents. Fitch views the trend in yield as one of the key factors for the company's 2016 operational performance.

GOL's adjusted gross leverage, measured as total adjusted debt/EBITDAR, was 11x at March 31, 2016, compared with 6.7x in 2014. The company's total adjusted debt was BRL16.9 billion at March 31, 2016. This debt includes BRL7.9 billion in on-balance-sheet debt and BRL9.0 billion in off-balance-sheet obligations related to operating leases with combined rental payments of around BRL1.2 billion during LTM March 2016. Fitch expects the company's adjusted gross leverage to be in the range of 10x to 12x during 2016.

Liquidity under Pressure

GOL's liquidity is viewed as weak. GOL would need to improve its operational performance, minimize capex levels and continue refinancing its debt to avoid a material decline in its liquidity position during the next few quarters. GOL's readily available cash, measured as total cash plus marketable securities, was BRL1.4 billion as of March 31, 2016. The company has debt principal payments due of approximately BRL439 million and BRL696 million during the second half of 2016 and 2017, respectively.

During LTM March 2016 the company's FCF generation was negative BRL1.7 billion, resulting in a FCF margin (LTM FCF/LTM revenues) of negative 16.7%. The company's cash flow from operations for 2016 is forecasted to be negative at around BRL621 million, reflecting the company's limited capacity to cover cash interest expenses and cash taxes, estimated at levels around BRL738 million and BRL246 million, respectively. Without a recovery in the company's operational performance, Fitch believes GOL's 2016 - 2017 FCF generation will remain negative and will continue to pressure its liquidity position.

KEY ASSUMPTIONS

Fitch's key assumptions within the rating case for GOL's ratings include:

--2016 consolidated RPK declines of around 12.5%;

--2016 consolidated ASK declines around 6% to 8%;

--2016 EBIT margin negative of around 2%;

--2016 FCF margin negative of around 10%;

--Minimum levels of net capital expenditure levels below BRL100 million in 2016;

--2016 Coverage ratio, EBITDAR/Gross Interest Expense + Rents), around 0.7x; --Gross adjusted financial leverage (total adjusted debt/EBITDAR) at levels around 11x by the end of 2016.

RATING SENSITIVITIES

Negative Rating Action: Future actions that may individually or collectively cause Fitch to take a negative rating action include:

--Weaker than expected operational performance in 2016;

--2016 FCF margin persistently below negative 13%;

--Readily available cash, measured as total cash plus marketable securities, consistently declining;

Positive Rating Action: Fitch could consider a positive rating action if GOL generates operational and FCF margins consistently above than those levels incorporated in the ratings, resulting in lower financial adjusted gross leverage while keeping current liquidity profile.

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) upgraded to 'CC' from 'RD';

--Long-Term National Rating upgraded to 'CC(bra)' from 'RD(bra)';

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

VRG Linhas Aereas S. A. (VRG):

--Long-Term Foreign and Local-Currency IDRs upgraded to 'CC' from 'RD;

--Long-term national rating upgraded to 'CC(bra)' from 'RD(bra)'.

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

--USD225 million of senior unsecured notes due 2017 affirmed at 'C/RR5';

--USD300 million of senior unsecured notes due 2020 affirmed at 'C/RR5';

GOL LuxCo S. A.:

--USD200 million of senior unsecured notes due 2023 affirmed at 'C/RR5';

--USD325 million of senior unsecured notes due 2022 affirmed at 'C/RR5';

--USD14.1 million of senior secured notes due 2018 upgraded to 'CCC-/RR3' from 'CC/RR3;

--USD41.3 million of senior secured notes due 2021 upgraded to 'CCC-/RR3' from 'CC/RR3;

--USD18.1 million of senior secured notes due 2028 upgraded to 'CCC-/RR3' from 'CC/RR3;