Fitch Rates Air Canada's Proposed Secured Debt Issuance 'BB+(EXP)/RR1'
Air Canada is expected to raise around USD$950 million of new debt through the issuance of a new secured term loan B. The term loan will feature a seven-year tenor. Air Canada will also upsize its revolving credit facility to USD$300 million from its current size of USD$210 million. Collateral for the facility will consist of Air Canada's Asian Pacific route rights, slots at certain airports including Heathrow, LaGuardia, and DCA, as well as some real estate and ground equipment. The collateral package excludes the engines and accounts receivable that are included as security for Air Canada's existing facility.
The refinancing will push a material amount of Air Canada's debt maturities from the 2019-2020 timeframe out to 2023 as it redeems its existing first and second lien secured notes and term loan B. The use of cash to pay down some existing debt will also result in a moderate reduction in Air Canada's gross leverage metrics, which Fitch currently calculates at 3.8x.
KEY RATING DRIVERS
The 'BB+(EXP)/RR1' rating is driven by Fitch's recovery analysis, which distributes an estimated distressed enterprise value to various classes of debt based on a going concern valuation. Recovery estimates in a going concern scenario are supported by the strategic importance of the collateral to Air Canada. Recovery in a liquidation scenario would be more uncertain as the route rights and slots that collateralize the transaction are intangible and inherently difficult to value. The 'RR1' rating indicates Fitch's expectation that the 1st lien secured debt holders would recover 91%-100% of principal in a distress situation. Ratings on the proposed issuance are consistent with Fitch's rating for AC's existing senior secured debt.
The Positive Outlook on Air Canada's IDR is supported by improving financial results, reduced pension obligations, and longer-term commitment to de-leveraging. Over the intermediate term, Fitch expects AC to continue generating solid financial results, with operating margins remaining well above historical levels produced prior to 2013.
--Continued moderate growth in demand for air travel through the forecast period;
--Fuel prices increasing to about $65/barrel by 2018;
--Air Canada's capacity continues to grow in the high single-digit range.
Future actions that may individually or collectively cause Fitch to take a positive rating action include:
--Sustained adjusted debt/EBITDAR below 4.0x;
--EBITDAR margins sustained above 15%, EBIT margins above 10%;
--Better than expected (neutral or positive) free cash flow generation over the intermediate term.
Although AC's current credit metrics are roughly in-line with those outlined above, future positive rating actions may be driven by expectations for metrics to be sustained amidst a more difficult operating environment (i. e. higher fuel prices or a notable drop in demand).
Future actions that may individually or collectively cause Fitch to take a negative rating action include:
--Weaker than expected margin performance or higher than expected borrowing causing leverage to reach or exceed 5x;
--Weaker than expected financial performance causing free cash flow to be notably below Fitch's expectations;
--A decline in the company's EBIT margin to the low single digits, EBITDAR margins into the high single digits.
Air Canada's liquidity is supportive of the rating. At June 30, 2016 the company had a cash and short-term investments balance of $3.1 billion and an undrawn revolver of $210 million. Total liquidity is equal to 24% of LTM revenue, which Fitch considers more than adequate given manageable upcoming debt maturities and expectations for Air Canada to generate meaningful operating cash flows.
FULL LIST OF RATING ACTIONS
Fitch has assigned the following ratings to the proposed issuance:
--Senior secured term loan B 'BB+(EXP)/RR1';
--Senior secured revolving credit facility 'BB+(EXP)/RR1'.
Fitch currently rates Air Canada as follows:
--Long-term IDR 'B+';
--Senior secured first-lien term loan 'BB+/RR1';
--Senior secured revolving credit facility 'BB+/RR1';
--Senior secured second-lien debt 'BB+/RR1';
--Senior unsecured debt 'B+/RR4'.