Fitch: The news releaseFrom the june 15 new release: (my precedent post was from CIBC aviation weekly)
Fitch Downgrades Air Canada to 'BB-'
Mon 15 Jun, 2020 - 17:15 ET
Fitch Ratings - Chicago - 15 Jun 2020: Fitch Ratings has downgraded Air Canada's Long-Term Issuer Default Rating (IDR) to 'BB-' from 'BB'. The Rating Outlook remains Negative. Fitch has also downgraded Air Canada's existing unsecured notes to 'B+'/'RR5' from 'BB/RR4'.
KEY RATING DRIVERS
Corporate Rating: Air Canada entered 2020 in a strong liquidity position with over $6 billion in cash. Fitch believes the company should have sufficient liquidity to manage through the crisis assuming a modest recovery that begins in the second half of 2020 and continues into 2021. Liquidity has been bolstered by various capital raises completed over the last few months.
However, Fitch has revised its forecast since our previous review to include a steeper downturn in 2020 and slower recovery in 2021. Fitch believes that Air Canada carries a greater risk of a slower recovery than some carriers due to its heavy reliance on international traffic. In 2019 30% of its passenger revenue came from domestic traffic, 48% from U.S. transborder and trans-Atlantic travel, and the remainder from the Pacific and other non-domestic traffic. Reluctance to travel internationally and the possibility of prolonged travel restrictions may delay Air Canada's recovery compared to more domestically focused carriers.
Given our expectation for a slower recovery in demand, we expect Air Canada's credit metrics will fall outside levels that would support a 'BB' rating at least through 2021 before returning to supportive levels around the end of 2022. The Negative Outlook reflects the high degree of uncertainty remaining around air traffic recovery in light of the ongoing coronavirus pandemic.
Air Canada has taken significant actions to date to build up liquidity and reduce cash burn. The company announced layoffs of some 20,000 of its 38,000 employees. The company has raised additional cash by fully drawing its revolvers, accessing a US$600 million 364-day term loan, issuing CAD$1 billion in convertible notes, CAD$575 million in equity. These actions have shored up liquidity, but represent significant additional debt over amounts included in Fitch's prior forecast.
Fitch's downgrade of Air Canada's senior unsecured debt reflects a growing amount of debt that has either already been issued or that is likely to be issued throughout the year that could dilute potential recovery to unsecured creditors in a restructuring scenario.
DERIVATION SUMMARY
Air Canada is rated in line with United Airlines and above American (B) and Hawaiian Air (B+). The ratings reflect Air Canada's balance sheet improvement over recent years prior to the coronavirus downturn, strong financial performance and commitment to conservative credit metrics. The company also entered the downturn in a relatively favorable position as its large cash balance and ample liquidity were favorable to other carriers. These benefits are partly offset by Air Canada's heavy exposure to international travel in relation to some U.S. carriers, particularly given the likely slow return of long-haul international travel.
KEY ASSUMPTIONS
Key Assumptions in Fitch's rating case include a steep drop in demand through 2020, with full recovery only occurring by 2023. During 2020 Fitch's base case includes revenues down more than 90% through the second quarter of the year, with only a slow recovery thereafter. Our base case reflects traffic only recovering toward 2019 levels by the end of 2021, with a full rebound to 2019 levels only occurring by 2023. Jet fuel prices for the year are assumed at around $1.55/gallon, and rise to about $1.65/gallon in 2021.