"The CFR upgrade to Ba2 reflects our expectation that Air Canada's credit metrics will continue to improve over the next 12 to 18 months, supported by solid demand for air travel and debt reduction," said Aziz Al Sammarai, Moody's assistant vice president.
Moody's expects demand for air travel, mainly in US transborder and international routes, to continue to improve in 2024. A solid air fare environment will also allow Air Canada to continue to pass on cost inflation. This will result in operating profit of around CAD2 billion in 2023 and 2024, compared to a loss in 2022. Moody's projects Air Canada will run its system capacity, measured by available seat miles, at about 89% and 95% of 2019 level in 2023 and 2024, respectively. Since September 2022, the Company has prepaid about CAD1.9 billion of debt and is committed to achieving its net leverage target of 1.5x.
Air Canada will have very good liquidity (SGL-1) through September 2024. The company's sources include cash and short-term investments of about CAD8.7 billion at June 2023, a fully available $600 million credit facility expires in August 2025 and CAD200 million credit facility expires in December 2025, and Moody's expected positive free cash flow of about CAD1 billion through September 2024. These sources will be more than sufficient to fund approximately CAD1 billion of annual mandatory debt and lease repayments. Moody's expects compliance with Air Canada's two financial covenants (minimum cash reserves and minimum collateral coverage ratio) over the next 12 months. Possible additional liquidity could be provided by Air Canada's unencumbered asset pool (excluding the value of Aeroplan and Air Canada Vacations) which amounts to approximately CAD6.3 billion.
The EETC ratings consider estimates of loan-to-value for each of the transactions. Moody's believes the aircraft models that comprise the collateral across these transactions will remain important to Air Canada's network, which supports Moody's expectation that the company would likely affirm these transactions if it were to reorganize under Canadian bankruptcy and insolvency law. The aircraft collateral are 777-300ERs (2013-1), 777-300ERs and 787-9s (2015-2) and 737-8s and 787-9s (2017-1). The 787s and 737 MAXes are the most fuel efficient in the fleet; the 777-300ERs have high seating density, and are used mainly on long haul flights to Europe and Asia. These models provide emissions benefits as well.
The stable outlook reflects Moody's expectation that Air Canada will be able to withstand cost pressures while maintaining very good liquidity over the next 12-18 months. Moody's also expects the company's credit metrics to benefit solid demand and price environment such that debt/EBITDA will fall to 3.7x and 3.5x in 2023 and 2024, respectively.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
The ratings could be upgraded if Air Canada is able to maintain adjusted debt-to-EBITDA below 3x, EBITDA margins toward 20%, very good liquidity, and a track record of conservative financial policy.
The ratings could be downgraded if the company's liquidity or operating performance deteriorate, adjusted debt/EBITDA is likely to be sustained above 4x, or EBITDA margins sustained below 15%.
Changes in EETC ratings can result from any changes in the underlying credit quality or ratings of the company or Moody's opinion of the importance of the aircraft collateral to the operations. Changes in estimates of current and projected aircraft market values, which will affect estimates of loan-to-value, could also result in a change to EETC ratings.
LIST OF AFFECTED RATINGS
..Issuer: Air Canada
Upgrades:
.... Corporate Family Rating, Upgraded to Ba2 from Ba3
.... Probability of Default Rating, Upgraded to Ba2-PD from Ba3-PD
.... Speculative Grade Liquidity Rating, Upgraded to SGL-1 from SGL-2
....Senior Secured Bank Credit Facility, Upgraded to Ba1 from Ba2
....Senior Secured Regular Bond/Debenture, Upgraded to Ba1 from Ba2
Outlook Actions:
....Outlook, Remains Stable
..Issuer: Air Canada 2013-1 Pass Through Trusts
Upgrades:
....Senior Secured Enhanced Equipment Trust, Upgraded to Baa2 from Baa3
Outlook Actions:
....Outlook, Remains Stable
..Issuer: Air Canada Series 2015-2 Pass Through Trusts
Upgrades:
....Senior Secured Enhanced Equipment Trust, Upgraded to A1 from A3
Affirmations:
....Senior Secured Enhanced Equipment Trust, Affirmed Ba1
....Senior Secured Enhanced Equipment Trust, Affirmed Baa2
Outlook Actions:
....Outlook, Remains Stable
..Issuer: Air Canada Series 2017-1 Pass Through Trusts
Upgrades:
....Senior Secured Enhanced Equipment Trust, Upgraded to Aa2 from A2
....Senior Secured Enhanced Equipment Trust, Upgraded to A2 from Baa1
....Senior Secured Enhanced Equipment Trust, Upgraded to Baa1 from Baa3
Outlook Actions:
....Outlook, Remains Stable
..Issuer: Air Canada Series 2020-1 Pass Through Trusts
Upgrades:
....Senior Secured Enhanced Equipment Trust, Upgraded to Ba2 from Ba3
Outlook Actions:
....Outlook, Remains Stable
The principal methodology used in rating Air Canada was Passenger Airlines published in August 2021 and available at https://ratings.moodys.com/rmc-documents/74345. The principal methodologies used in rating Air Canada 2013-1 Pass Through Trusts, Air Canada Series 2015-2 Pass Through Trusts, Air Canada Series 2017-1 Pass Through Trusts and Air Canada Series 2020-1 Pass Through Trusts were Passenger Airlines published in August 2021 and available at https://ratings.moodys.com/rmc-documents/74345, and Enhanced Equipment Trust and Equipment Trust Certificates published in July 2018 and available at https://ratings.moodys.com/rmc-documents/56462. Alternatively, please see the Rating Methodologies page on https://ratings.moodys.com for a copy of these methodologies.
Air Canada is the largest provider of scheduled airline passenger services within, and to and from Canada. The company is headquartered in Saint-Laurent, Quebec, Canada.
REGULATORY DISCLOSURES
For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found on https://ratings.moodys.com/rating-definitions.
For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security 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 credit rating action on the support provider and in relation to each particular credit 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 issuer/deal page for the respective issuer on https://ratings.moodys.com.
For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit 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 ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.
These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website https://ratings.moodys.com.
Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.
Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://ratings.moodys.com/documents/PBC_1355824.
The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on https://ratings.moodys.com.
The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the UK and is endorsed by Moody's Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK endorsement status and on the Moody's office that issued the credit rating is available on https://ratings.moodys.com.
The below contact information is provided for information purposes only. For disclosures on the lead rating analyst and the Moody's legal entity that issued the rating, please see the issuer/deal page on https://ratings.moodys.com for each of the ratings covered.
The person who approved Air Canada credit ratings is Paresh Chari, Associate Managing Director, Corporate Finance Group, 1 212 553 0376, 1 212 553 1653. The person who approved Air Canada 2013-1 Pass Through Trusts, Air Canada Series 2015-2 Pass Through Trusts, Air Canada Series 2017-1 Pass Through Trusts and Air Canada Series 2020-1 Pass Through Trusts credit ratings is Jonathan Kanarek, Associate Managing Director, Corporate Finance Group, 1 212 553 0376, 1 212 553 1653.
The relevant office for each credit rating is identified in "Debt/deal box" on the Ratings tab in the Debt/Deal List section of each issuer/entity page of the website.
Please see https://ratings.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 issuer/deal page on https://ratings.moodys.com for additional regulatory disclosures for each credit rating.
Aziz Al Sammarai
Asst Vice President - Analyst
Corporate Finance Group
Moody's Canada Inc.
70 York Street
Suite 1400
Toronto, ON M5J 1S9
Canada
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653
Paresh Chari
Associate Managing Director
Corporate Finance Group
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653
Releasing Office:
Moody's Canada Inc.
70 York Street
Suite 1400
Toronto, ON M5J 1S9
Canada
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653