Fitch Ratings conducted (20-Mar-2020) a portfolio review of the Latin American airlines amid the current challenging scenario of the coronavirus pandemic, and the expected sharp drop in demand occurring in the markets due to travel bans, social distancing and slow economic activity. The international ratings of LATAM Airlines Group, Azul, Gol and Avianca Holdings have all been downgraded one or two notches. All of the ratings of these airlines have been placed on Rating Watch Negative (RWN).
Key rating drivers are as follows:
- Strong cash flow burn due to coronavirus: The downgrades reflect increased credit risk as a result of the coronavirus pandemic that will lead to negative FCF, diminished liquidity positions and weaker balance sheets. The airlines have responded to the challenging environment with capacity reductions ranging from 30%-50% in domestic markets and up to 95% in international markets during 2Q2020. Capacity reductions in Brazil are projected to increase as the virus spreads and more restrictive measures are imposed that stifle demand. The downgrades take into account the expectation of a slow recovery period, as well as the sharp deterioration of local currencies and the mismatch between debt and lease obligations and revenues generated from domestic operations;
- High uncertainty results in rating watch: The RWN that have been assigned to these issuers reflect the continued cash flow pressure these companies would face if the travel restrictions related to coronavirus continue for a prolonged period of time. LATAM, Gol, Azul and Avianca are trying to reduce fixed costs and find alternatives to minimise liquidity deterioration. Access to credit lines and/or effective government support is a key item to watch as it could potentially constitute some relief from liquidity pressure;
- Rating action varies:
- LATAM Airlines: Ratings were downgraded by one notch to B+ to reflect deterioration in its strong liquidity position during the next few months and diminished prospects of strong performance in 2H2020. The carrier has the strongest liquidity position among the four issuers and the most diverse sources of revenues. It is currently operating at less than 50% of its capacity;
- Azul and Gol: Have been equalised at B to reflect their high exposure to the Brazilian market. Brazil‘s economy was starting to regain steam after a prolonged downturn and remains vulnerable to changing conditions and consumer sentiment given high unemployment levels and an uneven recovery. The timing and degree of support from the Brazilian government is hard to measure given its fiscal constraints;
- Avianca: Downgraded to CCC- from CCC+ to reflect limited financial flexibility, tight credit metrics and negative FCF. The carrier recently completed a debt restructuring and its business and financial position remain fragile. Avianca has high exposure to international travel. [more – original PR]