Fitch Maintains Rating Watch Positive on TAM S.A.; Rates Proposed Guaranteed Notes 'B+/RR4'

NEW YORK--(BUSINESS WIRE)--Fitch Ratings maintains the Rating Watch Positive on TAM S.A.'s (TAM) ratings as follows:

--Foreign currency Issuer Default Rating (IDR) 'B+';

--Local currency IDR at 'B+';

--Long-term national scale rating at 'BBB+(bra)';

--USD300 million senior unsecured note due to 2020 at 'B+/RR4';

--USD300 million senior unsecured note due 2017 at 'B+/RR4';

--BRL500 million debentures issuance due 2012 at 'BBB+(bra)'.

The rating Outlook is Stable.

Fitch Ratings has also assigned foreign currency (FC) and local currency (LC) IDRs to the following TAM fully owned subsidiaries:

Tam Linhas Aereas S.A.:

--Foreign currency Issuer Default Rating (IDR) 'B+';

--Local currency IDR at 'B+';

Tam Capital Inc. :

--Foreign currency Issuer Default Rating (IDR) 'B+';

--Local currency IDR at 'B+';

Tam Capital Inc. 2:

--Foreign currency Issuer Default Rating (IDR) 'B+';

--Local currency IDR at 'B+';

Tam Capital Inc. 3:

--Foreign currency Issuer Default Rating (IDR) 'B+';

--Local currency IDR at 'B+';

Fitch has also assigned a 'B+/RR4' rating (Expected) to TAM's proposed senior guaranteed notes. The target amount of the proposed issuance is expected to be around USD300 million; the final amount of the issuance will depend on market conditions and the tenor is projected to be up to 10 years. These notes will be issued through TAM's subsidiary TAM Capital 3 Inc. and will be unconditionally guaranteed by TAM and TAM Linhas Aereas S.A. Proceeds from the proposed issuance will be used to enhance the company's cash balance and for general corporate purposes. The final rating for the proposed transaction is contingent upon the receipt of final documents conforming to information already received.

On Aug. 16, 2010, Fitch placed TAM's ratings on Rating Watch Positive and LAN's 'BBB' IDR on Rating Watch Negative. These rating actions followed the announcement by TAM and LAN that they had reached an agreement to combine their holdings under a single parent entity. The Rating Watch Positive on TAM's ratings reflects the view that the combined credit profile of the two companies would be stronger than TAM's current credit profile.

The merger of the two airlines has been delayed by anti-trust authorities. The ratings of TAM remain on Rating Watch Positive to reflect the possibility the transaction will ultimately be approved, and that the transaction, if approved would benefit TAM's creditors.

TAM's 'B+' and 'BBB+ (bra)' ratings reflect the company's high leverage and volatile cash flow generation during the last few years. They factor in the company's solid liquidity position and its strong market presence in the domestic air-passenger transportation sector, with a leading market share in Brazil's domestic and international markets of approximately 41.8% and 85.8%, respectively, during the first quarter of 2011. TAM's ratings also factors in the company's solid market position as the sole Brazilian airline operator in long-haul routes to Europe and the U.S., which is strengthened by several code share agreements. The 'B+/RR4' ratings on the company's unsecured public debt reflect average recovery prospects given default. Industry-related risks such as fuel cost volatility, high operating leverage, and cyclicality are factored into the ratings, as is the company's high degree of sensitivity to changes in the macroeconomic scenario.

By the end of March 2011, TAM announced it had signed a letter of intention to buy a 31% stake in Brazil's TRIP Linhas Aereas (TRIP). Tam expects to close the deal during the next 90 days, subject to a positive outcome from the legal due diligence process. Although complete information regarding the transaction has not yet been disclosed to the market, Fitch expects the transaction to be neutral to TAM's credit quality as the total amount of the transaction is expected to be manageable relative to TAM's current liquidity position of BRL1.9 billion (USD1.2 billion) by the end of March 2011. TRIP reached revenues and EBITDAR in 2010 of BRL747 million (USD425 million)and BRL152 million (USD86 million), respectively. TRIP's total adjusted leverage measured by the total adjusted debt to EBITDAR ratio was 5.2x in 2010. TRIP's market share in Brazil's domestic market, measured by Revenue Passenger Kilometers(RPK) participation, was 2.57% and 1.84% during the first quarter of 2011 (1Q11) and first quarter of 2010 (1Q10), respectively. TRIP's participation in Brazil's domestic market capacity, measured by Available Seat Kilometers (ASK) was 2.94% and 2.08% during 1Q11 and 1Q10, respectively.

TAM's cash generation, as measured by Adjusted EBITDAR, was USD682 million (BRL1.4 billion), USD991 million (BRL 1.7 billion), and USD1.1 billion (BRL1.8 billion) during fiscal 2009, fiscal 2010 and the LTM period ended March 2011, respectively. TAM's adjusted EBITDAR calculation excludes the effect of the additional tariff reversal of approximately BRL405 million occurred during 2010. TAM's Adjusted EBITDAR margin has remained at 14.8% during LTM March 2011. The company had approximately USD6.9 billion (BRL 10.7 billion) in total adjusted debt at the end of March 2011. This debt consists primarily of USD4.8 billion (BRL7.6 billion) of on-balance-sheet debt and an estimated USD2.0 billion (BRL3.2 billion) of off-balance-sheet debt associated with lease obligations. The company's rental payments for the LTM March 2011 reached a total amount of USD270 million (BRL451 million). The company's leverage, as measured by the Net Adjusted Debt/Adjusted EBITDAR ratio was 5.1 times (x) at the end of March 2011. TAM's unrestricted cash on its balance was USD1.2 billion (BRL1.9 billion) by the end of March 2011, resulting in a cash and marketable securities/revenue ratio of 16%.

LAN's cash generation, as measured by EBITDAR, has remained relatively stable during the last few years, at USD823 million, USD1.1 billion and USD1.1 billion during fiscal 2009, fiscal 2010 and the last 12 month (LTM) period ended March 2011, respectively. LAN's EBITDAR margin has consistently been over 22% during the last two years The company had approximately USD4.2 billion in total adjusted debt at the end of March 2011. This debt consists primarily of USD3.4 billion of on-balance-sheet debt, most of which is secured, and an estimated USD823 million of off-balance-sheet debt associated with lease obligations. The company's rental payments for the LTM March 2011 period reached a total amount of USD117.6 million. The company's leverage, as measured by the Net Adjusted Debt/EBITDAR, ratio, remained stable at 3.5 times (x) by the end of March 2011. LAN's unrestricted cash on its balance was USD388 million by the end of March 2011, resulting in a cash and marketable securities/revenue ratio of 8%.

On a pro forma basis, ending in March 2011, the combined company's EBITDAR would be around USD2.2 billion, with an estimated EBITDAR margin of 18%, adjusted net leverage would be around 4.4x, and liquidity, measured by cash and marketable securities/revenue ratio, would be approximately 13%.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research:

--'Corporate Rating Methodology' (Aug. 13, 2010);

--'Liquidity Considerations for Corporate Issuers' (June 12, 2007).

Applicable Criteria and Related Research:

Corporate Rating Methodology

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=546646

Liquidity Considerations for Corporate Issuers

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=328666

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