Fitch Affirms GOL's IDR at 'BB-'; Outlook Stable

NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed Gol Linhas Aereas Inteligentes S.A.'s (GOL) ratings as follows:

--Foreign and local currency long-term Issuer Default Ratings (IDRs) at 'BB-';

--Long-term national rating at 'A-(bra)';

--USD200 million perpetual bonds at 'BB-';

--USD200 million of senior notes due 2017 at 'BB-';

--USD300 million of senior notes due 2020 at 'BB-';

Fitch has also assigned foreign currency (FC) and local currency (LC) IDRs, and long-term national ratings to the following GOL's fully owned subsidiaries:

VRG Linhas Aereas S.A.:

--Foreign currency IDR 'BB-';

--Local currency IDR at 'BB-';

--Long-term national rating at 'A-(bra)'.

GOL Finance, a company incorporated with limited liability in the Cayman Islands:

--Foreign currency IDR 'BB-';

--Local currency IDR at 'BB-';

In addition, Fitch has assigned an 'A-(bra)' rating to BRL500 million senior unsecured debentures due in 2017 issued by GOL's wholly owned subsidiary, VRG Linhas Aereas S.A.

The Rating Outlook is Stable.

GOL's ratings reflect the company's significant market share position in the Brazilian airline sector and consistent business strategy to focus its operations primarily on the Brazilian domestic market. The ratings also consider the company's cash flow generation, comfortable liquidity; and continued decline in leverage during the last several quarters. The company is exposed to fuel cost volatility and other industry-related risks, such as revenue volatility, high operating leverage and increasing competition. The ratings incorporate the high degree of sensitivity of GOL's operations to changes in the macroeconomic scenario.

The Stable Outlook reflects expectations that GOL will maintain its solid market position as Brazil's second largest airline and that the company will be able to maintain a credit profile relatively stable despite increasing competition and higher oil prices. The company is expected to continue to benefit from stronger domestic demand for domestic air travel in the business and leisure segments following continued positive trend in Brazil's economy.

Business Strategy, Focus on Domestic Market Expected to Continue:

GOL has a solid market position in the Brazilian domestic market with approximately 35.7% market share, measured by RPK, during the first five months of the year ended in May 2011. The domestic segment has benefited from the improving Brazilian economy as total demand, measured by RPK, increased by 23.5% and 21.7% during fiscal year (FY) 2010 and the first five months of 2011. The company's market position reflects its consistent business strategy to focus in the domestic market, low cost structure, access to approximately 50% of the available slots of Brazil's most important airports, well-diversified local route network, and brand recognition between middle class and local business travelers, segments that represent more than 75% the domestic market demand. This business strategy allowed the company to maintain EBITDAR margins around 20% during the last 12-month (LTM) period ended in March 2011. In addition, the company's market position in the Brazilian international markets was 11.7% during the first five moths of the year ended in May 2011.

Yields Expected to Remain Under Pressure due to Increasing Competition:

Increasing competition has and will continue to pressure the industry's yields during the next quarters with the main players focusing more in absorbing demand through increased load factors. Counterbalancing this increase in competition is the limited access to slots in the Brazilian's airports, which will continue to limit the access of new players while allowing main local players to maintain strong markets positions. Based on the company's fleet plan, over capacity risk is moderate during the next two years, 2011 and 2012, respectively. GOL's operating fleet was comprised of 115 aircraft by the end of March 2011, the company plans to maintain it in 115 aircrafts by the end of 2010, and increase it to 119 by the end of 2012.

Solid Liquidity, Cash Expected to Remain above 20% Revenues:

Positively, the company improved its liquidity during the LTM ended in March 2011 maintaining specific cash targets in the range of 20%-25% over its LTM period revenues. The company's cash position is expected to remain above 20% over its LTM revenues during 2011. The company ended the first quarter of 2011 (1Q'11) with a cash position of BRL1.8 billion, which positively compares with BRL1.4 billion by the end of March 2010.

Leverage Expected to Increase in 2011 in the 4.5 times (x) to 5x range:

GOL's cash generation, as measured by EBITDAR was BRL1.427 billion during the LTM period ended March 2011, respectively. The company had approximately BRL7.3 billion in total adjusted debt at the end of March 2011. This debt consists primarily of BRL3.6 billion of on-balance-sheet debt, most of which is secured, and an estimated BRL3.7 billion of off-balance-sheet debt associated with lease obligations. The company's leverage, as measured by net debt/EBITDAR, was 3.9x at the end of March 2011.

During FY2010 and LTM ended March 2011, GOL generated EBITDAR levels of BRL 1.5 billion and BRL1.4 billion, respectively, resulting in an EBITDAR margin of 22% and 20.1%, respectively. The ratings factor in the view that GOL's net leverage will increase during 2011 to reach levels in the 4.5x and 5x range by the end of FY2011 as the company's cash flow generation, measured by EBITDAR is expected to decline driven primarily by higher fuel costs, while yields should continue under pressure during 2011. The company's 2011 EBITDAR margin is expected to be around 15%. Fuel cost is the main component in the company's cost structure representing approximately 35% of the company's total revenues. The ratings incorporate the view that 2011 average WTI oil price will be around USD100 per barrel, which represents a 26% increase over the average 2010 WTI oil price of USD79.63 per barrel.

Webjet Acquisition Neutral to GOL's Credit Quality:

On July 8, 2011, GOL announced that it company has executed a memorandum of understanding, through its fully owned subsidiary VRG Linhas Aereas S.A. (VRG), to acquire 100% of the outstanding shares of Brazilian Webjet Linhas Aereas S.A. (WebJet). The transaction is considered as neutral to GOL's credit quality due to the size of the transaction regarding to the company's cash position, cash flow generation and leverage. The transaction is subject to the approval from the Brazilian regulatory authorities ANAC and CADE.

The acquisition price is BRL96 million, to be adjusted after due diligence is complete during the next 30 to 60 days. The level of new debt that this transaction would bring under GOL's adjusted debt is expected to be around BRL472.2 million.

With the proposed transaction, GOL will increase its slots in Brazil's airports as follows: Guarulhos (Sao Paulo), Santos Dumont (Rio de Janeiro), Galeo (Rio de Janeiro), and Confins (Belo Horizonte) from 77, 49, 71, and 52 slots to 97, 65, 79, and 69, respectively. During the first five months of 2011 (January - May) GOL and WebJet reached market shares, measured by revenue per kilometers (RPKs), of 37.53% and 5.40% respectively. The transaction is expected to generate BRL100 million in synergies over a period of two years.

On a pro forma basis considering most recent financials available for GOL (March 2011) and WebJet (December 2010), the combined company's annual EBITDAR would be around BRL1.523 billion, with an estimated EBITDAR margin around 20%, net leverage would be around 3.9x, and liquidity, measured by cash and marketable securities/revenue ratio, would be approximately 22%.

Adequate Debt Payment Schedule Provides Flexibility:

GOL maintains an adequate debt maturity schedule. By the end of March 2011, the company maintained debt amortizations of BRL141 million, BRL37 million, and BRL51 million during 2011, 2012, and 2013, respectively, comfortably covered by its current cash and marketable securities balance of BRL1.8 billion. If the acquisition of Webjet is completed, the company debt's maturity schedule is expected to remain manageable. On a pro forma basis, it would result in due debt payments of BRL227 million, BRL89 million, and BRL73 million during 2011, 2012, and 2013, respectively. In addition, during the last two years the company has maintained good access to international debt markets to improve its debt maturity schedule.

High Operational Risk:

GOL's operational results are highly correlated to the domestic economy. The lack of product and geographic diversification in the company's business model is the result of the domestic passenger segment representing approximately 90% of its revenues. The ratings also incorporate the positive current business environment affecting the domestic segment as the Brazilian economy is expected to grow by 4% and 4.5% during 2011 and 2012, respectively. Negative changes in the macro economic scenario could create pressure on ratings.

The company is exposed to currency risk as approximately 90% of the company's revenues are denominated in local currency, while its cost structure has a significant component in U.S. dollars, representing approximately 60% of the company's total costs. In addition, the company's debt is mostly denominated in U.S. dollars, segment that represents approximately 80% of the company's total debt. Also factored in the ratings is the company's exposure to oil price volatility since fuel costs represent approximately 32%-42% of its cost structure.

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;

--'Parent and Subsidiary Rating Linkage (Fitch's Approach to Rating Entities within a Corporate Group Structure), July 14, 2010.

Applicable Criteria and Related Research:

Corporate Rating Methodology - Amended

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

Parent and Subsidiary Rating Linkage Criteria Report

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=534826

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