CHICAGO--(BUSINESS WIRE)--Fitch Ratings has assigned a rating of 'B+/RR4' to the $500 million unsecured notes to be issued by American Airlines Group Inc. The Issuer Default Ratings (IDR) for American Airlines Group Inc., American Airlines, Inc., US Airways Group, Inc., and US Airways, Inc. remain unchanged at 'B+' with a Stable Outlook. A full rating list is shown at the end of this release.
The proceeds of American Airlines Group Inc.'s $500 million in senior unsecured notes will be used for general corporate purposes. The notes will feature a five-year tenor and will be fully and unconditionally guaranteed by American Airlines, Inc., US Airways Group, Inc. and US Airways, Inc. The notes will be rank pari passu with all current and future senior unsecured indebtedness of the issuer and all guarantors.
KEY RATING DRIVERS
The 'B+/RR4' rating is driven by Fitch's recovery analysis, which reflects recovery expectations under a scenario in which distressed enterprise value is allocated to the various debt classes. Fitch's recovery analysis incorporates a 'going concern' scenario, reflecting the likelihood that the company would restructure rather than liquidate in a potential future bankruptcy. Fitch notes that although our recovery model indicates the potential for above average recovery prospects for American's unsecured debt, recover percentages are highly sensitive to model inputs due to the heavy weighting of the capital structure towards secured debt. Fitch notes that unsecured recoveries have varied widely in previous airline bankruptcies as pension, rejected lease, and labor claims can dilute amounts available to unsecured creditors. An 'RR4' rating reflects the expectation that unsecured noteholders would likely experience average recovery.
Fitch currently rates American Airlines Group Inc. at 'B+' with a Stable Outlook. The most recent full ratings review was completed in December 2013 coinciding with American's exit from bankruptcy and the completion of its merger with US Airways. The company's financial and operating performance since that time has been strong. The company posted record results in both the first and second quarters of 2014. Revenues for the first half of the year were up by 8% compared to the pro forma combined results generated by American/US Airways in the first quarter of 2013. Meanwhile operating CASM excluding fuel and special items was up by only 3.1%. CASM pressure is coming from higher labor expenses, increased depreciation from owned aircraft, and maintenance costs. The ratings are also supported by the company's sizeable liquidity balance. As of 6/30/2014 the company had nearly $9.5 billion in cash on hand (though $791 million was held in Venezuelan Bolivars), and full availability under its $1.0 billion revolver.
The success that American has achieved since its exit from bankruptcy is tempered by several risks. While AAL and US Airways have made significant progress to date (combined frequent flier programs, progress in negotiating labor contracts, etc.) much of the integration process is still ahead. For instance, the companies have yet to merge their reservations systems (which can often be troublesome) or achieve a single operating certificate. Capital requirements may also be an issue as the company goes through its re-fleeting process. American plans to spend around $5.5 billion in capex each year for the next several years, which is likely to keep free cash flow minimal or negative at least for the next one to two years. Fitch is also cautious regarding the company's recently initiated dividend and share repurchase programs, which present additional drains on cash.
Fitch does not expect a ratings action in the near term. Longer-term, Fitch expects American's credit profile to improve if it is able to achieve the merger synergies that it expects and if the U.S. aviation market remains favorable as it has for the past several years.
RATING SENSITIVITIES:
The ratings on the unsecured notes are tied to American's IDR. An upgrade or downgrade of the notes could follow a rating action on the underlying IDR. A ratings change could also follow a material change in the recovery prospects for the notes through either a rising enterprise value or a material change in American's capital structure.
Fitch could consider a positive rating action on American's IDR if merger-related synergies perform to management's expectations, and if adjusted leverage declines from current levels. Fitch would also look for sustained unit revenue growth on par with or in excess of peers. Successful control over cost inflation particularly related to labor will also be key factors in a potential future upgrade.
A negative rating action on American's IDR is not anticipated at this time. However, Fitch could consider revising the ratings downward if the company were to experience significant/sustained integration-related difficulties. The ratings could be pressured by an unexpected drop in the demand for air travel or a fuel price shock that materially impacts operating results.
Fitch has assigned the following ratings:
American Airlines Group, Inc.
--Senior unsecured notes 'B+/RR4'.
Fitch currently rates American Airlines as follows:
American Airlines Group Inc.
--IDR 'B+'.
American Airlines, Inc.
--IDR 'B+';
--Senior secured credit facility 'BB+/RR1';
US Airways Group, Inc.
--IDR 'B+';
--Senior Unsecured Notes 'B+/RR4'.
US Airways, Inc.
--IDR 'B+';
--Senior secured credit facility 'BB+/RR1'.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (May 28, 2014);
--'Recovery Ratings and Notching Criteria for Nonfinancial Corporate Issuers' (Nov. 19, 2013).
Applicable Criteria and Related Research:
Recovery Ratings and Notching Criteria for Non-Financial Corporate Issuers
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=721836
Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=749393
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=876174
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