NEW YORK--(BUSINESS WIRE)--Fitch Ratings has assigned a 'BB-(Exp)' expected rating to LATAM Airlines Group S.A.'s (LATAM) proposed unsecured notes. The target amount for the proposed transaction is USD500 million. The total amount and tenor for the proposed issuance will depend on market conditions. Proceeds from the proposed issuance are expected to be used to refinance debt and for general corporate purposes. A portion of the proceeds from the proposed transaction will be used to refinance the existing USD300 million senior guaranteed notes due 2020 of TAM Capital 2 Inc.
Fitch currently rates LATAM's Long-term Issuer Default Rating (IDR) at 'BB-', with a Stable Outlook. A full list of LATAM's ratings is at the end of this rating action commentary.
LATAM's ratings reflect its diversified business model, strong regional market position, high gross adjusted leverage, and adequate liquidity. The ratings of LATAM and TAM S.A. (TAM) and their subsidiaries take into account the credit linkage between the two companies, which stems from their legal, operational, and strategic ties.
The Stable Outlook reflects expectations that the company will stabilize its operations and execute its business plan during 2015-2016, reaching an EBIT margin around 8%, adjusted gross leverage trending to 5x, and liquidity remaining in the upper level of the 10% to 15% range (liquidity is measured as cash and unused committed credit lines divided by the latest 12 months (LTM) revenue ratio). Brazil's macroeconomic scenario should continue to challenge the company's operational performance.
KEY RATING DRIVERS
Solid Business Position:
Fitch views LATAM's strong business position as sustainable in the medium term based on its business diversification, as well as its solid business position both within Latin America and in the international routes between Latin America and both North America and Europe. The company maintains a leading market position in the domestic markets of Brazil, Chile and Peru with participation of approximately 38%, 78%, and 63%, respectively. LATAM's market share of the Colombian domestic market is around 19%. The company's market share in terms of available seat kilometers (ASK) in intra-regional traffic is estimated at around 44%, while its participation in the traffic of the Latin American region with USA/Canada and Europe are estimated at levels of 23% and 11%. LATAM's business is diversified between international passengers, the Brazil domestic market, Spanish-speaking domestic markets and the cargo segment. These divisions represent 39%, 30%, 14% and 14%, respectively, of the company's total revenues at the end of December 2014.
Consolidated Capacity to Increase:
By segment, LATAM's capacity management in 2014 was -2% in the international segment, -1% in Brazil's domestic segment, +4% in the Spanish-speaking domestic segment, and -6% in the cargo segment. LATAM plans capacity increases in 2015 of between 4% and 6% in the international segment, 0% in Brazil's domestic segment, between 4% and 6% in the Spanish-speaking domestic segment, while in the cargo segment should be a contraction in the range of 0% to -2%. Overall, the company's consolidated capacity is expected to grow to between 2%-4% in 2015.
EBIT Margin Improving:
Fitch expects Latam will improve its operational performance and FCF generation resulting in lower gross adjusted leverage during the period 2015-2016. While pricing is expected to be weak and demand soft, which should result in declining passenger yields during 2015, lower total and fuel cost is expected to offset the decline in revenues per unit; total fuel cost per unit is expected to decline significantly during 2015. Overall, RASK - CASK spread per unit is expected to improve, resulting in the company's EBIT margin trending to levels around 8% during 2015-2016, versus 4.1% reached during 2014. The company saw a significant EBIT margin expansion during first quarter 2015 (1Q15), reaching 8.1% against 3.5% in 1Q14. This improvement was driven mainly by a 16% reduction in operating costs.
Brazilian Market Exposure Adds Volatility:
Fitch expects the company's exposure to the Brazilian market will continue to challenge its operational performance, as the Brazilian airline industry is facing a business environment characterized by single-digit growth in demand, low business travel activity, a weak yield atmosphere, and the benefits of lower international fuel prices being partially offset by devaluation of the Brazilian real against the U.S. dollar. The company is expected to counterbalance the negative impact of these factors by focusing on capacity management and cost control.
Deleveraging Expected:
LATAM's adjusted gross leverage metric is high; the ratings consider a gradual business deleveraging - driven by better margins - taking place during the next several quarters. The company's adjusted gross leverage is expected to trend toward around 5x during the 2015-2016 period. LATAM's gross adjusted leverage, measured as total adjusted debt over EBITDAR, was 5.8x during LTM March 31, 2015 (6.1x in 2014). The company achieved revenues, EBITDAR, and an EBITDAR margin of USD12 billion, USD2.1 billion, and 17.8%, respectively, during LTM March 31, 2015, while its EBIT margin was 5.3% during this period.
In addition, the company's total adjusted debt was approximately USD12.4 billion at the end of March 2015. This debt includes USD8.7 billion in on-balance-sheet debt and USD3.7 billion in off-balance-sheet obligations related to operating leases with combined rental payments of around USD522 million for LTM March 31, 2015.
Adequate Liquidity:
Fitch views the company's liquidity position as adequate for the rating category. At the end of March 2015, the company had cash of USD1.2 billion, along with USD210 million in unused committed credit lines. This level of liquidity, measured as total cash and marketable securities plus unused committed credit lines over LTM revenues, represents 12.1% of the company's revenues for LTM March 31, 2015. This ratio is expected to be around 15% in the foreseeable future. In addition, LATAM faces debt amortizations of USD1.3 billion and USD1.3 billion during 2015 and 2016, respectively, which will be primarily addressed through refinancing. The company's FCF is expected to be neutral to slightly negative during 2015-16 reflecting balanced levels of cash flow from operations and capital expenditures. LATAM maintains a capex plan - including fleet and non-fleet capex - that calls for capex levels of USD1.4 billion and USD1.6 billion during 2015 and 2016, respectively.
Strong Parent / Sub-Credit Linkage:
LATAM indirectly maintains substantially all of the economic rights and 20% of the voting rights in TAM, which is an affiliate company of LATAM. The ratings of LATAM and TAM also incorporate the strong credit linkage between both entities with significant legal, operational and strategic ties. This is reflected in the existence of cross-guarantees and cross-default clauses related to the aircraft financing for both entities, no restriction in terms of dividends and/or intercompany loan between both entities, with substantially all dividend flow generated by TAM expected to be oriented to LATAM through its non-voting shares in TAM. In addition, the financing of the combined fleet plan capital expenditure is primarily implemented through LATAM with the new aircraft being subleased to TAM.
KEY ASSUMPTIONS
Fitch's key assumptions within the rating case for the issuer include:
--2015 EBIT margin around 8%.
--Gross leverage trending to levels around 5x during the 2015-2016 period, and consistently in the 4.5x to 5x range thereafter.
--Neutral FCF in 2015.
--FFO fixed charge coverage consistently above 2.25x.
--Cash and marketable securities over LTM revenues consistently in the upper level of the 10% to 15% range.
RATING SENSITIVITIES
Considerations that could lead to a negative rating action (Rating or Outlook):
Future developments that may, individually or collectively, lead to a negative rating action include:
--Sustained negative FCF;
--Weakening liquidity consistently at levels below incorporated expectations;
--Gross adjusted leverage consistently above 5x;
--EBIT margin consistently below 7%;
--FFO fixed charge coverage consistently below 2x.
Considerations that could lead to a positive rating action (Rating or Outlook):
Conversely, Fitch may take a positive rating action if a combination of the following factors takes place:
--Adjusted gross leverage sustained at 4x;
--Neutral to positive FCF generation;
--FFO fixed charge coverage consistently around 3x;
--EBIT margin moving to 10%.
Fitch currently rates LATAM and TAM S.A. as follows:
LATAM Airlines Group S.A.:
--Long-term Issuer Default Rating (IDR) 'BB-';
--National Equity Rating at 'Primera Clase Nivel 2 (cl)'.
TAM S.A.
--Long-term IDR 'BB-';
--Local currency IDR 'BB-';
--National long-term rating 'A(bra)'.
Tam Linhas Aereas S.A.
--Long-term IDR 'BB-;
--Local currency IDR 'BB-';
--National long-term rating 'A(bra)'.
Tam Capital Inc.
--USD300 million senior unsecured note due 2017 at 'BB-'.
Tam Capital Inc. 2
--USD300 million senior unsecured note due to 2020 at 'BB-'.
Tam Capital Inc. 3
--USD500 million senior unsecured note due 2021 at 'BB-';
The Rating Outlook is Stable.
Additional information is available on www.fitchratings.com
Applicable Criteria
Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage (pub. 28 May 2014)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=749393
Additional Disclosures
Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=985820
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