NEW YORK--(BUSINESS WIRE)--Fitch Ratings has assigned an expected rating of 'B+(EXP)/RR4' to LATAM Airlines Group S.A.'s (LATAM) proposed unsecured notes to be issued through its fully owned subsidiary LATAM Finance Limited. The notes will be fully guaranteed by LATAM. 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 primarily to refinance debt and for general corporate purposes.
Fitch currently rates LATAM's Long-term Issuer Default Rating (IDR) 'B+' with a Negative Outlook. A full list of LATAM's ratings follows at the end of this press release.
The Negative Outlook reflects LATAM's weaker than expected consolidated operational performance during 2015. Fitch expects the company's key credit metrics, primarily operating margins, leverage, and FCF generation, will remain pressured over 2016 - 2017. Fitch believes that prevailing unfavourable economic conditions in Latin America, particularly in Brazil, will make it more difficult for the company to execute deleveraging during 2016 - 2017. The Negative Outlook also considers LATAM's higher leverage and weaker operational performance versus its global peers within the rating category.
LATAM's ratings incorporate its diversified business model, important regional market position, and adequate liquidity, which are tempered by its high gross adjusted leverage and ongoing weak operational performance. Despite the company's solid business position in the domestic and international Brazilian market, the company has failed to mitigate volatility in its operational results within these markets through the economic cycle. Brazil's subdued macroeconomic conditions will continue to challenge the company's operational performance during 2016-2017.
The ratings of LATAM and TAM and their subsidiaries take into account the credit linkage between the two companies, which stems from their operational, strategic, and legal ties. These links are reflected in the existence of cross-guarantee and cross-default clauses related to the financing of aircraft acquisitions for both LATAM and TAM.
KEY RATING DRIVERS
Traffic, International/SSC Segments Counterbalance Brazil:
The company's traffic trends during the first eight months of 2016 (8M2016) indicate that boarded passenger levels in its International and Spanish-speaking countries (SSC) segments are compensating for the decline in the Brazilian domestic segment's traffic. LATAM's total consolidated boarded passengers decreased by -1.3% during 8M2016 against 2015's same period. LATAM's SSC segment increased its total boarded passengers by 6.8% during 8M2016. The international segment increased its boarded passengers by 7.5% during 8M2016. The Brazilian domestic segment declined by 10.4%, during the same period. Fitch expects SSC and international traffic to continue performing well, counterbalancing Brazilian domestic traffic contraction to result in a low-single-digit increase in the company's 2016 total traffic over the 2015 level.
Yields Recovery Key for Credit Profile:
Declining yields have been one of the key factors affecting LATAM's total revenues and operational margin during the last six quarters ended in June 30, 2016. Fitch views the company's capacity to improve its passenger average yield as the key factor to sustain better levels of cash flow generation during 2016-2017. LATAM's net revenues declined by 18.8% and 14.7% during 2015 and the first six months of 2016, respectively, over the prior year's same period. This result was primarily driven by sharp 21.1% and 17.4% declines in its consolidated average passenger yields during each period. The declining trend in the company's average yield in 2015 is expected to continue during 2016 but at a slower pace than the 2015 level. Fitch projects the company's consolidated average passenger yield to decline by 8% to 10% during 2016 against the prior year. This assumption considers LATAM's consolidated passenger yields to reach some improvement during the second half of 2016.
Capacity Adjustments and Cost Control Incorporated, 2016 EBIT margin at 6.5%:
LATAM is expected to counterbalance lower revenues by focusing on capacity management and cost control during 2016. LATAM plans capacity increases in 2016 of 3%-5% in the international segment and 6%-8% in the SSC segment, along with a planned capacity decrease at 12% in the Brazilian domestic segment. The cargo segment should see a contraction in the range of 2%-4%. LATAM's strategy to improve its operational performance in 2016 is oriented to reduce costs offsetting lower revenues. As a result of lower fuel prices and the company's cost reduction initiatives, LATAM was able to reduce its total operational CASK by 20.4% during 2015. This trend is expected to continue in 2016. Fitch expects LATAM's net revenues to decline in 2016 due to flat levels of consolidated boarded passengers and lower yields. Under its base case, Fitch expects LATAM to improve its cost structure per capacity unit and exhibit a 6.5% EBIT margin.
High Adjusted Leverage of 6.5x:
LATAM's adjusted gross leverage metric is high and remains weak for the rating category. The company's increase in its adjusted gross leverage during 2015 primarily reflects its limited capacity to improve the operational performance during last year. Although Fitch's rating case is assuming the company will improve its operational performance during 2016, this is not expected to result in a material reduction in the company's adjusted gross leverage, with levels still above 6x. LATAM's adjusted gross leverage, measured as total adjusted debt/EBITDAR, was 6.5x at June 30, 2016. The company's total adjusted debt was USD12.8 billion at June 30, 2016. This debt includes USD9 billion in on-balance-sheet debt and USD3.8 billion in off-balance-sheet obligations related to operating leases with combined rental payments of around USD540 million in LTM June 2016.
Adequate Liquidity, Capital Increase Factored:
Fitch views the company's liquidity position as adequate for the rating category. At June 30, 2016, the company had cash of USD1.2 billion and no material levels of unused committed credit lines (CCL) or revolving credit facilities (RCF), while its short-term debt was USD1.8 billion. This level of liquidity, measured as total cash and marketable securities plus unused committed credit lines over LTM revenues, represents 13.6% of the company's revenues for LTM June 30, 2016. This ratio is expected to be around 17% to 13% during 2016. The announced agreement for Qatar Airways to acquire up to 10% of LATAM's total shares in connection with a capital increase is viewed as a positive for the company's liquidity.
Considering the announced capital increase, expected to be fully executed during the fourth quarter of 2016, the company's liquidity is expected to slightly improve to levels around USD1.4 billion by Dec. 31, 2016. Further, LATAM plans to have USD325 million available in unused CCL and/or RCF by Dec. 31, 2016. In addition, LATAM faces debt amortizations of USD1.5 billion, USD1 billion, and USD1.2 billion during 2016, 2017, and 2018, respectively. Furthermore, the company's coverage ratio, measured as EBITDAR/(Interest Exp. + Rents), was 2.1x in LTM June 2016 and is expected to remain at this level during 2016-2018.
Important Adjustments in 2016-2018 Fleet Capex:
During 2015, the company's free cash flow (FCF) generation was negative USD246 million, resulting in FCF margin (LTM FCF/LTM revenues) of negative 2.4%. The 2015 FCF calculation reflects USD1.3 billion, USD1.6 billion, and USD35 million in cash flow from operations, net capex, and paid dividends, respectively. Fitch views as a positive the company's efforts to reduce its capex levels as a key factor to improve free cash flow generation. During March 2016, LATAM reached a USD2.9 billion reduction in fleet commitments for 2016 - 2018; this is in line with the company's previously announced plans to achieve a 40% reduction in its fleet commitments for the period. LATAM maintains a capital expenditure (capex) plan - including fleet, non-fleet capex, pre-delivery payments; and, assets sales - that calls for levels of USD771 million, USD844 million, and USD842 million during 2016, 2017, and 2018, respectively. Fitch is projecting the company's FCF margin to be neutral to slightly negative in 2016 and trending to slightly positive levels during 2017-2018.
Fitch's key assumptions within the rating case for LATAM include:
--2016 total transported passengers to increase around 3.4%;
--2016 consolidated yield to decline by high single digits;
--2016 net revenues to decline around 8%;
--2016 EBIT margin approximately 6.5%;
--2016 gross adjusted leverage, measured as total adjusted debt to EBITDAR, around 6.3x;
--2016 Coverage ratio, EBITDAR/(Net Interest Expense + Rents), around 2.33x;
--2016 Liquidity, measured as readily available cash plus unused committed credit facilities over LTM net revenues, around 13%;
--2016 Net Capex levels around USD1.2 billion;
--2016 FCF generation neutral to slightly negative at around USD200 million.
Considerations that could lead to a negative rating action (Rating or
--Sustained negative free cash flow;
--Liquidity, cash/LTM revenues, consistently below 10%;
--Gross adjusted leverage consistently above 5.5x;
--EBIT margin consistently below 7%;
--Coverage ratio, measured as total EBITDAR/(Interest Expenses + Rents), consistently below 2.25x.
Considerations that could lead to a positive rating action (Rating or
Fitch may take a positive rating action if a combination of the following factors takes place:
--Liquidity, cash/LTM revenues, consistently above 15%;
--Gross adjusted leverage consistently approaching 4.5x;
--Neutral to positive FCF generation;
--Coverage ratio, measured as the total EBITDAR/(Interest Expenses + Rents), consistently above 2.5x;
--EBIT margin moving to 8%.
LATAM Finance Limited:
Fitch has assigned an expected rating of 'B+/RR4' to LATAM's proposed unsecured notes to be issued through its fully owned subsidiary LATAM Finance Limited. The notes will be fully guaranteed by LATAM.
Fitch currently rates LATAM and TAM S.A. as follows:
LATAM Airlines Group S.A.:
--Long-term Issuer Default Rating (IDR) 'B+';
--National Equity Rating at 'Primera Clase Nivel 3 (cl)';
--USD500 million senior unsecured note due 2020 'B+/RR4'.
--Long-term IDR 'B+';
--Local currency IDR 'B+';
--National long-term rating 'A-(bra)'.
Tam Linhas Aereas S.A.
--Long-term IDR 'B+';
--Local currency IDR 'B+';
--National long-term rating 'A-(bra)'.
Tam Capital Inc.
--USD300 million senior unsecured note due 2017 'B+/RR4'.
Tam Capital Inc. 3
--USD500 million senior unsecured note due 2021 'B+/RR4'.
The Rating Outlook is Negative.
The relevant committee date was March 23, 2016
Additional information is available on www.fitchratings.com
Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage - Effective from 17 August 2015 to 27 September 2016 (pub. 17 Aug 2015)
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