S&P downgrades Azul on grounded flights
May 20, 2020
Rating agency says a 50% drop in demand will keep 40% of the airline's planes on the ground until the end of the year
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S&P Global Ratings has downgraded Brazilian airline Azul by two notches to CCC+ with a negative outlook, saying travel restrictions "will crimp the company's cash flows and liquidity."
Brazilian airlines will likely face a 50% drop in demand in 2020, enough to keep 40% of Azul's planes on the ground through the end of the year, S&P said in a report on Monday.
"In addition, Azul has significant operating lease payments in the short-term, which requires continuous fleet management discussions to allow it to meet obligations," the rating agency said.
Azul and two other airlines in Brazil – Gol and LATAM Airlines – are in advanced negotiations with the national development bank BNDES to receive BRL4 billion ($701 million) in emergency financing, but S&P said it did not have enough information about the terms of the conditions of the loan.
The financing will likely boost the airlines' liquidity over the next 12 months, but it also depends on the participation of institutional investors that could require equity stakes as collateral, according to S&P.
Depending on market interest and conversion ratios, debt-for-equity clauses in the BNDES loan "could be deal breakers," S&P said.
Azul had around BRL16 billion in lease liabilities in March this year, including BRL2.4 billion in short-term obligations, and another BRL1 billion in short-term debt payments. As demand falls this year and recovers slowly in 2021, Azul may propose a distressed debt exchange in the medium term, which S&P said it could view as a default.
S&P said in a separate report that it kept a negative outlook on Gol's B- credit rating due to "the heightened risk of a near-term liquidity crisis if current long-term debt refinancing doesn't occur amid continued cash flow deficits."
Gol has around BRL3.2 billion in short-term debt maturities, including a BRL1.5 billion loan due in August. The airline has the money to pay its obligations, and it has said it is willing to do so, but it will have to use its cash holdings to service the debt as its keeps 20% to 30% of its fleet on the ground through the end of 2020.
S&P downgraded Santiago-based LATAM to CCC+ from B on Many 15, saying the airline's cash holdings will likely drop below $1 billion by the end of June.
LATAM stands to receive emergency financing from BNDES, but the loan, estimated to be roughly $240 million to $400 million per airline, does not shield the company from refinancing risks, S&P said.