Rating Action: Moody's assigns Ba3 rating to Avianca Holdings' $1.2 billion Tranche A super-priority DIP term loan facility and B3 to the $723 million subordinated Tranche BGlobal Credit Research - 26 Feb 2021New York, February 26, 2021 -- Moody's Investors Service ("Moody's") assigned a Ba3 rating on the $1.2 billion Senior Secured Super-priority Debtor-in-Possession (DIP) Term Loan A1 and A2 and B3 rating to the $723 million Senior Secured Super Priority Term Loan B, (the DIP facilities) issued by Avianca Holdings S.A. (DIP) (Avianca or the obligor).With the proceeds from the DIP Financing, Avianca expects to weather the COVID 19 crisis with the necessary liquidity and flexibility to execute its restructuring plan through the Chapter 11 process. Avianca filed for Chapter 11 in May 2020.The following ratings were assigned:Issuer: Avianca Holdings S.A. (DIP)...$1.0 billion Senior Secured Term Loan A1, Assigned Ba3...$176 million Senior Secured Term Loan A2, Assigned Ba3...$723 million Senior Secured Term Loan B, Assigned B3...$64 million Senior Unsecured Regular Bond/Debenture, Assigned Ba3Outlook Actions:..Issuer: Avianca Holdings S.A. (DIP)....Outlook, Assigned No OutlookRATINGS RATIONALEThe Ba3 rating on the $1.2 billion Senior Secured Term Loan A1 and A2 and B3 rating on the $723 million Senior Secured Term Loan B, incorporates the senior secured super-priority position of the claims and a number of factors including the cause of the bankruptcy, the nature and scope of reorganization, the structural features of the DIP facility, size of the DIP facility relative to pre-petition debt and collateral coverage of the DIP facility.The Company faced significant financial pressure before 2020; in fact, in 2019 the airline negotiated temporary deferrals on some of its debt and carried out an exchange offer for all of its $550 million senior notes due in May 2020 while raising additional liquidity and beginning the execution of a short-term strategic plan to increase margins. However, the bankruptcy was brought on by the effects of the coronavirus pandemic, which had a profound impact on the demand for air travel, preventing the company from achieving sustainable profitability expected after the voluntary restructuring program in 2019. Following the onset of the pandemic in early March 2020, all of Avianca's home countries imposed travel restrictions and flight bans, leading to a complete suspension of the company's scheduled passenger flight activity that largely persists to this day. In light of recent developments, Avianca initiated a restructuring under Chapter 11 of the U.S. bankruptcy code, allowing for an orderly court supervised process to reorganize the business.Total DIP financing amounts $2.0 billion, out of which $1.2 billion are related to new money and the balance to roll-up debt. The DIP term loans are issued in two tranches subject to different terms and conditions. To establish collateral package securing the DIP financing, Avianca negotiated three transactions. The company agreed with the stakeholder lenders to participate in the Tranche B that converts to equity in exchange for a release of significant collateral to support the entire DIP. As part of the agreement, stakeholder lenders provided fresh liquidity, raising $336 million of new money and $384 million rollup of an existing facility, for a total of $723 million for tranche B. Avianca also negotiated with an ad hoc group of its 2023 noteholders to roll up $220 million into Tranche A of the DIP facility in exchange for $200 million new money commitments to Tranche A and the ability to pledge the noteholder collateral on a senior priming basis. Additionally, $168.5 million was issued to Advent for its remaining stake in LifeMiles Ltd. (Lifemiles), totaling $389 million in roll-up debt and acquisition financing. Total Tranche A amounts to $1.2 billion, out of which $900 million is new money and the balance consists of roll up debt and acquisition financing.Moody's believes the reorganization is somewhat complex because of Avianca's debt structure and the ongoing execution risk given major transformative restructurings of key aspects of its business. Complexity is attributable to multiple claim priorities. Avianca expects aircraft financings to be rejected or abandoned through the court process and to refinance LifeMiles debt upon maturity in August 2022. As per the two-tranche term loan DIP facility, the company expects it to be converted into exit financing and equity upon emergence. The forecast assumes Tranche B DIP Facility will be converted into equity and $1.2 billion under Tranche A will be converted into new debt to be issued at exit. From an operational standpoint, Avianca faces high execution risk to resume the reorganization started in 2019 to turnaround its operation. The plan focuses on profitable growth by simplifying the network and eliminating unprofitable flying. By re-designing its network, Avianca plans to focus on profitable routes and to strengthen the Bogota hub, whereas by modifying its fleet, the company plans to maximize profits in the new network. The plan also includes lifting commercial performance and customer experience. Prior to the pandemic, the company had already achieved some milestones such as the sale of aircrafts, reduction in orders of aircraft to be delivered from 2025 onwards, cancellation of 25 unprofitable routes and an overall capacity reduction of 6.9%. Since the irruption of the pandemic, the company faces strong challenges to turnaround its operations in the midst of ongoing travel weaknesses. Avianca expects revenues to recover to $2.3 billion in 2021 from approximately $1.6 billion in 2020 and to sustain growth through stabilization close to $4.0 billion through 2025. Likewise, it expects to expand EBIT margin towards 15% through 2025 from a flat 0.7% in 2021 and around 5.0% prior to coronavirus.Collateral coverage relies heavily on assets that are more difficult to value, such as intangibles. The company estimates collateral value to surpass $2.0 billion based on third party valuations. However, the largest portion is related to Avianca's 89.9% equity interest in the LifeMiles loyalty program. Appraisal value is between $1.6 billion to $2.6 billion. Collateral also includes pledge of the cargo freighter business valued at $600 million to $920 million given a 5x to 7x annualized EBITDA multiple. Close to $300 million are related to the valuation of brand and trademark, aircraft and credit card receivables. The balance is $400 million perfected first lien on cash.Moody's estimates that the collateral value provides adequate coverage relative to the DIP facility in the most likely reorganization bankruptcy exit scenario, but collateral in the event of liquidation would not be sufficient to cover the DIP facility. Value of LifeMiles under a liquidation scenario would be much lower than when assuming ongoing concern given its strong ties with the airline. Although LifeMiles has a strong business model that includes unrelated commercial partners and co-branded credit cards, its single largest contributor to gross billings is Avianca, which, together with its air partners, represent around 30% of gross billings. LifeMiles' benefits from Avianca's leading market position in Colombia (Colombia, Government of; Baa2 negative) and Central America, where its share of passengers is 50% and 60%, respectively. As of March 31, 2020, LifeMiles had over 600 active commercial partners, which include airlines, financial institutions, hotels, gas stations, supermarkets, restaurants, car rentals and apparel stores. These partnerships allow LifeMiles' members to accrue and redeem miles for different products and services. Around 80% of the accrued miles are redeemed, and 90% of them are redeemed into airline tickets. The balance is redeemed into hotel nights, merchandise and other rewards.We also assume the DIP facility is not subject to borrowing base conditions and estimate the $2.0 billion face value of the DIP is between 30%-50% of pre-petition debt obligations that we believe is at least $5.4 billion as of March 31, 2020 or later, to the extent known.The principal methodology used in these ratings was Debtor-in-Possession Lending published in June 2018 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1108429. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.Avianca Holdings S.A. (DIP) (Avianca) is domiciled in Panama and has been the flag carrier of Colombia since 1919, when it was initially registered under the name SCADTA. It is headquartered in Bogotá, D.C. with its main hub at El Dorado International Airport. Since 2013, the company has been publicly listed in the New York Stock Exchange.This rating is assigned on a point-in-time basis and will be withdrawn as soon as practicable, before which it is subject to monitoring.REGULATORY DISCLOSURESFor further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. 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