Azul Investments LLP -- Moody's upgrades Azul to B3; stable outlook
Rating Action: Moody's upgrades Azul to B3; stable outlook
Global Credit Research - 17 Dec 2020
New York, December 17, 2020 -- Moody's Investors Service ("Moody's") has today upgraded Azul S.A.'s (Azul) Corporate Family Rating (CFR) to B3 from Caa1. At the same time, Moody's upgraded to Caa1 from Caa2 the rating on the USD400 million senior unsecured notes issued by Azul Investments LLP and guaranteed by Azul and Azul Linhas Aéreas Brasileiras S.A. The outlook was changed to stable from negative.
Upgrades:
..Issuer: Azul S.A.
.... Corporate Family Rating Upgraded to B3 from Caa1
..Issuer: Azul Investments LLP
....Gtd Senior Unsecured Regular Bond/Debenture, Upgraded to Caa1 from Caa2
Outlook Actions: ..Issuer: Azul S.A.
....Outlook, Changed To Stable From Negative
..Issuer: Azul Investments LLP
....Outlook, Changed To Stable From Negative
RATINGS RATIONALE
The upgrade to B3 from Caa1 was prompted by the better passenger traffic in Brazil versus our estimates at the beginning of the virus outbreak. Azul's ability to reduce costs during the pandemic that resulted in lower than expected cash burn and its proven access to the financial markets through the recent issuance of BRL1.7 billion in convertible debentures also support the upgrade. Our expectation that Azul will succeed in taking advantage of the recovery in the market through its unique position in most of its network while keeping liquidity at adequate levels is also reflected in the upgrade to B3. Moody's believes that there is strong potential for Azul to substantially improve key credit metrics towards 2019 levels through 2023.
The B3 rating is constrained by the still fragile situation of the Airlines industry combined with Azul's still weak credit metrics. The rating incorporates the uncertainties ahead of the sector as a result of the coronavirus pandemic that could lead to slower economic recovery or another round of restrictions for travel and tourism reducing the speed of the rebound in the industry. Despite the recovery observed so far, the capital markets are still demanding stronger collaterals packages and higher returns when offering new funding to airlines in general. The ability to raise liquidity and control cash burn will still be a key aspect in Azul's ratings assessment.
The adverse impacts of the coronavirus pandemic on the global economy, oil prices and asset prices have sustained a severe and extensive credit shock across many sectors, regions and markets. The combined credit effects of these developments are unprecedented. The passenger airline industry is one of the sectors most significantly affected by the shock given its exposure to travel restrictions and sensitivity of consumer demand to sentiment. Moody's regards the coronavirus pandemic as a social risk under its ESG framework, given the substantial implications for public health and safety.
LIQUIDITY
Azul's liquidity is adequate. Moody's estimates that Azul will end 2020 with around BRL2.5 billion in cash on hand, considering the issuance of the new convertible debentures, which compares with about BRL1.3 billion in financial debt maturing until the end of 2022. The new BRL1.7 billion convertible debentures were issued in October with 5-year maturity with the option for additional BRL550 million under the same terms reducing the company's short-term refinancing needs.
The company has around BRL3.0 billion in other potential liquidity sources including, receivables, financeable deposits and unencumbered assets that could be used in potential secured financing transactions.
The stable outlook reflects Moody's belief that Azul will succeed in taking advantage of the recovery in the market through its unique position in most of its network while keeping liquidity at adequate levels.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
Moody's could upgrade Azul if:
risks and uncertainties are reduced significantly, and passenger demand begins a sustainable recovery towards pre-coronavirus levels.
Azul to maintain an adequate liquidity profile, with cash consistently above 20% of revenues, and key metrics to improve such as
debt-to-EBITDA declines below 6x
(funds from operations + interest)/ interest is sustained above 3x.
Moody's could downgrade Azul if:
pace of recovery of passenger demand is slower than Moody's expects
liquidity concerns increase
the company is unable to strengthen credit metrics through the recovery phase
there are increased expectations of a default in the company's financial obligations
PRINCIPAL METHODOLOGY
The principal methodology used in these ratings was Passenger Airline Industry published in April 2018 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1091811. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.
COMPANY PROFILE
Headquartered in Barueri near the City of Sao Paulo, Brazil, Azul S.A. (Azul) is a Brazilian airline founded by David Neeleman in 2008. The company is the largest airline in Brazil by number of cities and departures, serving 116 destinations with an operating fleet of 142 aircraft and operating 916 flights daily. The company also flies its aircraft to select international destinations, including Fort Lauderdale, Orlando and Lisbon. Azul is the sole owner of the loyalty program TudoAzul, a strategic revenue-generating asset, which had around 12 million members in the end of 2019. In 2019 Azul generated BRL11.4 billion in net revenue and carried almost 28 million passengers.
REGULATORY DISCLOSURES
For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.
For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.
For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.
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Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.
Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1243406.
At least one ESG consideration was material to the credit rating action(s) announced and described above.
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Marcos Schmidt VP - Senior Credit Officer Corporate Finance Group Moody's America Latina Ltda. Avenida Nacoes Unidas, 12.551 16th Floor, Room 1601 Sao Paulo, SP 04578-903 Brazil JOURNALISTS: 0 800 891 2518 Client Service: 1 212 553 1653 Marianna Waltz, CFA MD - Corporate Finance Corporate Finance Group JOURNALISTS: 0 800 891 2518 Client Service: 1 212 553 1653 Releasing Office: Moody's Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A. JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653
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