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Rating Action: Moody's affirms Hawaiian Holdings B1 corporate family rating; outlook remains negative
Global Credit Research - 26 Jan 2021
Assigns Ba3 rating to new five-year notes secured by the company's loyalty program and brand
New York, January 26, 2021 -- Moody's Investor's Service affirmed the B1 corporate family and B1-PD probability of default ratings of Hawaiian Holdings, Inc. ("Hawaiian") but downgraded the ratings of subsidiary Hawaiian Airlines, Inc.'s ("Airlines") Series 2013-1 enhanced equipment trust certificates; Class A to Ba3 from Ba2, Class B to Caa1 from B1. Hawaiian's speculative grade liquidity rating was upgraded to SGL-1 from SGL-2. The ratings outlook is negative.
Moody's also assigned a Ba3 rating to the new senior secured notes due 2026 ("Notes") announced earlier today. The co-issuers of the Notes -- HawaiianMiles Loyalty, Ltd. and Hawaiian Brand Intellectual Property, Ltd. -- are new, wholly-owned, indirect, bankruptcy-remote, special purpose entity subsidiaries of Airlines. Hawaiian and Airlines and the respective newly created intermediate holding companies Hawaiian Finance 1, Ltd. and its subsidiary, Hawaiian Finance 2, Ltd. -- owner of the co-issuers -- will unconditionally guarantee the issuers' obligations under the notes' indenture on a joint and several basis.
Moody's regards the coronavirus pandemic as a social risk under its ESG framework, given the substantial implications for public health and safety. The combined effects of the pandemic on air travel demand and airline credit and their duration are unprecedented. The passenger airline industry is one of the sectors most significantly affected given its exposure to travel restrictions and the sensitivity of consumer demand to sentiment. The pace and scale of vaccinations and the tempering of travel restrictions and quarantine protocols will be important drivers of the recovery of passenger demand and the industry's recovery.
The B1 corporate family rating reflects Moody's view that Hawaiian has the potential to restore its financial leverage to the 4.5x to 5x range through 2023. Moody's continues to expect that coronavirus vaccinations will lead to sustained stronger travel demand sometime in the second half of 2021, from which all airlines will benefit. Moody's believes Hawaiian's strong market position in US mainland to Hawaii and inter-island service will support improving performance for the company in the early stages of the recovery of air travel demand. Demand for vacation trips to Hawaii will be strong compared to demand for international trips in the early stages of the industry's recovery.
Hawaiian has a record of solid operating performance and a relatively conservative financial policy, demonstrated by its focused debt reduction since 2014, sustaining debt-to-EBITDA below 2.6x between 2016 and 2019, which provided significant cushion for the Ba3 corporate family rating heading into 2020. Moody's expects Hawaiian to prioritize the restoration of its historical balance sheet strength; however, the pace of demand recovery and the willingness to incur premiums to retire debt before maturity dates will dictate the pace. The timing of deliveries of the ten 787-9 wide-bodies -- the first is scheduled for September 2022 with a second before that year end -- will offset some of the anticipated debt reduction, either directly or via increasing lease expense, if the company chooses to do sale/leasebacks for these aircraft. However, these investments will further improve operating efficiency and financial performance.
The B1 corporate family and SGL-1 speculative grade liquidity ratings reflect the company's very strong liquidity. Moody's estimates about 900 or more days of coverage of Q4 2020 average daily cash burn of $1.7 million, following the completion of the notes offering. This roughly 30+ month cushion will be one of the largest across Moody's rated airline universe and includes debt principal repayments aggregating about $475 million through December 31, 2022.
The Ba3 rating on the Notes reflects the essentiality of the Hawaiian Airlines' brand and related intellectual property ("IP") for it to operate its business and the importance of its loyalty program to its day-to-day operations and cash flows, balanced by an expected relatively low recovery if the collateral ever needed to be monetized to pay off the Notes under an Airlines liquidation scenario. The Notes rating, one notch above the B1 corporate family rating, reflects Moody's assumption of a lower probability of default relative to that of the company's other senior secured debt obligations, which are unrated. The Ba3 rating reflects a one notch override compared to the senior secured rating Moody's would likely assign to other of the company's senior secured obligations using its Loss Given Default rating methodology, given the company's debt and debt-like claims are all senior secured but for some pension underfunding, accounts payable, non-aircraft operating leases and the unsecured loan under the CARES Act's Payroll Support Program.
The importance of the brand will cause Airlines to continue to make the sub-license fee payments were it to file for a reorganization under Chapter 11 of the US Bankruptcy Code. The rating also considers the cash contributions of the loyalty program to the company's operating cash flows, which, together with the brand sub-license fees, will support the interest-only debt service due on the Notes and provide the residual cash collections to Airlines for its general corporate purposes. Under a bankruptcy scenario, the transaction's terms require Airlines to file a customary and reasonable motion within ten days of the initiation of a proceeding to assume all of the agreements related to the loyalty program pursuant to Section 365 of the Bankruptcy Code (the "Code"). The company will not be required to do the same for the brand sub-license. However, it would need to file a Brand IP License Assumption Motion seeking customary and reasonable treatment to assume the Brand IP License pursuant to Section 365 of the Code if a missed interest payment on the Notes is not cured within 60 days. Approval of these motions will allow payments pursuant to the transaction's terms to continue during the course of a bankruptcy case and require the company to cure any defaults then existing at that time. The importance of the brand and the loyalty program and these terms inform our view of a lower default probability for the Notes relative to other senior secured obligations.
Hawaiian will contribute its brand intellectual property and its HawaiianMiles loyalty program assets and related intellectual property (together, "loyalty program") to the respective newly created entities to facilitate the Notes transaction. The co-issuers will license these assets to Hawaiian Finance 2, Ltd, which will sub-license the assets to Airlines for its use. The loyalty assets will be licensed on a royalty-free basis. Airlines will pay an annual license fee of the greater of $35 million or 2% of Airlines' total annual revenue for the brand assets, paid on a quarterly basis. Cash receipts from the loyalty program partners -- lead partner Barclays accounts for a substantial majority of third-party program cash flows -- and the brand royalty payments will be paid into the transactions collection account and fund the interest-only debt service of the Notes. The brand and loyalty assets, the license and sub-license agreements, the transaction's cash accounts and the equity interests of the intermediate holding companies and of the co-issuers will secure the Note obligations. The issuer's will not receive cash from Airlines awarding program miles to its customers.
The downgrades of the EETC ratings reflect the evaporation of the equity cushion on both Classes because of Moody's now more bearish assumptions of the value of Airbus A330-200 wide-body aircraft. With an estimated loan-to-value on the Class B of about 160%, loss on this class would be substantial were Hawaiian to file for bankruptcy and reject the transaction.
The negative outlook reflects the uncertain timing of when vaccines and loosening of travel restrictions will start a sustained recovery in travel demand and the pace of de-leveraging of the balance sheet once demand recovers.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
The corporate family rating could be downgraded if Moody's believes the start of the recovery of air travel demand to Hawaii will not begin in earnest sometime in the second half of 2021, or if it expects a material reduction in the company's liquidity. Downward ratings pressure would result if the aggregate of cash and revolver availability falls below $1 billion before the demand recovery takes hold, the start of the recovery of demand for travel to Hawaii is delayed to the end of 2021, or if the demand recovery occurs at such a slow pace that it remains below 50% of the 2019 level through the first half of 2022. Expectations of debt-to-EBITDA being sustained above 5x, funds from operations plus interest-to-interest approaching 2.5x or retained cash flow-to-debt remaining below 12% for an extended period after a recovery in demand could also pressure the rating. There will be no upwards pressure on the ratings until after passenger demand returns to pre-coronavirus levels and Hawaiian maintains liquidity above $700 million and key credit metrics improve, such as EBITDA margins approaching 20%, debt-to-EBITDA sustained below 4.5x and retained cash flow-to-debt approaching 15% while the company takes delivery of the 787s on order in upcoming years and while effectively competing with expanding service from Southwest Airlines.
Changes in the EETC ratings can result from any combination of changes in the underlying credit quality or ratings of the company, Moody's opinion of the importance of the aircraft collateral to the company's operations and/or its estimates of current and projected aircraft market values, which will affect estimates of loan-to-value.
Materially different final terms of the Notes offering relative to Moody's expectations could also lead to a rating change for the Notes.
The methodologies used in these ratings were Passenger Airline Industry published in April 2018 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1091811, and Enhanced Equipment Trust and Equipment Trust Certificates published in July 2018 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1125852 . Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of these methodologies.
Headquartered in Honolulu, Hawaii, Hawaiian Holdings, Inc. is a publicly traded company (NASDAQ: HA) and the holding company parent of Hawaiian Airlines, Inc., Hawaii's biggest and longest-serving airline. Hawaiian offers non-stop service to Hawaii from 13 US gateway cities, along with service from Japan, South Korea, Australia, New Zealand, American Samoa and Tahiti during normal times. In 2019, Hawaiian also provided approximately 170 jet flights daily between the Hawaiian Islands, with a total of almost 260 daily flights systemwide. Revenue was $845 million in 2020, down from $2.8 billion in 2019.
The following rating actions were taken:
..Issuer: Hawaiian Holdings, Inc.
.... Corporate Family Rating, Affirmed B1
.... Probability of Default Rating, Affirmed B1-PD
..Issuer: HawaiianMiles Loyalty, Ltd. (with Hawaiian Brand Intellectual Property, Ltd as co-issuer)
....Senior Secured Regular Bond/Debenture, Assigned Ba3 (LGD3)
..Issuer: Hawaiian Holdings, Inc.
.... Speculative Grade Liquidity Rating, Upgraded to SGL-1 from SGL-2
..Issuer: Hawaiian Airlines, Inc.
....Senior Secured Enhanced Equipment Trust Class A, Downgraded to Ba3 from Ba2
....Senior Secured Enhanced Equipment Trust Class B, Downgraded to Caa1 from B1
..Issuer: Hawaiian Airlines, Inc.
....Outlook, remains Negative
..Issuer: Hawaiian Holdings, Inc.
....Outlook, remains Negative
..Issuer: HawaiianMiles Loyalty, Ltd.
....Outlook, Assigned Negative
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.
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Jonathan Root, CFA Senior Vice President Corporate Finance Group 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 Peter H. Abdill, CFA MD - Corporate Finance Corporate Finance Group JOURNALISTS: 1 212 553 0376 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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