Fitch Ratings-Chicago-08 February 2019: Fitch Ratings has assigned a final rating of 'B+'/'RR4' to LATAM Airlines Group S.A.'s (LATAM) USD600 million unsecured notes issued through its fully owned subsidiary LATAM Finance Limited. The assignment of the final ratings follows the receipt of documents confirming the information already received. The final ratings are the same as the expected rating assigned to the senior unsecured notes on Jan. 28, 2019. For more information see "Fitch Rates LATAM Airlines' Sr. Unsecured Notes 'B+(EXP)'/'RR4" at www.fitchratings.com.
The notes will be fully guaranteed by LATAM. Proceeds from the issuance are expected to be used for general corporate purposes. Fitch currently rates LATAM's Long-Term Issuer Default Rating (IDR) 'B+' with a Positive Outlook. A full list of LATAM's ratings follows the end of this press release.
LATAM's ratings are supported by its diversified business model, important regional market position and adequate liquidity, which are tempered by its still high gross adjusted leverage and operational volatility related to some of its key markets. The ratings also consider the vulnerability of the company's cash flow generation to fuel price variations and the inherent risks of the airline industry, as well as the carrier's capacity to maintain operational margins based on its leadership position in the markets where it operates. The Positive Outlook is supported by Fitch's expectations that the improvement in the company's credit metrics may occur during 2019, leading adjusted gross leverage to move around 4.5x and liquidity, measured as cash and unused committed credit lines/latest 12 months revenues ratio, remaining around 20%.
KEY RATING DRIVERS
Market Position and Diversification: Fitch views LATAM's strong business position as sustainable in the medium term, based on its diversification within Latin America and in the international routes between Latin America and either North America, Europe, Oceania or Africa. The ratings incorporate the company's No. 2 market share in Brazil's domestic market and its position as the leader among Brazilian companies in international markets, as well as the volatility in operating results associated with these markets through the economic cycle. The company maintains a good business diversification with international passengers, domestic Brazil, domestic Spanish-speaking countries (SSC) and cargo divisions representing 46%, 22%, 16% and 12%, respectively; of the company's total revenue as of LTM Sept. 30, 2018.
Mid-Single-Digit Traffic Growth: Fitch expects the company's consolidated boarded passengers to increase by 5% during 2019, an improvement over the 2.5% during 2018. This incorporates the expectation that traffic trends for the International segment will continue performing well, a recovery for the traffic levels in the SSC segment, and continued improvement in traffic levels for the Brazilian segment. The company's consolidated passenger yields remained stable during the nine months period ended in 2018, Fitch does not expect a significant expansion on that for 2019 (0%-2%). Changes in rational capacity management by the key players could pressure passenger yields and, consequently, operating margins. The successful implementation of the joint venture agreements with American Airlines Group and IAG's British Airways and Iberia (members of the Oneworld Alliance), should also benefit profitability in the medium term.
Better Industry Scenario: The relatively improved fuel and FX outlook are expected to drive some profit margin recovery since third-quarter 2018. The expectation of Brazil's better macroeconomic environment in 2019, notwithstanding any reverse due to political turbulence, should benefit traffic levels resulting in a stable cost structure for the company's Brazilian operations. Fitch forecasts Brazil's GDP growth to be 2.2% in 2019, and this represents an important expansion compared with the average of 1.2% during 2017-2018 and negative 0.3% during 2012-2016. This expectation should lead an improvement over the company's operational margins, moving around 7.5%, up from 6.6% in the LTM period ended in Sept. 30 218 and from 6% during 2016 and 7% in 2017, respectively.
Challenge to Deleverage: LATAM still has the challenge to improve its credit metrics and reduce gross leverage to around 4.5x. The improvement trend observed during 2015-2017 period was impacted by the high fuel and FX volatility during 2018. The company's gross adjusted leverage, measured as total adjusted debt/EBITDAR, was 5.2x at LTM Sept. 30, 2018, stable from 2017 level, yet better than the average of 6.3x in 2015-2016. The company's total adjusted debt was USD11.4 billion at LTM Sept. 30, 2018. This debt includes USD7.6 billion of on-balance-sheet debt and USD3.8 billion of off-balance-sheet obligations related to operating leases with combined rental payments of approximately USD541 million in the LTM Sept. 30, 2018.
Neutral to Positive FCF: Managing growth capex in the next two years will be key to allow a more robust FCF generation and deleveraging trends. Fitch expects LATAM's FCF margin to be neutral to positive during 2018-2020, driven by revenue growth, continued EBIT margin improvement and targeted capex levels. LATAM reported FCF of USD126 million during the LTM period ended on Sept. 30 2018, this considers USD968 million in cash flow from operations (after net cash interest paid), USD760 million in total capex, and paid dividends around USD82 million.
Strong Credit Linkage: LATAM maintains indirectly all of the economic rights and 49% of the voting rights in TAM. The ratings of LATAM and TAM also incorporate the strong credit linkage between the entities, with significant legal, operational and strategic ties. In addition, the financing of the combined fleet plan capex is implemented through LATAM, with the new aircraft being subleased to TAM. Furthermore, the view of strong legal ties between LATAM and TAM is supported by cross-default clauses incorporated in LATAM's USD500 million unsecured notes due in 2020 and LATAM Finance Limited's USD700 million unsecured notes due in 2024.
LATAM's 'B+' rating is one notch higher than the ratings of the other two main regional players in Latin America Avianca Holdings S.A. (B/Stable) and GOL Linhas Aereas Inteligentes S.A. (B/Stable). LATAM is well positioned in the 'B' rating category relative to its regional peers given its diversified business model, significant regional market position and adequate liquidity. These positive factors are tempered by the company's still-high gross adjusted leverage and operational volatility related to some key markets. LATAM is rated lower than global players Delta Air Lines (BBB-/Stable), United Continental Holdings, Inc. (BB/Stable), and American Airlines Group, Inc. (BB-/Stable), primarily due to the company's higher financial leverage and weaker profitability. Liquidity continues to be a credit positive, as LATAM has consistently maintained a stronger liquidity position, measured as cash plus committed credit lines over LTM revenues, compared with regional peers.
Fitch's Key Assumptions within Our Rating Case for the Issuer:
--Consolidated RPK of 5%;
--Low single-digit yield growth and load factor in the 81%-83% range;
--EBIT margin of 7%-8% in 2019;
--2018-2019 neutral to positive FCF generation;
--Liquidity, measured as readily available cash plus unused committed credit facilities over LTM net revenue, of 20% in 2018-2019;
KEY RECOVERY RATING ASSUMPTIONS
The recovery analysis assumes that LATAM would be considered a going concern in bankruptcy and that the company would be reorganised rather than liquidated. Fitch has assumed a 10% administrative claim.
Going-Concern Approach: Fitch assumes a going concern enterprise value of USD7.6 billion based on post-default EBITDA of approximately USD1.37 billion (a 20% discount from the company's 2017 EBITDA level of USD1.7 billion) and a multiple of 5.5x. After deducting 10% for administrative claims, the remaining $6.8 billion of enterprise value leads to full recovery for LATAM's secured debt and approximately 40% to 45% recovery for the unsecured debt, which reflects average recovery prospects consistent with the 'RR4' level.
Developments that May, Individually or Collectively, Lead to Positive Rating Action
--Liquidity, measured as cash/LTM revenue, consistently above 15%;
--Gross adjusted leverage approximately 4.5x on a consistent basis;
--Neutral to positive FCF generation;
--Coverage ratio, measured as total EBITDAR/(net interest expense plus rents),consistently above 2.5x;
EBIT margin moving to 8%.
Developments that May, Individually or Collectively, Lead to Negative Rating Action
--Sustained negative FCF;
--Liquidity, measured as cash/LTM revenue, consistently below 10%;
--Gross adjusted leverage consistently above 5.5x;
--EBIT margin consistently below 6.5%;
--Coverage ratio, measured as total EBITDAR/(interest expense plus rents), consistently below 2.3x.
Adequate Liquidity: Fitch views the company's liquidity position as adequate for the rating category. LATAM held cash of USD1.2 billion as of Sept. 30, 2018, compared with short-term debt of USD1.5 billion. LATAM has in place a senior secured revolving credit facility (RCF) of USD600 million. The RCF is collateralized by a combination of aircraft, spare engines and spare parts. Including the RCF, the company's level of liquidity, measured as total cash and marketable securities plus unused committed credit lines over LTM revenue, was 17.4% as of Sept. 30, 2018. The company's upcoming debt maturities are viewed as high relative to its expected FCF generation, but mitigated by solid cash balance and revolving credit facility. LATAM faces debt amortizations of USD0.9 billion and USD1.5 billion during 2019 and 2020, respectively, which will be primarily addressed through a combination of FCF generation and refinancing.
FULL LIST OF RATING ACTIONS
Fitch has assigned the following ratings:
LATAM Finance Limited
--Senior unsecured notes up to USD600 million, 'B+'/'RR4'.
Fitch currently rates LATAM as follows:
LATAM Airlines Group S.A
--Long-Term Foreign Currency IDR 'B+';
--National Equity Rating 'Primera Clase Nivel 3 (cl)';
--USD500 million senior unsecured note due 2020 'B+'/'RR4'.
LATAM Finance Limited Limited
--USD700 million senior unsecured note due 2024 'B+'/'RR4'.
--Long-Term Foreign Currency IDR 'B+';
--Long-Term Local currency IDR 'B+';
- TAM Linhas Aereas S.A.:
Long-Term Foreign Currency IDR 'B+';
Long-Term Local currency IDR 'B+';
The Rating Outlook is Positive.