News Column

Fitch Affirms LATAM Airlines' Ratings; Revises Outlook to Negative

May 2, 2014

CHICAGO--(BUSINESS WIRE)-- Fitch Ratings has affirmed the 'BB' FC IDRs and LC IDRs of Latam Airlines Group S.A. (LATAM), TAM S.A. (TAM) and TAM Linhas Aereas S.A. Fitch has simultaneously affirmed the Primera Clase Nivel 2 (cl) equity rating of LATAM and the 'A+ (bra)' national scale ratings of TAM and TAM Linhas Aereas S.A.

A full list of ratings affirmations is shown below.

Fitch has revised the Rating Outlook of LATAM, TAM S.A. and TAM Linhas Aereas S.A. to Negative from Stable. The Outlook revision reflects the high leverage of LATAM versus its global peers within the rating category, as well as weak economic conditions in the region that will make it more difficult for the company to deleverage as quickly as anticipated.

The ratings of LATAM and TAM and their subsidiaries take into account the credit linkage between the two companies, which stems from their legal, operational, and strategic ties. These links are reflected in the existence of cross-guarantee and cross-default clauses related to the financing of aircraft acquisitions for both LATAM and TAM.

KEY RATING DRIVERS:

Leading Regional Market Position Incorporated:

Fitch views LATAM's strong business position as sustainable in the medium term based on its business diversification, as well as its extremely strong business position both within Latin America and in the international routes between Latin America and either North America or Europe. LATAM's International Passenger, Domestic Brazilian, Spanish Speaking Countries and Cargo divisions represents 39%, 30%, 14% and 14%, respectively, of the company's total revenues in 2013. The ratings incorporate the company's leading market share in Brazil's domestic and international markets, as well as the volatility in operating results associated within these markets through the economic cycle. Currently, economic conditions in Brazil remain relatively weak. LATAM also maintains leading position in the domestic markets of Chile and Peru, and it is one of the main players in Colombia.

Adequate Liquidity:

LATAM improved its liquidity during 2013, as its cash and marketable securities increased from USD1.1 billion at the end of 2012 to USD2.6 billion by Dec. 31 2013. This level of cash and marketable securities is equivalent to approximately 19% of the company's 2013 revenues. The sharp improvement in LATAM's liquidity position was primarily a result of its USD1 billion equity offering during 2013. In addition to the aforementioned liquidity position, LATAM has unused committed credit lines of approximately USD185 million. The company's cash exposure to Venezuela and Argentina of approximately USD163 million and USD59 million, respectively, represents 10% of its liquidity and it is not expected to materially increase during 2014.

High Gross Adjusted Leverage:

Fitch views the company's leverage as high for the rating category. LATAM's gross adjusted leverage ratio, as measured by total adjusted debt versus EBITDAR, was 6.1x for 2013, while it net adjusted leverage ratio was 4.9x and its FFO adjusted leverage ratio was 5.5x. LATAM's revenues, EBITDAR and an EBITDAR margin were USD13.3 billion and USD2.2 billion, respectively, while its EBITDAR margin expanded to 16% from 12% during 2013. LATAM's total adjusted debt was approximately USD12.8 billion at the end of December 2013. This debt includes USD9.9 billion in on-balance-sheet debt and USD3 billion in off-balance-sheet obligations related to operating leases with combined rental payments of around USD441 million for 2013.

Limited FCF Generation:

LATAM's capex plan remains relatively aggressive despite the fact that it has revised down its capex plan for 2014 through 2015 by USD1 billion. These investments in addition to weaker macro-economic conditions in the region than previously projected by Fitch should limit the company's ability to generate strong FCF during 2014 and 2015. LATAM initiated a fleet restructuring plan during 2013 in which it intends to phase out less efficient models and reallocate aircrafts throughout its markets to better optimize the use of its fleet. LATAM's capex related to aircraft equipment for 2014 and 2015 is expected to reach levels of USD738 million and USD968 million, respectively. The company's total capex - including spare parts, engines and other items - for the period should be approximately USD2.5 billion. During 2013, LATAM's FCF was negative USD364 million, representing a FCF margin (LTM FCF/LTM revenues ratio) of negative 2.7%.

Modest to Flat Improvements Projected for 2014 and 2015

Fitch's base case for 2014 results in FCF improving to approximately USD100 million due to a USD300 million improvement in cash flow from operations (CFFO). This level of FCF would not be material enough to reduce debt significantly absent asset sales or the issuance of additional equity by the company. A key driver in the CFFO improvement is a sharp reduction in working capital outflows, as FFO is projected to remain relatively unchanged at approximately USD 1.4 billion. For 2014, Fitch projects an increase in LATAM's EBITDAR to USD2.3 billion from USD2.1 billion. LATAM's consolidated capacity is expected to remain flat during 2014. By segments, LATAM plans capacity increases in 2014 of between 0% and 2% in the international segment, 0% in Brazil's domestic segment, between 6% and 8% in the Spanish Speaking Domestic segment, and from 0% to 2% in the cargo segment. At Dec. 31, 2014, LATAM's fleet totaled 339 aircrafts (211 owned), this includes 323 passenger (201 owned) and 16 dedicated cargo (10 owned) aircrafts. The company maintains flexibility to adjust the physical size of its fleet as between 2014 and 2016, it has 25 operating lease expiring in its wide-body passenger fleet, which can be terminated without cost.

RATING SENSITIVITIES:

Negative Rating Actions: Fitch would consider downgrading LATAM's ratings if its net debt/EBITDAR ratio and/or its FFO adjusted leverage ratio were not expected to decline to around 4.5x by the first half of 2016. A total debt/EBITDAR ratio above 5.0x during this time period could also result in negative rating actions.

Positive Rating Actions: A rating upgrade is not anticipated in the near term. The company's Outlook could be revised to Stable from Negative if it achieves some of the aforementioned targets.

Fitch has taken the following rating actions:

LATAM Airlines Group S.A.:

--Long-term Issuer Default Rating (IDR) affirmed at 'BB';

--National Equity Rating affirmed at Primera Clase Nivel 2 (cl).

TAM S.A.:

--Long-term IDR affirmed at 'BB';

--Local currency IDR affirmed at 'BB';

--National long-term rating affirmed at 'A+(bra)'.

Tam Linhas Aereas S.A.:

--Long-term IDR affirmed at 'BB';

--Local currency IDR affirmed at 'BB';

--National long-term rating affirmed at 'A+(bra)'.

Tam Capital Inc.:

--Long-term IDR affirmed at 'BB';

--Local currency IDR affirmed at 'BB';

--USD300 million senior unsecured note due 2017 affirmed at 'BB'.

Tam Capital Inc. 2:

--Long-term IDR affirmed at 'BB';

--Local currency IDR affirmed at 'BB';

--USD300 million senior unsecured note due to 2020 affirmed at 'BB'.

Tam Capital Inc. 3:

--Long-term IDR affirmed at 'BB';

--Local currency IDR affirmed at 'BB';

--USD500 million senior unsecured note due affirmed at 'BB'.

The Outlook is revised to Negative from Stable.

Fitch has simultaneously withdrawn the Long-term Foreign Currency and Local Currency IDRs of TAM Capital Inc., TAM Capital Inc. 2, and TAM Capital Inc. 3. These three entities are financing vehicles for TAM. The issue ratings remain outstanding.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research:

--'Corporate Rating Methodology' Aug. 5, 2013;

--'Parent and Subsidiary Rating Linkage' Aug. 5, 2013;

--'National Ratings Criteria' Oct 30, 2013;

--'Rating Airline Companies, Sector Credit Factors' Dec. 14, 2012.

Applicable Criteria and Related Research:

Corporate Rating Methodology: Including Short-Term Ratings and Parent and Subsidiary Linkage

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=715139

National Scale Ratings Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=720082

Rating Airline Companies

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=697062

Additional Disclosure

Solicitation Status

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.



Fitch Ratings

Primary Analyst

Jose Vertiz, +1-212-908-0641

Director

Fitch Ratings, Inc.

One State Street Plaza

New York, NY 10004

or

Secondary Analyst

Debora Jalles, +11-55-21-4503-2629

Director

or

Secondary Analyst

Francisco Mercadal, +56-2-499-33-40

Associated Director

or

Committee Chairperson

Daniel Kastholm, CFA, +1-312-368-2070

Managing Director

or

Media Relations

Elizabeth Fogerty, New York, +1-212-908-0526

elizabeth.fogerty@fitchratings.com


Source: Fitch Ratings


For more stories on investments and markets, please see HispanicBusiness' Finance Channel



Source: Business Wire


Story Tools






HispanicBusiness.com Facebook Linkedin Twitter RSS Feed Email Alerts & Newsletters