Avianca Downgraded To CCC By Standard & Poor, Credit Watch Negative

Already under financial pressure, over the weekend credit ratings firm Standard & Poor (S&P) downgraded Colombian airline Avianca (NYSE: AVH, BVC: PFAVH) from B- to CCC, along with ratings downgrades of Avianca’s senior secured notes from B- to CCC and on senior unsecured notes from CCC+ to CCC-. The agency also placed Avianca on Creditwatch with negative implications, and downgraded its Lifemiles loyalty program to B- from B+ with a stable outlook.

• The global spread of the COVID-19 Coronavirus Pandemic has significantly reduced demand for air travel in recent weeks. S&P stated that it expects Avianca Holdings S.A.’s (Avianca) operating results to materially deviate from prior assumptions.
• The airline has taken immediate measures to manage the impact of reduced demand for global air transport. However, S&P believes that these measures will be insufficient to offset the impact on the company’s credit metrics, tightening its already stressed liquidity. Thus, they believe Avianca faces higher refinancing risk.
• On March 20, 2020, S&P Global Ratings lowered its issuer credit rating on Colombia-based airline operator Avianca to ‘CCC’ from ‘B-‘. They are also lowered their rating on its senior secured notes to ‘CCC’ from ‘B-‘ and on its senior unsecured to ‘CCC-‘ from ‘CCC+’.
• At the same time, S&P lowered its issuer credit rating on LifeMiles LTD and their issue-level rating on the company’s senior secured term loan to ‘B-‘ from ‘B+’. The outlook is stable.
• S&P placed ratings for Avianca on CreditWatch with negative implications, reflecting that a prolonged travel disruption could further deteriorate the company’s liquidity.

Excerpts from a statement issued by Standard & Poor:

Reduced travel demand and capacity will affect Avianca’s credits metrics. The Colombian government recently announced that it will close the Colombian international airspace to passenger travel effective March 23, 2020. Therefore, Avianca will cease international passenger capacity for the next 30 days (which represented 50% of the company’s revenues as of Dec. 31, 2019), and will reduce domestic capacity by 84%. Although the company has immediately implemented additional cost savings, we do not believe these measures will be adequate to offset the impact of already deteriorated liquidity and credit metrics. As a result, we downgraded the company. We now expect the company’s debt to EBITDA to remain well above 5x, funds from operations (FFO) to debt below 6%, and pressured EBITDA margins below 15%.

Avianca owns 70% of LifeMiles, and Advent International (not rated) owns the remaining 30%. The downgrade of LifeMiles reflects that of its parent company, Avianca, but we limit it to ‘B-‘ given that LifeMiles is an insulated subsidiary with a separate governance structure, and we don’t expect Avianca would intervene in LifeMiles’ operations. As a result, the outlook is stable, and the rating on LifeMiles wouldn’t be affected if we take a further rating action on its parent.

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