Is Avianca In Trouble? Standard & Poor’s Downgrades Avianca Holding’s Credit Rating to CCC+ & LifeMiles down to B

According to Standard & Poor’s, Avianca Holding’s plans to refinance its $550 million (USD) senior unsecured notes has taken longer than expected, given several reasons. These include delays to clear certain contractual proceedings with Avianca’s shareholders associated with a breach of covenants by BRW Aviation LLC (Avianca’s main shareholder) under the November 2018 loan agreement between it and United Airlines Inc., which are necessary to prevent a breach of the company’s financial commitments.

To be clear, it was Avianca majority shareholder BRW Aviation defaulting on the loan agreement, with United Airlines,not Avianca itself.

• Avianca Holdings S.A.’s plan to refinance its $550 million senior unsecured notes due May 10, 2020, has taken longer than expected, thus Standard & Poor’s believes the company faces a higher refinancing risk.
• On May 13, 2019, S&P Global Ratings lowered its issuer credit rating on the Colombia-based airline operator to ‘CCC+’ from ‘B’ and its issue-level ratings to ‘CCC’ from ‘B-‘. Additionally, they lowered their issuer credit rating on LifeMiles LTD and their issue-level rating on the company’s senior secured term loan to ‘B’ from ‘BB-‘. Standard & Poor’s placed all ratings on CreditWatch with negative implications.
• The negative CreditWatch listing reflects a potentially additional downgrade stemming from the uncertainty about the timing and outcome of the company’s plan to address its 2020 debt maturities.
• Standard & Poor’s indicated that it will resolve the CreditWatch listing within the next 90 days. They indicated that they could lower their ratings if the company fails to refinance its senior unsecured notes due May 2020 within the next three months.

Standard & Poor’s stated that it believes Avianca faces a higher refinancing risk due to the approaching maturity of its $550 million senior unsecured notes on May 10, 2020, and potential implications in the cost of financing associated with the reputational risk that stems from the bankruptcy filing of related party Oceanair Linhas Aereas S.A., a Brazilian airline that licenses the trademark Avianca Brasil, and is also controlled by Germán Efromovich, the controlling shareholder of Avianca Holdings, through his investment vehicle Synergy Group.

During April, aircraft leasing firm Aircastle Limited (NYSE: AYR) reposessed 10 Airbus A320-200 aircraft leased to Avianca Brazil – a separate company from Avianca Holdings, but also controlled by Efromovich. Avianca Argentina. officially known as Avian Lineas Aéreas, also separate but related, faces similar action, with repossessions possible within 20 days that could shut down Argentine operations, according to reports.

The refinancing risk leaves the company dependent on favorable economic conditions to meet its financial commitments despite the management’s progress toward completing a potential refinancing of the notes. However, if end-market demand deteriorates or financial markets weaken, Standard & Poor’s believes Avianca would face difficulties securing new financing. The ratings firm has also downgraded its liquidity assessment on Avianca to “weak” from “less than adequate,” given that they expect the company’s sources of liquidity to be sharply lower than its uses in the next 12 months, well below 1.0x, reflecting a wide deficit as a result of its now $550 million short-term debt maturity.

Avianca could face liquidity pressures if it is unable to refinance these notes in the next 12 months. However, Standard & Poor’s believes that Avianca has relatively solid bank relationships in Colombia and internationally.

In November 2018, Efromovich’s Synergy transferred its 78.1% stake in Avianca to Delaware holding company BRW Aviation LLC, still owned by Synergy, to serve as collateral.

Avianca then indicated in an SEC filing that BRW is now in breach of at least one covenant of the loan agreement, and “any such breach constitutes an event of default under the United Loan.”

United Airlines could now theoretically take over Avianca completely, or sell control of Avianca to a third party, though a takeover would be complicated by certain national regulations where Avianca operates mandating certain percentages of local ownership.

Such defaults and change in control of the airline may trigger requirements by Avianca Holdings to purchase the 30% stake in its LifeMiles loyalty program that it sold to Advent International.

As of press time, United has not indicated publicly any intent to take control of Avianca, and Efromovich has insisted on his intention to retain control.

In April, Avianca CEO Hernan Rincón resigned “for personal reasons” after a 3-year tenure marred by a bitter pilot’s strike, and collapses in route operations leading to punitive government fines. The airline is currently without a permanent CEO. Rincón came to Avianca from outside the Airline industry, previously heading Microsoft’s Colombia operations.

This article was edited from a press release issued by Standard & Poor, with additional information from Ch-Aviation.