Moody’s Investors Service last week downgraded to B2 from Ba2 LifeMiles Ltd.’s corporate family and senior secured ratings. The outlook has been revised to negative from stable.
LifeMiles, Ltd. is a coalition loyalty, program and the sole operator of Avianca Airline’s frequent flyer program. LifeMiles has commercial partnerships that allow its members to accrue and redeem miles for different products and services such as airline tickets, hotels, and rental cars among others. For example, LifeMiles can be earned or redeemed at major Colombian retailers like Totto or hotel chain Estelar. LifeMiles is 70% owned by Avianca Holdings, S.A. and 30% owned by Advent International, that stake being taken in Avianca under previous management 4 years ago. LifeMiles reported gross billings of $352 million over the twelve months ended March 31, 2019.
Issuer: LifeMiles Ltd.
Corporate Family Rating, Downgraded to B2 from Ba2
Senior Secured Bank Credit Facility, Downgraded to B2 from Ba2
Outlook, Changed To Negative From Stable
LifeMiles’ downgrade to B2 reflects its exposure to the weak credit profile and liquidity pressures of Avianca Holdings, S.A. (Avianca) which increases the risk of additional up streaming of cash flows to shareholders, either in the form of dividends, most likely financed with incremental debt, or anticipated purchases of airline tickets. LifeMiles’ B2 rating also incorporates its good liquidity and solid business model being the sole operator of Avianca’s frequent flyer program, its diversified and sticky base of commercial partners and co-brand credit card growth. Also reflected in the rating are the potential benefits to the company’s growth plan from improved economic dynamics in its largest markets.
The rating of the term loan takes into consideration its secured position within the capital structure of the company. The corporate family rating is at the same level of the senior secured rating given that it is the only debt in the company’s capital structure.
On July 22, Avianca announced it has temporarily deferred payments on some long-term leases and on principal payments on certain loans. On the same date, Avianca announced that it will commence as soon as possible an exchange offer for all of its $550 million senior notes due in May 2020.
LifeMiles has a strong business model that includes unrelated commercial partners and co-branded credit cards, but its single largest contributor to gross billings is Avianca, who together with its air partners, represent around 30% of gross billings. As such, if Avianca were to face operating problems this would hamper LifeMiles’ operation as customers’ interest in purchasing, adding or converting LifeMiles miles into Avianca’s air tickets would decline. Moreover, Avianca’s liquidity pressures may affect LifeMiles’ credit profile in the form of debt-financed dividend payments which will ultimately result in higher leverage. For example, in August 2017 LifeMiles obtained a $300 million amortizing term loan used to pay dividends, and in 2018 and 2019 the company up-sized its outstanding term loan by a total of $195 million which also up streamed to its shareholders. Still, the rated term loan has a mandatory prepayment clause that obliges the use of a percentage of excess cash to pay down the term loan. This clause partly offset the risk of cash leakage at LifeMiles before fulfilling its debt payment obligations. Furthermore, LifeMiles´ solid corporate governance framework, and particularly Advent International´s strong minority shareholder rights, also mitigate the risk of a potential cash leakage before payment of debt obligations. In addition, LifeMiles liquidity policy of maintaining a minimum cash balance equivalent to six months of rewards plus two quarters of debt service also mitigates this risk.
Moody’s estimates that, absent additional indebtedness, LifeMiles’ leverage (adj. debt/EBITDA) would gradually decline from 3.3 times as of March 31, 2019 to below 3.0 times by year-end 2020. Nonetheless, we believe LifeMiles could increase its indebtedness to finance dividend payments over the next few quarters.
LifeMiles has good liquidity. The company generates strong cash flow from operations and has limited capital spending requirements. It has minimum cash requirements to cover six months of rewards plus two quarters of debt service. In addition, LifeMiles benefits from a five-year $20 million committed revolving credit facility, which is currently undrawn.
LifeMiles’ largest contributors to gross billings are its financial partners (50%) and Avianca and air partners (30%), being Avianca its largest customer, responsible for approximately 26% of gross billings. Around 80% of accrued miles are redeemed, with 92% being redeemed into air tickets. The 8% balance is redeemed into non-ticket rewards. LifeMiles benefit from Avianca’s leading market position in Colombia and Central America.
LifeMiles has around nine million members, more than 100 agreements with financial institutions including co-branded credit cards and miles conversion agreements, and more than 700,000 active co-branded credit cards. The number of members has grown steadily at a 9.3% CAGR in the last five years.
LifeMiles’ largest market is Colombia where it generates 42% of its gross billings. It also sells miles in Peru, Costa Rica, El Salvador, Honduras, Guatemala, and the US; being the US the only contributor of more than 10% to gross billings. Moody’s forecasts the Colombian economy will grow by 3.3% in 2019 and 3.5% in 2020. Similarly, Moody’s estimates that, in Colombia, private consumption will grow at a 4% CAGR and retail sales will grow at a CAGR of 4.6% in 2019-2023.
The negative outlook reflects Moody’s view that the company’s credit quality may be negatively impacted by Avianca’s weak financial profile and that LifeMiles will be required to increase its dividend payout.
An upgrade would require an improvement in Avianca’s credit profile and maintaining ring-fencing provisions that limit cash upstream to shareholders, as well as the maintenance of adequate liquidity and profitability. Quantitatively, an upgrade would require LifeMiles to maintain its adjusted debt/EBITDA lower than 4.0 times on a sustained basis.
The ratings could be downgraded if the company’s profitability or credit metrics worsen, with adjusted debt/EBITDA remaining above 5.0 times. A deterioration in the company’s liquidity or profitability, or a change in the company’s financial policy leading to excessive cash distribution to shareholders can lead to a downgrade. Also, any further weakening on Avianca’s credit profile or repetitive amendments to the loan agreement such that the mandatory prepayment provisions are waived or canceled, and excess cash flow is not used to pay down debt could result in a downgrade.
The principal methodology used in these ratings was Business and Consumer Service Industry published in October 2016 and viewable on the Moody’s Rating Methodologies page.