Standard & Poor’s Upgrades Avianca Holdings To ‘B-‘ From ‘SD’ & LifeMiles To ‘B+’ From ‘B-‘ On Debt Restructuring Completion

S&P Global Ratings last week raised its issuer credit rating to ‘B-‘ from ‘SD’ and its issue-level rating on the 9% senior secured notes due 2023 to ‘B-‘ from ‘CCC-‘ and the 8.375% senior unsecured notes due 2020 to ‘CCC+’ from ‘CC’ on Avianca (NYSE: AVH) (BVC:PFAVH). This after Standard & Poor’s reassessment of Avianca’s credit quality after the Colombian airline announced the completion of its debt-restructuring plan.

Avianca successfully exchanged 88.1% of its 8.375% senior unsecured notes due 2020 for the new 8.375% senior secured notes due 2020 (mandatory conversion by Dec. 31, 2019). At the same time, Avianca received $250 million from shareholders Kingsland and United Airlines under a convertible secured loan, which triggers the exchange of $484.4 million of principal amount of its existing 8.375% senior secured notes due 2020 for an equivalent principal amount of 9% senior secured notes due 2023, which will occur on Dec. 31, 2019. Avianca also successfully completed all of its operating and financial lease renegotiations and extended its contract period, which will allow for a more manageable capital structure in the next 12 months.

The credit rating reflects Avianca’s still weak credit metrics, including debt to EBITDA remaining above 5.0x and funds from operations (FFO) to debt of about 10%. Avianca’s debt restructuring included the reorganization of all routes and frequencies and the slowing of its fleet renewal pace. S&P Global stated that it believes Avianca will focus on its most profitable routes by eliminating some of its regional flights and increasing its trans-border services through main hubs in Colombia, Costa Rica, El Salvador, and Peru. At the same time, the ratings agency expects more cautious capital expenditures for fleet renewals, which will alleviate pressure on Avianca’s cash generation.

About 65% of the company’s total operating costs are in dollars, primarily jet fuel, maintenance, airport fees, and some workforce expenses. In addition, Avianca’s 81.2% revenues are denominated in, or linked to, the dollars, and approximately 6.9% in Colombian pesos, mainly stemming from international route tickets in greenback denomination (USD). However, domestic ticket prices are also exposed to FX volatility. Standard & Poor’s stated that it considers that the company holds a natural hedge on its exposure to the dollar-denominated expenses.

In addition, weak liquidity will constrain the credit rating. For the next 12 months, S&P Global expects the company to maintain a ratio of 0.86x of expected cash sources to its uses, and their liquidity assessment also reflects Avianca’s likely inability to absorb low-probability adversities. However, the company received an additional $125 million under secured financing commitments, which is expected to alleviate pressure on the company’s funding, while it’s implementing its new operating and financial strategy.

• Standard & Poor’s raised its issuer credit and issue-level ratings on LifeMiles Ltd., a loyalty rewards program company, to ‘B+’ from ‘B-‘.
• The stable outlook on Avianca and LifeMiles reflects S&P Global’s view that they will maintain a solid operating and financial performance in the next 12 months. Standard & Poor’s also believes that Avianca’s capital structure will be manageable after debt restructuring.

Avianca owns 70% of LifeMiles, and Advent International (not rated) owns the remaining 30%. The upgrade of LifeMiles reflects that of its parent company, Avianca, given that LifeMiles is an insulated subsidiary. This reflects LifeMiles’ ‘bb-‘ stand-alone credit quality, constrained by the parent company’s credit quality.

LifeMiles generates only about 30% of gross billings from the sale of miles to its parent company under a 20-year exclusive agreement, while the remaining 70% come from long-term agreements with third parties and direct sales to members. Therefore, LifeMiles’ financial performance and funding prospects are independent from those of Avianca, so that even if other core entities encounter severe setbacks, LifeMiles’ relative strengths would remain mostly intact. Standard & Poor’s believes Avianca has a compelling economic incentive to preserve LifeMiles’ credit strength because the subsidiary is an important source of passenger traffic for the airline.

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