Fitch issues US airline recovery rating review

London
Source: Flightglobal.com
This story is sourced from Flightglobal.com

 

Fitch Ratings has issued its 2008 “recovery rating review” of the US airline industry, covering six companies and eight issuing entities

 

The recovery estimates were calculated using a going-concern scenario, rather than a liquidation scenario. The rating agency says this assumption is consistent with recent historical results of major airline bankruptcies.

 

The report focuses on airline issuers with an issuer default rating (IDR) of ‘B+’ or below and explicit recovery ratings.

 

Fitch says the recovery review for the US airlines rated ‘B+’ and below share some common traits. First, the majority of the debt in the airlines’ capital structures is secured.  As such, virtually all of the post-restructuring enterprise value is expected to be allocated to secured claimholders. Recoveries for unsecured claimholders, therefore, are expected to be minimal.

 

Another common trait is that recovery prospects for senior secured bank credit facilities, to the extent that airlines have them, generally are “excellent.” Fitch says this is the result of strong over-collateralization and the facilities’ first-priority status in the capital structure.

 

However, Fitch notes Delta’s second-lien term loan has average recovery prospects, given its lower priority claim to the collateral backing the facility. Delta is the only airline reviewed with a second-lien facility in place.

 

AMR Corp

 

• IDR: ‘B−’/positive rating outlook

• Senior Unsecured Notes: ‘CCC’/’RR6’

 

Fitch says AMR’s ‘B−’ IDR and positive rating outlook reflect “progress made by the company in directing free cash flow toward debt reduction throughout 2007.”

 

The rating agency believes the airline can delever its balance sheet further even with high jet fuel costs and a challenging US economic outlook in 2008.

 

Fitch calculated AMR’s total debt claims at $12.3 billion. It believes the first-priority senior secured credit facility and term borrowings would receive a full recovery, leading to a recovery rating of ‘RR1’ and an issue rating of ‘BB−’, three notches above the IDR.

 

However, the unsecured claimholders would receive virtually nothing, resulting in a recovery rating nothing, resulting in a recovery rating of ‘RR6’ and an issue rating of ‘CCC’, two notches below the IDR.

 

 

Continental Airlines

 

• IDR: ‘B−’/stable rating outlook

• Sr. Unsecured Notes: ‘CCC’/’RR6’

 

Fitch says Continental’s ratings reflect the airline’s heavy fixed obligation funding burden, the risk of rising leverage levels in a potentially difficult 2008 industry operating environment, as well as ongoing vulnerability to fuel price and air travel demand shocks.

 

The rating agency notes Continental is currently without access to a bank credit facility, leaving holders of secured notes (primarily aircraft-backed securities) with the highest priority claims in bankruptcy reorganization.

 

“In such a scenario, holders of Continental’s senior unsecured debt, totalling $760 million at Sept. 30, would be left with zero recovery,” says Fitch.

 

This results in a recovery rating of ‘RR6’ and an issue rating of ‘CCC’ for Continental’s senior unsecured debt, two notches below the airline’s two notches below the airline’s IDR.

 

 

Delta Air Lines

 

• IDR: ‘B’/stable rating outlook

• Senior Secured First-Lien Credit Facility: ‘BB’/’RR6’

• Senior Secured Second-Lien Term Loan B: ‘B’/’RR4’

 

 

Fitch says the ‘B’ IDR for Delta reflects the high levels of debt and lease obligations that remain in the airline’s capital structure even after its Chapter 11 restructuring.

 

Delta’s senior secured credit facility consists of a first-lien portion and a second-lien portion.

 

Fitch assumed that the credit facility would be fully drawn in a distressed scenario, resulting in $1.6 billion drawn against the first-lien portion and $900 million outstanding on the second-lien portion.

 

Based on Fitch’s analysis, recovery on the first lien portion would be 100%, resulting in a recovery rating of ‘RR1’ and an issue rating of ‘BB’, three notches above Delta’s IDR. Recovery on the second-lien portion would be limited by the remaining value of the underlying collateral after satisfaction of the first lien claims.

 

“The remaining collateral value would result in a recovery of $400 million on the second-lien portion of the credit facility. This equates to a 44% recovery and leads to a recovery rating of ‘RR4’. The issue rating for the second-lien portion of the credit facility is ‘B’, the same as Delta’s IDR,” concludes Fitch.

 

 

JetBlue Airways Corp

 

• IDR: ‘B’/stable rating outlook

• Senior Unsecured Notes: ‘CCC’/’RR6’

 

 

Fitch says ratings for JetBlue Airways reflect the low-cost carrier’s “highly levered capital structure and weak free cash flow generation capacity, balanced against its competitive cost structure, improving operating profile and fleet plan flexibility in an industry that remains highly vulnerable to overcapacity and very high energy costs.”

 

With $2.6 billion in secured debt outstanding, Fitch expects no recovery for unsecured claimholders, resulting in a recovery rating of ‘RR6’. With only a 59% estimated recovery on secured claims, there is “very little likelihood that senior unsecured claimholders could receive anything in reorganization.” 

 

As a result, the senior unsecured rating is three notches below JetBlue’s IDR.

 

United Air Lines

 

• IDR: ‘B−’/positive rating outlook

• Sr. Secured Credit Facility: ‘BB−’/’RR1’

UAL Corp. (Parent)

• IDR: ‘B−’/Positive Outlook

 

Ratings for UAL and its principal operating subsidiary, United Air Lines, reflect the carrier’s highly leveraged balance sheet, improving but still weak margins and ongoing susceptibility to revenue and fuel price shocks in an industry that remains particularly vulnerable to event risk, says Fitch.

 

The rating agency believes United’s operating profile has improved and its free cash flow generation in 2007 was “relatively good.”

 

It further notes, with no aircraft deliveries on the near-term horizon and reasonably strong international revenue fundamentals still in place, United is poised to strengthen its liquidity position again this year.

 

Fitch says with first-priority claim status, recovery prospects for United’s senior secured credit facility are expected to be excellent at 100%. This results in a recovery rating of ‘RR1’and an issue rating of ‘BB−’, three notches above United’s IDR of ‘B−’.

 

 

US Airways Group

 

• IDR: ‘B−’/positive rating outlook

• Sr. Secured Credit Facility: ‘BB−’/’RR1’

• Sr. Unsecured Notes: ‘CCC’/’RR6’

 

The ratings of US Airways Group, reflect the substantial improvement in the airline’s credit profile since the carrier exited Chapter 11 protection and merged with America West Holdings Corp.

 

US Airways’ relatively strong liquidity position and a lack of significant debt maturities over the next several years reduce the likelihood of a near-term cash crisis,” says Fitch.

 

Fitch estimates a full recovery for the airline’s credit facility and has assigned a recovery rating of ‘RR1’. The resulting issue rating is ‘BB−’, three notches above US Airways’ IDR of ‘B−’.

 

Fitch estimates that recoveries for unsecured claimholders would be zero, resulting in a recovery rating of ‘RR6’ and an issue rating of ‘CCC’, two notches below the airline’s IDR.