Fitch Ratings has downgraded Avianca one notch to "B-" with a negative outlook citing the airline's high financial leverage.

"The rating downgrade reflects deterioration of Avianca's credit profile as a result of persistently high leverage ratios, limited financial flexibility and high refinancing risks," says Fitch in a 12 June report. "The ongoing macroeconomic and FX volatilities in the region associated with increasing competition from LCCs are negative headwinds."

Bogota-based Avianca's debt-to-EBITDAR leverage ratio has remained above 6x since at least 2017, standing at 6.6x in 2018, the rating agency says. It forecasts leverage rising to 6.7x this year before falling to 6.3x in 2020.

In addition to the debt concerns, Fitch says Avianca faces "increasing refinancing risks" for its $550 million senior unsecured notes that are due in May 2020.

The airline's majority shareholder Synergy breached the covenants of a $456 million loan from United Airlines in April. As a result, United supported replacing Avianca board chairman German Efromovich with Roberto Kriete in May – an action Fitch says was a credit positive.

Avianca, Copa Airlines and United have announced plans to form an immunised joint venture between the USA and Latin America. Fitch expects this to benefit the Colombian carrier over the medium- to long-term. Regulatory approval of the tie up is not expected for up to 18 months.

Fitch also sees Avianca's decision to defer and cancel aircraft deliveries to lower capital expenditures as a credit positive. The rating agency expects this move to help boost free cash flow and help reduce leverage in coming years.

The airline deferred 35 Airbus A320 family deliveries and cancelled another 17 aircraft in March. The move cut more than $350 million from its capital commitments through 2022.

S&P Global downgraded Avianca's credit rating two notches to "CCC+" from "B" in May.

Source: Cirium Dashboard