Fitch Affirms GOL's IDR at 'B-'; Outlook Stable
Gol Linhas Aereas Inteligentes S.A. (GOL):
--Long-term foreign and local currency Issuer Default Ratings (IDRs) at 'B-';
--Long-term national rating at 'BBB-(bra)';
--USD200 million perpetual bonds at 'B-/RR4'.
VRG Linhas Aereas S.A. (VRG):
--Long-term foreign and local currency IDRs at 'B-';
--Long-term national rating at 'BBB-(bra)';
--BRL500 million of local debentures due 2017 at 'BBB-(bra)'.
GOL Finance, a company incorporated with limited liability in the Cayman Islands:
--USD225 million (USD84 million outstanding) of senior unsecured notes due 2017 at 'B-/RR4';
--USD300 million (USD154 million outstanding) of senior unsecured notes due 2020 at 'B-/RR4'.
GOL LuxCo S.A.:
--USD200 million (USD35 million outstanding) of senior unsecured notes due 2023 at 'B-/RR4';
--USD325 million of senior unsecured notes due 2022 at 'B-/RR4'.
The Rating Outlook is Stable.
GOL's credit ratings are supported by its strong market position in the Brazilian domestic airlines industry and adequate liquidity. Key credit constraints include its limited geographic diversification and high adjusted gross leverage. Also factored into the ratings is the high degree of sensitivity of GOL's financial performance to several factors not controlled by the company such as competition, devaluation of the local currency versus the U.S. dollar, and fuel cost. The 'B-/RR4' rating of the company's unsecured public debt reflects average recovery prospects in the event of a default.
The Stable Outlook for GOL's ratings incorporates the view that the company's consolidated adjusted gross leverage and liquidity, measured as total cash to LTM revenues, will remain in the 5.5x to 7x range and around 20%, respectively, during 2015. The ratings also factor in the expectation that the company will maintain neutral to slightly negative FCF during 2015.
KEY RATING DRIVERS
Rational Capacity Management to Continue
GOL managed to reduce its capacity, measured as available seat kilometres (ASK), in the domestic market by approximately 7.4% and 1.7% during 2013 and 2014, respectively, closing 2014 with 43.4 billion of ASK in this segment. The company's EBIT margins were 3% and 4.9% during 2013 and LTM Sept. 2014, respectively, after reaching negative -11.2% in 2012. Margin recovery reflected an elevated pricing environment, which resulted from capacity reductions executed by the two main players, as well as a number of actions taken by the company to adjust its non-fuel costs. The ratings factor in the expectation that GOL will maintain a rational capacity management during 2015, resulting in flat to minimum capacity increases in the domestic market this year.
High Operational Risk Add Volatility
GOL's operational results are highly correlated to the domestic economy. The company is exposed to currency risk, as approximately 90% of the company's revenues are denominated in local currency, while approximately 60% of its cost structure is U.S. dollars denominated. In addition, about 60% of the company's debt denominated in U.S. dollars. Also factored in the ratings is the company's exposure to oil price volatility since fuel costs represent approximately 38%-40% of its cost structure.
2015 Revenue Growth Around 10%
The company's demand (RPKs) increased by 9.8% during 2014. The current weak economic climate in Brazil will hurt results, as the business segment represents approximately 70% of the total traffic in the domestic market, which could lead to 6% to 9% demand growth during 2015. In terms of pricing, the company reached an important increase in yields of 19% in 2013, however during 2014 its yield only increased around 1.1%. In the current scenario, it is likely that yield increases remain difficult.
High Adjusted Gross Leverage at 6.3x
Fitch does not foresee GOL deleveraging materially during 2015. The company's adjusted gross leverage, measured as total adjusted debt to EBITDAR ratio, declined during 2013 and 2014 due to better cash flow generation (EBITDAR). GOL's adjusted gross leverage were 5.9x on Dec. 31, 2013 and 6.3x on Dec. 31, 2014. The company's EBIT margin during LTM Sept. 30, 2014 was 4.94%. The trends in Brazil's macroeconomic environment and the company's fuel hedge position are expected to limit the benefits from low international fuel price. Fitch expects the Brazilian economy to contract by 0.4% during 2015. The Brazilian real depreciation by 27% versus the U.S. dollar since January 28, 2015 also presents strong headwinds.
Adequate Liquidity
Positively factored in the ratings is the company capacity to maintain a strong liquidity position. GOL had a cash position of BRL2 billion as of Sept. 30, 2014, representing 20% of the company's LTM Sep. 2014 revenues. The company's exposure to Venezuela is estimated at around BRL300 million, which has been excluded for Fitch's cash calculation. GOL's short term debt increased during the second half of 2014 to BRL1.2 billion. The ratings incorporate the view that GOL will maintain adequate liquidity with cash/LTM revenue in the 15% to 20% range during 2015 and 2016.
KEY ASSUMPTIONS
Fitch's key assumptions within the rating case for the issuer include:
--Brazilian GDP contracting by 0.4% in 2015;
--2015 revenue per kilometers (RPK) increase - domestic market in the 6% to 9% range;
--Increase in the domestic market capacity of between 0% to 2% during 2015;
--2015 Adjusted Gross Leverage in the 5.5x to 7x range;
-- Cash and marketable securities over last twelve month (LTM) revenues around 20% during 2015-2016 period;
-- Neutral to slightly negative 2015 free cash flow (FCF).
RATING SENSITIVITIES
Negative Rating Action: A negative rating action could be triggered by a deterioration of the company's credit protection measures - at levels not incorporated in the ratings - resulting from the some combination of the following factors: a fuel spike, significant devaluation of the local currency versus the U.S. dollar, excess capacity in the sector affecting pricing environment, and falling demand scenario affecting Brazil's domestic market.
Positive Rating Action: Fitch could consider a positive rating action if GOL generates margins and FCF higher than the expected levels incorporated in the ratings, resulting in lower financial adjusted gross leverage while keeping current liquidity profile.
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