Fitch Rates Air Canada's Prop'd Sr Secured Credit Facils & Notes 'BB/RR1'; 2d Lien Notes 'BB-/RR2'

CHICAGO—(BUSINESS WIRE)—Fitch Ratings expects to rate Air Canada’s (AC) proposed $700 million 1st lien senior secured term loan B, $100 million 1st lien senior secured revolving credit facility, and C$300 million 1st lien senior secured notes ‘BB/RR1’. Fitch also expects to rate Air Canada’s proposed $300 million 2d lien senior secured notes ‘BB-/RR2’. The Issuer Default Rating (IDR) for Air Canada remains unchanged at ‘B’ with a Positive Outlook. A full rating list is shown at the end of this release.

Air Canada is expected to raise $1.3 billion of new debt through the issuance of a $700 million 1st lien senior secured term loan B, C$300 million of 1st lien senior secured notes and $300 million of 2d lien senior secured notes. Both the 1st lien term loan and 1st lien notes will feature a six-year tenor, while the 2d lien notes will feature a six-and-a-half year tenor. AC will also enter a four-year $100 million 1st lien senior secured revolving credit facility.

Proceeds from the transaction will be used to pay down AC’s existing $900 million 1st lien and $200 million 2d lien high yield notes scheduled to mature in 2015 and 2016, respectively. Air Canada announced a tender offer for the existing 9.25%, 10.125%, and 12.0% senior notes on Sept. 5. The tender period runs through Oct. 2. Proceeds remaining after funding the tender will be used for general corporate purposes. The new debt is expected to feature improved pricing compared to the outstanding high yield notes. The transaction will also push the company’s largest debt maturities out to 2019, beyond the middle of the decade when capital spending for new aircraft is expected to peak.

The proposed issuance largely mirrors Air Canada’s planned $1.3 billion debt issuance from June of this year which Fitch rated ‘BB-/RR2’. Whereas the previously planned issuance featured only 1st lien debt, AC’s new issuance includes a smaller amount of 1st lien debt as well as some 2d lien debt, improving the recovery prospects for the 1st lien holders.

The proposed June issuance was subsequently withdrawn from the market due to an adverse interest rate environment. As such, Fitch has withdrawn its expected ratings on that issuance.

The new debt will be secured by a priority lien on accounts receivable, certain real estate, spare engines, ground equipment, AC’s Pacific route authorities, and slots at LaGuardia, Heathrow, and Washington-Reagan. This represents the same collateral pool that secures AC’s existing secured notes, supplemented by 10 additional spare engines.

Key Rating Drivers

The ‘BB/RR1’ rating is driven by Fitch’s recovery analysis, which distributes Air Canada’s distressed estimated enterprise value to various classes of debt based on a going concern valuation. The ‘RR1’ rating indicates Fitch’s expectation that the 1st lien secured debt holders would recover 91%-100% of principal in a distress situation. Ratings on the proposed issuance are consistent with Fitch’s rating for AC’s existing 1st lien high yield notes.

The ‘BB-/RR2’ rating on the 2d lien secured debt is driven by the notes’ junior position relative to the proposed 1st lien debt.

AC’s IDR reflects the company’s leveraged balance sheet, adequate liquidity position and high, but improving, cost structure mitigated by AC’s extensive global network and dominant market positions across all segments. The Outlook for Air Canada’s IDR remains Positive, reflecting the company’s continued efforts to reduce costs and expand its presence in international markets.

Rating Sensitivities

The secured note ratings are tied to AC’s IDR and the value of the collateral securing the notes. Fitch could consider a negative rating action on the notes if there were a significant devaluation of the collateral or a downgrade of AC’s IDR. A positive rating action on the notes could follow an upgrade of AC’s IDR.

Fitch expects to assign the following ratings:

Air Canada

—Senior secured term loan B due 2019 ‘BB’/‘RR1’;

—Senior secured revolving credit facility ‘BB’/‘RR1’;

—CDN$ first lien senior secured notes due 2019 ‘BB/RR1’;

-Second lien senior secured notes due 2020 ’BB/RR2’.

Fitch has withdrawn the following ratings:

Air Canada

-Proposed $1 billion senior secured term loan B due 2019 ’BB‘/’RR2’;

-Proposed $100 million senior secured revolving credit facility ’BB‘/’RR2’;

-Proposed CDN$300 million 1st lien secured notes due 2019 ’BB‘/’RR2’.

Fitch currently rates Air Canada as follows:

—Long-term IDR ‘B’;

—Senior secured 1st -lien debt ‘BB/RR1’;

-Senior secured 2d-lien debt ’BB/RR2’.

Additional information is available at ‘www.fitchratings.com’

Applicable Criteria and Related Research:

—‘Corporate Rating Methodology’ (Aug. 5, 2013);

—‘Recovery Ratings and Notching Criteria for Nonfinancial Corporate Issuers’ (Nov. 13, 2012).

Applicable Criteria and Related Research:

Recovery Ratings and Notching Criteria for Non-Financial Corporate Issuers

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=693773

Corporate Rating Methodology: Including Short-Term Ratings and Parent and Subsidiary Linkage

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=715139