Moody's affirms Gol Finance's B3 ratings, outlook changed to positive

New York, August 07, 2014 — Moody’s Investors Service today affirmed the B3 foreign currency rating assigned to Gol Finance’s perpetual notes and senior notes due in 2017 that are guaranteed by Gol Linhas Aereas Inteligentes S.A. (Gol, B3 positive). The outlook for all ratings was changed to positive from stable.

Ratings affirmed:

Issuer: Gol Finance LLP (Gol Finance)

- 7.5% USD 225 million guaranteed senior unsecured notes due 2017: B3 in the global scale

- 8.75% USD 200 million guaranteed senior unsecured perpetual notes: B3 in the global scale

Outlook actions:

The outlook for all ratings: changed to positive from stable.

Please see ratings tab on the issuer/entity page on moodys.com for information on Global Scale Rating.

Please refer to press release

RATINGS RATIONALE

The positive rating outlook reflects Moody’s belief that Gol should be able to sustain the improvements in operating margins and cash flow generation that it achieved since the end of 2012. The company significantly reduced capacity in step with its domestic market peers in pursuit of higher yields and streamlined its costs to help mitigate earnings pressure of the weakening Real. These actions and the incremental passenger growth that has come with strategic partnerships with other global carriers have led to meaningful improvement of credit metrics. The outlook positions the ratings for an upgrade if the company can at least maintain the recently improved credit metrics profile, as the market experiences what Moody’s expect to be a moderate decline in demand because of slowing growth in the domestic economy and potential devaluation of local currency, which could lead to more volatile earnings.

Gol’s B3 rating considers the company’s solid position in the Brazilian domestic market supported by its strong brand name and efficient business model based on young fleet of Boeing 737 aircraft. It also reflects Gol’s improved liquidity position and manageable debt profile over the next three years. On the other hand, the company’s high exposure to foreign currency and fuel price volatility constrain the rating, as does the challenging environment for the Brazilian aviation industry due to reduced consumer confidence, the still aggressive industry competition and evolving regulatory changes for domestic aviation.

Over the last eighteen months, Gol has implemented significant capacity adjustments and marketing strategies that balanced its revenues amid weaker economic growth and higher costs, which supported an increase of its net passenger yields to 23.95 cents of Brazilian real in 2Q14 (up 22% from the average in 2012) and an average load factor increase to 76.1% (up from 70.2% in 2012). As a result, Moody’s calculates the company’s EBITDA margin, adjusted to exclude operating lease expenses, at 19% for the twelve months that ended 31 March, 2014 (up from 7% in 2012). At the same time, leverage, measured by adjusted gross Debt to EBITDA, decreased to 6.2x in the LTM 1Q14 (down from 18.6x in 2012) driven by lower pressure on Gol’s operating margins.

In the absence of major fuel price or exchange rate volatility, Moody’s believes that Gol could further improve operating performance in 2015, which supports the positive outlook for the rating. Still, a prolonged or material weakness for the Real would reduce Gol’s financial flexibility and limit its ability to further reduce leverage, because 55% of the airline’s operating expenses and about 77% of its gross debt are denominated in foreign currency with limited hedging coverage. For example, we estimate that a sustained 25% devaluation of local currency could lead Gol’s leverage ratios to the 8x – 10x range.

To protect against a major currency devaluation, Gol has improved its liquidity position, diversified investments and revenues with international flights, and entered into strategic alliances with global airlines. In the event of a material devaluation of local currency or significant increase in fuel prices, Moody’s expects the company to continue with its disciplined capacity and yield management strategies. The low cost structure has been a long time hallmark of Gol’s culture and Moody’s expects management to remain focused on the turnaround plan to reduce leverage and improve cash generation.

Despite weaker macroeconomic trends in the near term, the outlook for passenger demand growth in Brazil remains broadly positive for the medium-to-long-term with the enlarged middle-class, the airport expansion programs and potential for higher penetration rates for air travel.

An upgrade in Gol’s ratings is possible if the company sustains adjusted leverage below 6.0 times on a gross basis along with an EBIT interest coverage above 1.0x and unrestricted cash that represents at least 25% of net revenues.

Downward pressure on Gol’s ratings or the outlook will occur if credit metrics materially deteriorate over the next few quarters, for example, as a result of a significant devaluation of the local currency or increases in fuel prices beyond the limits of its existing hedge protection agreements. Quantitatively, negative ratings pressure will increase if adjusted gross Debt to EBITDA increases above 8.0x or should cash trend towards 15% of revenues. Moody’s perception of a material deterioration in the company’s financial flexibility to meet capital requirements could also lead to a negative rating action for Gol.

The principal methodology used in this rating was the Global Passenger Airlines Industry Methodology published in May 2012. Please see the Credit Policy page on www.moodys.com for a copy of these methodologies.

Based in Sao Paulo and founded in 2001, Gol Linhas Aereas Inteligentes S.A. (Gol) currently is the largest low-cost and low-fare carrier in Latin America, offering approximately 910 daily passenger flights to 67 destinations in South America, the Caribbean and the United States. Gol is primarily focused in servicing domestic passengers in Brazil, but the company also provides cargo and charter flight services. Additionally, Gol has a 54% stake in Smiles, a loyalty program company that allows members to accumulate miles on Gol and selected international partners to redeem tickets in more than 560 locations around the world. In the last twelve months ended March 2014, Gol reported consolidated net revenues of BRL 9.4 billion (USD 4.2 billion) and EBITDAR of BRL 1,652 million (USD 730 million).

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody’s rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider’s credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this rating action, and whose ratings may change as a result of this rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody’s legal entity that has issued the rating.