Market Overview

Fitch Downgrades GOL's IDR to 'B+'; Unsecured Debt to 'B/RR5'; Outlook Negative

NEW YORK--(BUSINESS WIRE)--

Fitch Ratings has downgraded the ratings of Gol Linhas Aereas Inteligentes S.A.'s (GOL) and its fully owned subsidiaries as follows:

Gol Linhas Aereas Inteligentes S.A. (GOL):

--Foreign and local currency long-term Issuer Default Ratings (IDRs) to 'B+' from 'BB-';

--Long-term national rating to 'BBB(bra)' from A-(bra)';

--USD200 million perpetual bonds to 'B/RR5' from 'BB-';

VRG Linhas Aereas S.A.:

--Foreign and local currency long-term IDRs to 'B+' from 'BB-';

--Long-term national rating to 'BBB(bra)' from A-(bra)';

--BRL500 million of senior notes due 2017 to 'BBB-(bra)' from A-(bra)';

GOL Finance, a company incorporated with limited liability in the Cayman Islands:

--Foreign and local currency long-term IDRs to 'B+' from 'BB-';

--USD200 million of senior notes due 2017 to 'B/RR5' from 'BB-';

--USD300 million of senior notes due 2020 to 'B/RR5' from 'BB-';

Fitch Ratings has also withdrawn the expected rating of 'BB-' assigned on Feb. 14, 2012 to a proposed perpetual bonds as the transaction did not close, the deal was originally planned to be issued by GOL's wholly owned subsidiary, VRG Linhas Aereas S.A. (VRG).

In conjunction with these rating actions, the Rating Outlook for GOL, VRG Linhas Aereas and GOL Finance have been revised to Negative from Stable.

These rating downgrades reflect the deterioration in GOL's cash flow generation. During 2011, its EBITDAR declined by 54% from the prior year, while its EBITDAR margin fell to 9% from 22%. The weakening of GOL's margins during 2011 reflects the very challenging scenario faced by the company with yields under pressure due to increasing competition and additional capacity being added into the Brazilian domestic market. High fuel costs, which represent approximately 40% of the company's operating costs, also hurt the company's performance, as did the depreciation of the Brazilian real relative to the U.S. dollar (Enf of the period exchange rate BRL/USD was 1,8758 in 2011 and 1,6662 in 2010). Approximately 90% of the company's revenues are denominated in local currency, while around 60% of its total costs are denominated in U.S. dollars.

The Negative Outlook incorporates Fitch's concern regarding a potential scenario of continued negative trends in the company's free cash flow generation (FCF) that could result in a deterioration of its liquidity during 2012. Fitch views as positive to GOL's credit quality management's efforts to control capacity and reduce costs.

Also factored into the Negative Outlook is the high degree of sensitivity of GOL's financial performance to several factors not controlled by the company such as competition, performance of the local currency, and fuel price trend - which are expected to continue putting pressure on the company's margins in the short to medium term - that could offset the actions taken by management to improve its free cash flow generation during 2012.

GOL's ratings reflect the company's solid business position in the Brazilian domestic market with a significant market share of 42.3% (including recently acquired Webjet S.A.) measured by RPK by the end of 2011. The ratings also consider the company's business model, which is primarily oriented to the domestic passenger market, and has limited product and geographic diversification. The volatility of cash flow generation and high leverage are additional credit considerations.

The 'B/RR5' rating of the company's unsecured public debt reflects below average recovery prospects in the event of a default due to the subordination of the unsecured debt to secured debt related to aircraft finance.

Potential Liquidity Deterioration Driven by Negative FCF Main Credit Concern:

During 2011, GOL's FCF was negative BRL1.3 billion. This figure is equivalent to about 27% of the company's on-balance debt at the end of December 2011. Fitch's FCF calculation for the 2011 period considers cash flow from operations (CFFO) (negative BRL603 billion) less capex considering aircraft finance (BRL671 million) and less paid dividends (BRL51 million). Positively factored in the ratings is the company's focus to maintain healthy liquidity. At the end of 2011, the company had BRL2.2 billion of cash and marketable securities.

The main sources of incremental cash for GOL during 2011 were BRL671 million of additional debt and an equity advance from Delta Air Lines of approximately BRL186 million.

The company's negative FCF trend has been driven by a significant deterioration in the company operational performance. GOL's EBIT margin was negative 2.5% in 2011, a sharp decline from a positive EBIT margin of 10% in 2010. Fitch expects the company's EBIT margin to remain under pressure during the first half of 2012, as this period of time is seasonally the weakest portion of the year for the company. Continued high negative FCF levels in 2012 with negative FCF margins in the 15% to 20% range would likely result in a material deterioration of the company's liquidity.

High Leverage, Further Worsening Expected during First Half of 2012:

GOL's cash generation, as measured by EBITDAR reached BRL707 million in 2011, a decline from BRL1.5 billion in 2010. The company had approximately BRL8.5 billion in total adjusted debt at the end of December 2011. This debt consists primarily of BRL5 billion of on-balance-sheet debt, 41% of which is secured aircraft financing, and an estimated BRL3.5 billion of off-balance-sheet debt associated with lease obligations. The company's gross and net leverage, as measured by total adjusted debt/EBITDAR and total adjusted net debt/EBITDAR ratios, reached levels of 12.1x and 8.9x, respectively, during 2011. This represents a sharp increase versus 5x and 3.7x during 2010. The ratings factor in the expectation of continued deterioration during the first half of 2012. A potential recovery in the company's leverage toward the end of 2012 would depend upon the effectiveness of GOL's efforts on manage capacity and reduce costs. Macroeconomic conditions and the actions taken by the other main players in the Brazilian domestic market will also affect the company's performance.

Capacity Management Key Credit Factor in 2012:

One of the main factors negatively affecting the Brazilian market during 2011 was the excess capacity being added primarily by the main players, TAM S.A. (TAM) and GOL, which ended December 2011 with total ASK levels in the domestic market of 48.7 billion (TAM) and 44.3 billion (GOL), representing increases of 9.5% and 6.4%, respectively, over their ASK levels as of Dec. 2010. The Brazilian domestic industry as whole ended 2011 with a total ASK level of 116.1 billion, representing an increase of 13.1% versus December 2010.

Fitch expects ASK levels to grow at a single-digit rate during 2012, as the two major airlines, which account for more than 80% of the total domestic capacity, are considering slowing their ASK growth rates or reducing them. Continued efforts by TAM or GOL to maintain a focus on market share - reflected in ASK growth at a pace similar to the level observed in 2011 - instead of profitability would be seen as a negative for the sector's credit quality.

Considering capacity from recently acquired Webjet S.A. (only 4Q2011), GOL ended 2011 with a total capacity, measured by ASK, of 50.1 billion. GOL's management is likely to be conservative in the future in an effort to boost profitability and cash flow. This should result growth rates for the company's capacity in range of -2% to 2%, which is expected to be positive in terms of yields. The company's 2011 yield was BRL19.51 cents per kilometer, a decline of 4.8% when compared with the company's 2010 yield (BRL20.48 cents). On a quarterly basis, the company's yields have shown moderate improvements toward the end of 2011.

Focus on Cost Reduction Expected to Continue:

Positively, the company is implementing several actions oriented to reduce its ex-fuel cost per ASK (CASK), as a key component of recovering its operating cash flow. The ratings factor in the view that the company will require material improvements in its cost structure versus 2011 levels. GOL ended 2011 with a total operating cost per ASK (CASK) of BRL15.41 cents, which increased 12.7% over the 2010 CASK (BRL13.67 cents). The two components of the company's 2011 total CASK, ex-fuel CASK and fuel CASK ended 2011 at levels of BRL9.31 cents and BRL6.1 cents, reaching increases of 7% and 23%, respectively, over 2010 levels. Current oil price trends are expected to continue putting pressure on the company's operational performance as the 2012 average price WTI per barrel is expected to be around USD110 per barrel versus an average price of USD95 per barrel in 2010.

Rating Drivers:

An inability of the company to lower leverage materially form 2011 levels could result in a negative rating action. A deterioration of the company's strong liquidity position could also trigger downgrades in the company's ratings. Conversely, better operational performance during 2012 could warrant a change in the Rating Outlook to Stable.

Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.

Applicable Criteria and Related Research:

--'Corporate Rating Methodology' (Aug. 12, 2011);

--'Parent Subsidiary Rating Linkage (Aug. 12, 2011);

--'National Ratings - Methodology Update (Jan. 19, 2011).

Applicable Criteria and Related Research:

Corporate Rating Methodology

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=647229

Parent and Subsidiary Rating Linkage

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=647210

National Ratings Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=595885

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE.

Fitch Ratings
Primary Analyst
Jose Vertiz
Director
+1-212-908-0641
Fitch, Inc.
One State Street Plaza
New York, NY 10004
or
Secondary Analyst
Debora Jalles
Director
011 5521 4503 2629
or
Committee Chairperson
Joseph Bormann, CFA
Managing Director
+1-312-368-3349
or
Media Relations:
Brian Bertsch, +1-212-908-0549 (New York)
brian.bertsch@fitchratings.com

 

Around the Web, We're Loving...

Partner Network

Get Benzinga's Newsletters