Fitch Maintains LAN Airlines S.A.'s 'BBB' IDR on Rating Watch Negative

NEW YORK--(BUSINESS WIRE)--

Fitch Ratings has maintained the 'BBB' foreign currency Issuer Default Rating (IDR) of LAN Airlines S.A. (LAN) on Rating Watch Negative. Fitch has also affirmed LAN's national equity rating at Level 2 (Primera Clase Nivel 2).

Fitch's decision to maintain the Rating Watch Negative reflects the view that the LAN/TAM S.A. (TAM) transaction, if approved, would weaken the credit quality of LAN. Both companies expect to complete all required steps in the legal process to have the merger finalized by the end of the first quarter of 2012.

On Aug. 16, 2010, Fitch placed TAM's ratings on Rating Watch Positive and LAN's 'BBB' IDR on Rating Watch Negative. These rating actions followed the announcement by TAM and LAN that they had reached an agreement to combine their holdings under a single parent entity.

The rating continues to reflect LAN's diversified business model, strong regional market position, adequate liquidity, moderate leverage, and sound growth strategy. The rating also incorporates increased competition affecting the industry as well as the company's aggressive fleet plan, which is partially mitigated by LAN's flexibility in adjusting the fleet size as a result of expirations of its operating and financial leases. The company is exposed to fuel cost volatility and other industry-related risks, such as revenue volatility and high operating leverage. The rating also factors in LAN's continued and consistent operating performance over the last several years and its proven ability to grow and deliver positive results without compromising its capital structure. The company has a positive track-record in selecting, entering and developing new markets.

The company's EBITDAR margin during the latest 12 months LTM ended September 2011 was 20.5%; this level was lower than those reached during 2010 (21.3%) and 2009 (20.2%). This decline in the company's EBITDAR margin reflects increasing fuel costs, the Puyehue-Cordon Caulle volcano disruption, and cost related to Colombian Airline Aires' integration process. LAN's cash generation, as measured by EBITDAR, was USD1.1 billion during the LTM period ended September 2011.

LAN reached negative free cash flow (FCF) of USD792 million during LTM September 2011, which resulted in a lower cash position and incremental debt during the period. FCF calculation for the period considers cash flow from operations after interest paid (USD703 million), capex (USD1.3 billion), and distributed dividends (USD192 million). The company maintains a fleet plan that calls for capex levels of USD841 million and USD1.8 billion during 2011 and 2012, respectively, resulting in capacity increase in the passenger and cargo segments of 14%/16% and 12%/14%, respectively, during 2011; and of 12%/14% and 7%/9% during 2012. By the end of September 2011, LAN's consolidated fleet was composed of 141 aircraft units; the company expects to close 2011 and 2012 with 149 and 166 aircraft units, respectively.

The company had approximately USD4.6 billion in total adjusted debt at the end of September 2011. This debt consists primarily of USD3.5 billion of on-balance-sheet debt, most of which is secured, and an estimated USD1.1 billion of off-balance-sheet debt associated with lease obligations. The company's net leverage, as measured by the net adjusted debt/EBITDAR ratio, was 3.8 times (x) by the end of September 2011; it was 3.2x at the end of December 2010.

LAN's unrestricted cash on its balance was USD332 million at the end of September 2011, resulting in a cash and marketable securities/revenue ratio of 6.1%. The company maintains unused committed credit lines for USD160 million.

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).

Applicable Criteria and Related Research:

Corporate Rating Methodology

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

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