Brazilian airlines’ stock prices plunged last week with uncertainty about the future of their financing as American credit rating agency Fitch Ratings has downgraded both Azul’s and Gol’s Issuer Default Ratings (IDR) and National Scale Ratings.
While Azul’s was downgraded from a CCC+ to a CCC-, both considered, by Fitch, a “substantial credit risk”, Gol’s went from a B- (“highly speculative”) to a C (“near default”). Fitch’s scale considers a C rating as being worse than a CCC-.
Azul’s shares in the São Paulo Stock Exchange opened the past week at BRL11.42, it closed it at BRL8.81, hitting its historic lowest closing. Gol’s, meanwhile, opened at BRL7.81, closing at BRL6.29.
In the case of Azul, Fitch’s report says that the downgrade was owed to the airline’s “high refinancing risks, operating cash flow pressure due to current and deferred leases payments, liquidity deterioration per Fitch’s criteria, and the more restrictive local credit market due to Americanas’ [a major retail chain which has just gone bust, ed.] default”.
The report added “Fitch’s view of a less friendly renegotiation backdrop with lessors and other main suppliers, despite their proven support during the pandemic, is also considered in this rating action”.
Such downgrade echoes reports, by the media, that Azul is seeking renegotiating its debt with its creditors. An article by O Estado de São Paulo newspaper last week says that, this year, Azul owes BRL3.8 billion (as of February 13, USD730 million) to aircraft lessors and BRL700 million (USD134 million) to banks, as per their sources. Of these 3.8 billion, 3.2 billion refer to the annual leasing rates, with 600 million paying off the rates deferred during the COVID-19 pandemic.
The newspaper reported that the airline had planned to access the market with further capital raising, but the difficulties in the Brazilian market prompted the talks with creditors. Azul’s plan, according to Estado, is to close a deal by this week. Seabury Capital is leading the negotiations.
Fitch says that, should the agreement go through, Gol’s IDR rating “will be downgraded to Restricted Default (RD)” and subsequently rated “to a level that is consistent with the company’s new capital structure and risk profile”. Technically, this would amount to a default rating, albeit a higher grade than “D”, meaning Gol won’t be in a bankruptcy process.
According to Fitch, both Azul and Gol will have a difficult 2023 (albeit better than 2022), with further negative cash flow pressuring the companies’ liquidity requirements.
This is not unbeknownst to both analysts and airline executives, however. In Azul’s last earnings call, in November, the airline said it could reach financing for the “gap” between available liquidity and the 2023 cash burn.
“It’s in the best interest of all of our stakeholders for Azul to remain a strong airline going forward”, said Azul’s CEO, John Rodgerson, back then. “And so do they need to get all their cash paid back in 2023 and 2024? Maybe that gets extended out […] we’ve run a great business that’s generating an enormous amount of operating cash flows. And I think that that’s the way.”
The owner of the other major Brazilian airline, LATAM Airlines Group, has no IDR rating coverage by Fitch, given its Chapter 11 bankruptcy filing back in 2020.
An evaluation by Fitch upgrading its Chilean National Scale Rating from D(cl) to BBB-(cl) back in November 2022 — once the group left bankruptcy — said that the conglomerate will also burn cash through 2023, despite having a more diversified market platform.
