Fitch Ratings-New York-05 May 2016: Fitch Ratings has downgraded Gol Linhas Aereas Inteligentes S.A.‘s (GOL) Issuer Default Ratings IDRs to ’C’ from ‘CCC’. Fitch has also downgraded GOL and its fully owned subsidiaries’ ratings; see the full list at the end of this release.

The rating downgrade follows GOL’s proposed exchange offering announced on May 3, 2016. According to Fitch’s rating methodology, the proposed offering imposes a material reduction in terms versus the original terms of unsecured notes. The successful completion of the exchange would result in the IDRs being downgraded to Restricted Default ‘RD’. Shortly after the distressed debt exchange is completed, the IDRs would be re-rated, which usually is still in the low speculative grade.

The revised Recovery Ratings for GOL’s current unsecured notes reflect the terms and conditions incorporated in the proposed debt exchange offering.

KEY RATING DRIVERS

GOL recently announced that its subsidiary GOL LuxCo S.A. (LuxCo) has commenced a private exchange offer for any and all of the outstanding senior notes of GOL and its subsidiaries cash and LuxCo’s newly issued 8.50% secured notes. The new notes will be guaranteed by GOL and its fully owned subsidiary VRG Linhas Aereas S.A. The offering proposes to exchange GOL’s unsecured notes for up to US$781.4 million of senior secured notes for a total cash payment of US$51.3 million and new notes for a total amount of US$228.1 million. These new notes consider principal payments of US$39.2 million, US$138 million and US$51 million maturing in 2018, 2022, and 2028, respectively. The proposed offering implies an average discount of 65% on the total aggregate principal amount of the original notes.

The new notes will be secured by a first-priority security interest in all spare parts owned by GOL and, as a result, structurally senior to all of GOL’s existing and future unsecured indebtedness to the extent of the value of collateral securing the new notes. The offering is contingent upon the consent of at least 95% of the aggregate principal amount of the outstanding notes that are the target of the exchange offer, unless lowered by the issuer. The exchange offer and solicitation expires on June 1, 2016.

Brazil’s adverse macroeconomic scenario should result in declining levels of passenger activity and lower yields within the airline industry. Considering GOL’s current capital structure, Fitch expects continued deterioration in the company’s capacity to cover its interest expenses and rents related to operational leases, and in the most likely scenario, the company is expected to reach negative free cash flow margin in the 15% to 20% range in 2016.

If the company’s debt exchange offer is unsuccessful, debt service would be contingent upon extraordinary measures. The company’s total on-balance-sheet debt consisted of BRL9.3 billion as of Dec. 31, 2015. Of this total, BRL3.9 billion, approximately, 41% is secured debt and is mainly financial leases. The remaining debt is approximately BRL5.4 billion or 59% of the company’s total on-balance-sheet debt.

KEY ASSUMPTIONS

The exchange offer launched on May 3, 2016, constitutes a distressed debt exchange under Fitch’s criteria, because investors face a reduction in terms and the restructuring is conducted in order to avoid a traditional payment default. Fitch considers alternative options to be limited.

RATING SENSITIVITIES

The completion of the proposed exchange offer will lead to a downgrade of the Long-Term IDRs to ‘RD’. A positive rating action may follow the implementation of an alternative capital structure that arises out of the restructuring process.

Fitch has downgraded the following ratings:

Gol Linhas Aereas Inteligentes S.A. (GOL):
-Long-term foreign and local currency Issuer Default Ratings (IDRs) to ‘C’ from ‘CCC’;
—Long-term national rating to ‘C(bra)’ from ‘CCC’;
—USD200 million (USD179 million outstanding) perpetual bonds to ‘C/RR5’ from ’CCC/RR5’.

VRG Linhas Aereas S.A. (VRG):
—Long-term foreign and local currency IDRs to ‘C’ from ‘CCC;
—Long-term national rating to ’C(bra)’ from ‘CCC’.

GOL Finance, a company incorporated with limited liability in the Cayman Islands:
-USD225 million (USD84.2 million outstanding) of senior unsecured notes due 2017 to ‘CC/RR3’ from ’CCC/RR5’;
-USD300 million (USD158.1 million outstanding) of senior unsecured notes due 2020 to ‘C/RR4’ from ’CCC/RR5’.

GOL LuxCo S.A.:
-USD200 million (USD35 million outstanding) of senior unsecured notes due 2023 to ‘C/RR4’ from ’CCC/RR5’;
-USD325 million of senior unsecured notes due 2022 to ‘C/RR4’ from ’CCC/RR5’.