Fitch Expects to Rate LATAM Airlines' $450MM Ticket Securitization 'BB+'

CHICAGO—(BUSINESS WIRE)—Fitch Ratings expects to assign a rating of ‘BB+(exp)’ with a Stable Outlook to Guanay Finance Limited’s proposed $450 million issuance of senior notes. Guanay Finance Limited is a special purpose vehicle incorporated in the Cayman Islands and sponsored by LATAM Airlines Group S.A. (LATAM).

Fitch’s rating on the 2013-1 notes addresses the timely payment of interest and principal on a quarterly basis. The proposed issuance is backed by U.S. and Canadian dollar-denominated receivables from ticket and cargo sales generated by credit, debit or charge cards in the United States and Canada.

This expected rating does not incorporate Fitch’s full legal analysis as this process is currently ongoing and the final rating is contingent upon the receipt of final documents conforming to information already received.

KEY RATING DRIVERS

The expected rating reflects (i) the credit quality of LATAM; (ii) the strategic and growing business that backs the pool of receivables; (iii) the expected quarterly debt service coverage ratio commensurate with the expected rating category; (iv) the level of future flow debt relative to LATAM’s overall funding; and (v) moderate diversion risk.

LATAM has a Fitch local currency (LC) Issuer Default Rating (IDR) of ‘BB’, Outlook Stable. Formed in 2012 through a business combination of LAN Airlines S.A. (LAN) and TAM Linhas Aereas, S.A. (TAM), LATAM maintains a solid market position in the domestic, regional and international (long-haul), and cargo markets.

The majority of receivables will be for flights to and from North American gateways. The pool of receivables grew 21.45% CAGR from 2005-2012 driven by increased capacity and yield, improved load factors, the strength of the North American cargo business and growth in internet ticket sales. Many of the key North American gateways are more profitable than LATAM’s overall and long-haul businesses.

Fitch expects the average quarterly debt service coverage ratio (DSCR) to be approximately 3.78×. This is based on average quarterly receivables for the last 12 months and the average quarterly debt service for the life of the transaction.

The proposed issuance represents approximately 4.4% of LATAM’s consolidated debt and 6.8% of unconsolidated debt (excluding TAM). While these percentages are low relative to the balance sheet, the transaction size is large compared to the company’s total unsecured debt, as most of company debt relates to leases and secured debt.

While designated obligors to the transaction have signed notice and consent agreements (N&Cs), the transaction is exposed to potential diversion risk. Cash flows could be diverted from the transaction by changing designated obligors or rerouting sales through a different IATA code. This risk limits differentiation of issuance rating from the originator’s IDR.

RATING SENSITIVITIES

The rating is sensitive to changes in the credit quality of LATAM. A downgrade of LATAM’s ‘BB’ IDR could lead to a downgrade of the notes. In addition, reductions in DSCRs could result in rating downgrades.

Key Rating Drivers and Rating Sensitivities are further described in the accompanying pre-sale report.

TRANSACTION SUMMARY

The notes are backed by flows related to airline ticket sales and cargo charges by LATAM under IATA code 045 that are purchased using a qualified credit, debit or charge card in the U.S. and Canada.

The originator and initial servicer to the transaction, LATAM is headquartered in Santiago, Chile with the largest operations in Chile and Brazil. LATAM’s rating incorporates the company’s diversified business model, strong regional market position, high gross adjusted leverage, and low liquidity.

For more details on the transaction see Fitch’s presale report ‘Guanay Finance Limited,’ dated Oct. 22, 2013, available by clicking on the link.