Fitch Rates Air Canada's Proposed Senior Secured Credit Facilities 'BB-'/'RR2'

NEW YORK—(BUSINESS WIRE)—Fitch Ratings has assigned ratings of ‘BB-’/‘RR2’ to Air Canada’s (AC) proposed US$1 billion senior secured term loan and proposed US$100 million senior secured revolving credit facility. The Issuer Default Rating (IDR) for Air Canada (AC) remains unchanged at ‘B’ with a Positive Outlook. A full rating list is shown at the end of this release.

Proceeds from the transaction will be used to fund a tender for AC’s existing $900 million first-lien and $200 million second-lien high yield notes scheduled to mature in 2015 and 2016, respectively. The existing notes are also callable. The new term loan will feature a six-year maturity, while the new revolving credit facility will have a four-year maturity.

The transaction will extend the company’s largest debt maturities out to 2019, which Fitch believes is beyond the expected peak in AC’s capital spending for new aircraft. The new credit facilities will also likely feature significantly lower interest rates than the outstanding high yield notes.

The credit facilities will be secured by a first priority lien on AC’s Pacific route authorities, accounts receivable, certain real estate, spare engines, ground equipment, and slots at LaGuardia, Heathrow, and Washington-Reagan. This is the same collateral pool that secures AC’s existing secured notes, with the addition of 10 extra spare engines.

KEY RATING DRIVERS

The ‘BB-’/‘RR2’ rating is driven by Fitch’s recovery analysis, which distributes an estimate of AC’s distressed enterprise value to various classes of debt based on a going-concern assumption. The ‘RR2’ rating indicates Fitch’s expectation that the secured credit facility holders would receive superior recovery of 71%-90% of principal in a distressed scenario. Fitch also performed a recovery analysis based on a liquidation scenario in which appraised values of the collateral were stressed. This analysis supported the ‘RR2’ result in the going-concern analysis. Per Fitch’ recovery methodology, an ‘RR2’ rating is notched up two levels from the underlying IDR.

RATING SENSITIVITIES

The secured credit facilities ratings are tied to AC’s IDR and the collateral securing the facilities. Fitch could consider a negative rating action on the facilities if there were a significant devaluation of the collateral, or a downgrade of AC’s IDR. A positive rating action on the facilities could follow an upgrade of AC’s IDR.

AC’s IDR reflects the company’s leveraged balance sheet, adequate liquidity position and high, but improving cost structure mitigated by AC’s extensive global network and dominant market positions across all segments. The Rating Outlook for Air Canada’s IDR remains positive, reflecting the company’s continued efforts to reduce costs, pay down debt, and expand its presence in international markets.

Fitch has assigned the following ratings:

Air Canada

-Senior secured term loan B due 2019 ’BB‘/’RR2’;

-Senior secured revolving credit facility ’BB‘/’RR2’.

Fitch rates Air Canada as follows:

—Long-term IDR ‘B’;

—Senior secured first-lien debt ‘BB’/‘RR1’;

-Senior secured second-lien debt ’BB‘/’RR2’.

The Rating Outlook is Positive.

Additional information is available at ‘www.fitchratings.com’

Applicable Criteria and Related Research:

—‘Corporate Rating Methodology’ (Aug. 8, 2012);

—‘Recovery Ratings and Notching Criteria for Nonfinancial Corporate Issuers’ (Nov. 13, 2012).

Applicable Criteria and Related Research:

Corporate Rating Methodology

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=684460

Recovery Ratings and Notching Criteria for Non-Financial Corporate Issuers

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=693773

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=793906