Fitch Rates Air Canada's Proposed Secured Debt Issuance 'BB+(EXP)/RR1'

CHICAGO–(BUSINESS WIRE)–Fitch Ratings has assigned a rating of ‘BB+(EXP)/RR1’ to Air Canada’s
new proposed senior secured debt issuance. Proceeds from the issuance
will be used, along with cash, to refinance Air Canada’s existing
secured term loan B and first and second lien senior secured notes.
Fitch currently rates Air Canada ‘B+’ with a Positive Rating Outlook.

Air Canada is expected to raise around USD$950 million of new debt
through the issuance of a new secured term loan B. The term loan will
feature a seven-year tenor. Air Canada will also upsize its revolving
credit facility to USD$300 million from its current size of USD$210
million. Collateral for the facility will consist of Air Canada’s Asian
Pacific route rights, slots at certain airports including Heathrow,
LaGuardia, and DCA, as well as some real estate and ground equipment.
The collateral package excludes the engines and accounts receivable that
are included as security for Air Canada’s existing facility.

The refinancing will push a material amount of Air Canada’s debt
maturities from the 2019-2020 timeframe out to 2023 as it redeems its
existing first and second lien secured notes and term loan B. The use of
cash to pay down some existing debt will also result in a moderate
reduction in Air Canada’s gross leverage metrics, which Fitch currently
calculates at 3.8x.

KEY RATING DRIVERS

The ‘BB+(EXP)/RR1’ rating is driven by Fitch’s recovery analysis, which
distributes an estimated distressed enterprise value to various classes
of debt based on a going concern valuation. Recovery estimates in a
going concern scenario are supported by the strategic importance of the
collateral to Air Canada. Recovery in a liquidation scenario would be
more uncertain as the route rights and slots that collateralize the
transaction are intangible and inherently difficult to value. The ‘RR1’
rating indicates Fitch’s expectation that the 1st lien secured debt
holders would recover 91%-100% of principal in a distress situation.
Ratings on the proposed issuance are consistent with Fitch’s rating for
AC’s existing senior secured debt.

The Positive Outlook on Air Canada’s IDR is supported by improving
financial results, reduced pension obligations, and longer-term
commitment to de-leveraging. Over the intermediate term, Fitch expects
AC to continue generating solid financial results, with operating
margins remaining well above historical levels produced prior to 2013.

KEY ASSUMPTIONS

–Continued moderate growth in demand for air travel through the
forecast period;

–Fuel prices increasing to about $65/barrel by 2018;

–Air Canada’s capacity continues to grow in the high single-digit range.

RATING SENSITIVITIES

Future actions that may individually or collectively cause Fitch to take
a positive rating action include:

–Sustained adjusted debt/EBITDAR below 4.0x;

–EBITDAR margins sustained above 15%, EBIT margins above 10%;

–Better than expected (neutral or positive) free cash flow generation
over the intermediate term.

Although AC’s current credit metrics are roughly in-line with those
outlined above, future positive rating actions may be driven by
expectations for metrics to be sustained amidst a more difficult
operating environment (i.e. higher fuel prices or a notable drop in
demand).

Future actions that may individually or collectively cause Fitch to take
a negative rating action include:

–Weaker than expected margin performance or higher than expected
borrowing causing leverage to reach or exceed 5x;

–Weaker than expected financial performance causing free cash flow to
be notably below Fitch’s expectations;

–A decline in the company’s EBIT margin to the low single digits,
EBITDAR margins into the high single digits.

LIQUIDITY

Air Canada’s liquidity is supportive of the rating. At June 30, 2016 the
company had a cash and short-term investments balance of $3.1 billion
and an undrawn revolver of $210 million. Total liquidity is equal to 24%
of LTM revenue, which Fitch considers more than adequate given
manageable upcoming debt maturities and expectations for Air Canada to
generate meaningful operating cash flows.

FULL LIST OF RATING ACTIONS

Fitch has assigned the following ratings to the proposed issuance:

Air Canada

–Senior secured term loan B ‘BB+(EXP)/RR1’;

–Senior secured revolving credit facility ‘BB+(EXP)/RR1’.

Fitch currently rates Air Canada as follows:

–Long-term IDR ‘B+’;

–Senior secured first-lien term loan ‘BB+/RR1’;

–Senior secured revolving credit facility ‘BB+/RR1’;

–Senior secured second-lien debt ‘BB+/RR1’;

–Senior unsecured debt ‘B+/RR4’.

Date of most recent committee: April 22, 2016

Additional information is available on www.fitchratings.com

Applicable Criteria

Corporate Rating Methodology – Including Short-Term Ratings and Parent
and Subsidiary Linkage (pub. 17 Aug 2015)

https://www.fitchratings.com/site/re/869362

Additional Disclosures

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1011496

Endorsement Policy

https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

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Contacts

Fitch Ratings
Primary Analyst
Joe Rohlena, CFA, +1-312-368-3112
Director
Fitch
Ratings, Inc.
70 W. Madison Street
Chicago, IL 60602
or
Secondary
Analyst
Craig Fraser, +1-212-908-0310
Managing Director
or
Committee
Chairperson
Michael Weaver, +1-312-368-3156
Managing Director
or
Media
Relations
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alyssa.castelli@fitchratings.com