Loading

Fitch rates GOL's proposed bonds 'BB-'

Direct News Source

12-Jul-2010 Fitch Ratings has assigned a 'BB-' rating to Gol Linhas Aereas Inteligentes S.A.'s (GOL) proposed senior guaranteed notes due 2020.

These notes will be issued through GOL's subsidiary, GOL Finance, and will be unconditionally guaranteed by GOL and VRG Linhas Aereas S.A. (VRG), a wholly owned subsidiary of GOL. The notes will be junior to any outstanding secured debt of the issuer and its guarantors and will rank pari passu with the outstanding USD200 million of senior notes due 2017. The target amount of the proposed issuance is in the range of USD200 million to USD400 million; the final amount of the issuance will depend on market conditions. Proceeds from the proposed issuance will be used to refinance existing debt.

Fitch currently rates GOL as follows:

--Foreign currency and local currency Issuer Default Ratings (IDRs) 'BB-';

--USD200 million perpetual bonds 'BB-';

--USD200 million of senior notes due 2017 'BB-';

--National scale rating 'A-(bra)'.

The Rating Outlook is Stable.

The ratings reflect GOL's consistent improvements in cash flow generation, comfortable liquidity, and continued decline in leverage during the last several quarters. The ratings also factor in expectations that the company will continue lowering its net leverage while maintaining an ample cash position. The company is exposed to fuel cost volatility and other industry-related risks, such as revenue volatility, high operating leverage and increasing competition. The ratings incorporate the high degree of sensitivity of GOL's operations to changes in the macroeconomic scenario.

The Stable Outlook reflects expectations that GOL will maintain its solid market position as Brazil's second largest airline and that the company will continue to benefit from stronger domestic demand for domestic air travel in the business and leisure segments following the recovery in Brazil's economy. Any material event that would positively or negatively alter the company's business and/or financial profile could affect the company credit quality.

Business Strategy Focused on Domestic Market:

GOL has a solid market position in the Brazilian domestic market with a 41% market share at the end of May 2010; this segment is benefiting the most from the improving Brazilian economy. In the first quarter of 2010 (1Q'10) and for the first five months of 2010 (January-May), Brazil's domestic flight demand, measured by revenue passenger kilometers (domestic RPK) increased by 35% and 29.9%, respectively, over the same periods of the prior year. Brazil's demand for international traffic, meanwhile, increased at lower rates of 12.8% and 11.7%, respectively, during the same periods.

The company has focused its operations primarily in the domestic market and is taking advantage of the most profitable routes in Brazil, and from its access to approximately 45%-50% of the available slots in Brazil's most important airports. This business strategy allowed the company to maintain EBITDAR margins around 20% during the last six quarters ended in March 2010.

Solid Liquidity, Cash 20%-25% Revenues:

Positively, GOL dramatically improved its liquidity during the last four quarters as well as its commitment to maintain specific cash targets in the range of 20%-25% over its last 12-month period (LTM) revenues. The company ended the 1Q'10 with a cash position of BRL1.4 billion, 2.5 times (x) and 7.7x higher than its cash position by the end of fiscal year (FY) 2008 (BRL415 million) and 1Q'09 (BRL396 million), respectively. Steps taken by GOL during 2009 to improve its liquidity included a capital increase of BRL203.5 million and the issuance of BRL400 million in local debentures due in 2011. In addition, the company completed an equity offering which generated net proceeds of BRL602 million. The company also raised BRL255 million through the advance sale of miles to Bradesco and Banco do Brasil.

Improving Cash Flow Generation, Further Deleverage Expected:

GOL's net leverage is expected to be around 4x by the end of FY 2010 as the company continues to improve cash flow generation, measured by EBITDAR, and reduce its net leverage. EBITDAR improvements are expected to be driven by higher load factors and lower ex-fuel costs, while yields are not expected to improve. During the LTM ended March 2010, GOL generated BRL1.3 billion of EBITDAR, an improvement from BRL826 million and BRL681 million during the comparable period in 2009 and FY 2008, respectively.

GOL's total debt adjusted for operating leases was BRL7.3 billion at the end of March 2010, while its cash and marketable securities balance was BRL1.4 billion. These figures result in an adjusted net debt-to-EBITDAR ratio of 4.7x for the LTM ended in March 2010, which favorably compares with the company's net leverage by the end of December 2008 and September 2009 of 11.0x and 6.2x, respectively. GOL's on-balance-sheet debt totalled BRL3.2 billion by the end of March 2010 and consists of BRL1.8 billion of secured debt and financial leases, BRL134 million in PDP loans, and BRL687 million in local public debentures and perpetual bonds. Lease expense for the LTM were BRL583 million, resulting in an off-balance-sheet debt adjustment of BRL4.1 billion.

High Operational Risk:

GOL's operational results are highly correlated to the domestic economy. The lack of product and geographic diversification in the company's business model is the result of the domestic passenger segment representing approximately 90% of its revenues. The ratings also incorporate the positive current business environment affecting the domestic segment as the Brazilian economy is expected to grow by 7.0% and 4.5% during 2010 and 2011, respectively. Negative changes in the macroeconomic scenario could create pressure on ratings.

The company is exposed to currency risk as approximately 90% of the company's revenues are denominated in local currency, while its cost structure has a significant component in U.S. dollars, representing approximately 60% of the company's total costs. In addition, the company's debt is mostly denominated in U.S. dollars, which represents approximately 80% of the company's total debt. Also factored into the ratings is the company's exposure to oil price volatility, since fuel costs represent approximately 32%-42% of its cost structure.

Overcapacity Risk, Increasing Competition:

Based on the company's fleet plan, overcapacity risk is moderate during the next two years, 2010 and 2011. By 2013 and thereafter, the company's increase in capacity could potentially generate some overcapacity and affect the company's cash flow generation. GOL's fleet plan for the next two years considers the growth of its operational fleet from 108 aircrafts by the end of March 2010 to 111 and 115 by the end of 2010 and 2011, respectively. The company's capacity will increase from 12% to 18% in 2010 on a year-over-year basis, from 39.9 billions available seat kilometers (ASK) posted by the end of 2009. The company maintains aircraft commitments for years 2010 and 2011 of BRL772 million and BRL1.2 billion, respectively, while for 2012 and 2013 the company maintains aircraft commitments of BRL842 million and BRL2.7 billion, respectively. At the end of March 2010, GOL maintains a standardized fleet composed primarily of 737NG aircrafts with and average age of 5.8 years.

Increasing competition has and will continue to pressure the industry's yields during the next quarters with the main players focusing more on absorbing demand through increased load factors. Counterbalancing this increase in competition is the limited access to slots in the Brazilian airports, which will continue to limit the access of new players while allowing main local players to maintain strong market positions.

Ratings for GOL reflect the application of Fitch's current criteria, which are available at 'www.fitchratings.com' and specifically include the following reports:

--Corporate Rating Methodology (Nov. 24, 2009);

--Liquidity Considerations for Corporate Issuers (June 27, 2007).