oInternational Consolidated Airlines Group S.A. (IAG) has issued EUR1.2 billion of senior unsecured notes and signed a $1.8 billion multi-borrower secured three-year revolving credit facility (RCF), boosting its liquidity sources.
oWe have therefore revised our assessment of IAG's liquidity position upward to exceptional, from strong, which however does not affect the ratings.
oWe affirmed our 'BB' ratings on IAG and its existing unsecured debt.
oThe negative outlook reflects our view that the group's financial metrics will remain under considerable pressure in the next few quarters and that there is high uncertainty regarding the pandemic and its effects on air traffic demand and IAG's financial position.
FRANKFURT (S&P Global Ratings) --S&P Global Ratings today took the rating actions listed above.
We have revised up our assessment of IAG's liquidity to exceptional from strong.
Including the proceeds from the EUR1.2 billion unsecured notes issuance completed in March 2021 and undrawn multi-borrower secured three-year $1.8 billion RCF signed in March 2021, we forecast that the group's sources of liquidity will be more than double the amount of liquidity uses over the next two years. Well-established and solid relationships with banks and high standing in credit markets have further enhanced IAG's already exceptional liquidity sources-to-uses coverage ratio. While the most recent treasury measures provide IAG with an ample liquidity cushion to withstand the continued weak trading conditions, we believe that our revised liquidity assessment is susceptible to the recovery of air passenger traffic by the end of the third quarter of 2021 and IAG's operating cash flow (OCF) turning positive from 2022, which we assume in our base case.
IAG started 2020 with more financial leeway and a larger liquidity buffer than that of many peers and has maintained solid liquidity during the pandemic so far.
We continue to count IAG among the airline industry's financially strongest groups, with total liquidity of about EUR10.2 billion on March 31, 2021, comprising EUR7.7 billion of available cash, cash equivalents, and interest-bearing deposits, as well as nearly EUR2.3 billion of undrawn committed general and aircraft facilities maturing beyond 24 months, as adjusted by S&P Global Ratings. IAG demonstrates proactive treasury management, continued access to debt markets, and an ability to safeguard liquidity. We also factor IAG's expressed determination and flexibility to defer capital spending (capex) for new planes and suspend shareholder remuneration, with a focus on preserving cash and restoring its credit metrics.
We expect 2021 to be another very difficult year for IAG.
We believe the ongoing turbulent traffic conditions will likely continue in the coming months, depending on local travel constraints, including quarantine rules or mandatory testing for COVID-19, particularly in IAG's home markets. Furthermore, we anticipate a delayed and subdued recovery of business and corporate traffic, which typically is one of IAG's most profitable segments. According to our base case, this year's passenger numbers for the group will rebound to about 40% of 2019 levels. This includes only up to 20% air traffic recovery in the first quarter because of continuing extensive lockdowns and travel restrictions, and our expectation of only a gradual recovery in the second quarter, translating to our overall estimate of up to 30% of pre-pandemic traffic volumes in first-half 2021. This compares with IAG's current passenger capacity plans in first-quarter 2021 for about 20% of 2019 capacity. We anticipate a delay to a more meaningful recovery until after the crucial third-quarter/summer season and an acceleration in traffic toward the year-end. However, our forecast is subject to significant uncertainties and, most importantly, it hinges on overall vaccination progress.
We expect IAG will report a continuing substantial deficits in OCF (after lease payments) and accumulate new debt in 2021, while its credit metrics remain under considerable pressure.
The group executed significant restructuring measures during 2020, among others, to downscale the workforce and aircraft fleet to expected capacity levels and reduce payments to suppliers. It should benefit from a lower fuel bill, which S&P Global Ratings forecasts at up to EUR2.2 billion (versus last year's EUR3.7 billion, including EUR1.7 billion of losses from ineffective fuel hedges). That said, these factors will be insufficient to counterbalance the only gradual revenue recovery in 2021 to 50%-55% below 2019 levels, according to our base case. We estimate that IAG's adjusted EBITDA will turn positive this year to EUR700 million-EUR1.0 billion from negative EUR4.47 billion in 2020, but it will be far off the strong EUR5.4 billion in 2019. This will result in continually negative OCF (after lease payments) and buildup of financial leverage in 2021, aggravated by:
oWorking capital needs, which could be significant because of potential ongoing ticket refunds and slow forward bookings (particularly in first-half 2021);
oThe outstanding cash settlement of ineffective hedge losses, which we estimate at EUR500 million in 2021, after EUR1.2 billion IAG paid in 2020); and
oCash outflows for restructuring.
We forecast IAG's S&P Global Ratings-adjusted debt (including an EUR830 million upfront payment from American Express, which we view akin to factoring) will increase to EUR12.5 billion-EUR12.8 billion by year-end 2021 from EUR10.6 billion in 2020.
Financial flexibility for operational glitches under our base-case scenario and the 'BB' rating is limited.
Nevertheless, IAG's efforts to contain capital spending and safeguard cash should partly offset the slow rebound in passenger volumes, contribute to the group's financial recovery, and help to preserve the rating. The accumulation of new debt will be hindered to some extent by deferrals or cuts to capex for new planes and other discretionary projects. IAG slashed its capex guidance further to EUR1.7 billion in 2021, from the previously communicated EUR1.9 billion and pre-pandemic target of EUR4.0 billion-EUR4.5 billion. Trimmed capex and a good grip on working capital control (more specifically, with regard to liabilities from deferred revenue on ticket sales and collection of receivables) meant new debt was close to EUR2 billion lower than we expected in 2020. Furthermore, we envisage passenger traffic and IAG's operating performance will start to improve meaningfully from late third-quarter 2021--after the crucial summer season--and strengthen in 2022, with adjusted EBITDA reaching up to EUR3.0 billion. We assume that widespread immunization across Europe and most other developed economies will be achieved by the end of third-quarter 2021 and help to lessen or lift travel restrictions and restore passenger confidence in flying. Our base case supports our view that adjusted funds from operations (FFO) to debt will rebound to the rating-commensurate level of more than 12% only in 2022.
S&P Global Ratings believes there remains high, albeit moderating, uncertainty about the evolution of the coronavirus pandemic and its economic effects.
Vaccine production is ramping up and rollouts are gathering pace around the world. Widespread immunization, which will help pave the way for a return to more normal levels of social and economic activity, looks to be achievable by most developed economies by the end of the third quarter. However, some emerging markets may only be able to achieve widespread immunization by year-end or later. We use these assumptions about vaccine timing in assessing the economic and credit implications associated with the pandemic (see our research here: www.spglobal.com/ratings). As the situation evolves, we will update our assumptions and estimates accordingly.
The negative outlook reflects our view that the group's financial metrics will remain under considerable pressure in the next few quarters and that there is high uncertainty regarding the pandemic and its effects on air traffic demand, as well as IAG's financial position.
We would lower the rating if:
oPassenger demand recovery is further delayed or appears to be structurally weaker than expected, placing additional pressure on IAG's credit metrics; and
oIf we do not expect that adjusted FFO to debt will recover to at least 12% by 2022.
This could occur if the pandemic cannot be contained, resulting in prolonged lockdowns and travel restrictions, or if passengers remain reluctant to book flights.
Although we currently don't see liquidity as a near-term risk, we would lower the rating if air traffic does not recover in line with our expectations, external funding becomes unavailable for IAG, and if management's proactive efforts to adjust operating costs and capex are insufficient to preserve at least adequate liquidity, such that sources exceed uses by more than 1.2x in the coming 12 months.
We could also lower the rating if industry fundamentals weaken significantly for a prolonged period, impairing IAG's competitive position and profitability.
We could revise the outlook to stable if we became more certain that demand is normalizing and the recovery is robust enough to enable IAG to partly restore its financial strength, such that adjusted FFO to debt increases sustainably to at least 12%, while maintaining at least adequate liquidity. A revision of the outlook to stable would also hinge on our view that IAG was maintaining prudent capital spending and shareholder returns.
Related Criteria
oGeneral Criteria: Group Rating Methodology, July 1, 2019
oCriteria | Corporates | General: Corporate Methodology: Ratios And Adjustments, April 1, 2019
oCriteria | Corporates | General: Recovery Rating Criteria For Speculative-Grade Corporate Issuers, Dec. 7, 2016
oCriteria | Corporates | Recovery: Methodology: Jurisdiction Ranking Assessments, Jan. 20, 2016
oCriteria | Corporates | General: Methodology And Assumptions: Liquidity Descriptors For Global Corporate Issuers, Dec. 16, 2014
oCriteria | Corporates | General: Corporate Methodology, Nov. 19, 2013
oGeneral Criteria: Country Risk Assessment Methodology And Assumptions, Nov. 19, 2013
oGeneral Criteria: Methodology: Industry Risk, Nov. 19, 2013
oGeneral Criteria: Methodology: Management And Governance Credit Factors For Corporate Entities, Nov. 13, 2012
oGeneral Criteria: Principles Of Credit Ratings, Feb. 16, 2011
Related Research
oEurope's 2021 Air Passenger Traffic Likely To Stall At 30%-50% Of 2019 Level, Feb. 18, 2021
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