Moody's assigns Ba1 rating to American Airlines' new term loan B
New York, January 17, 2020 -- Moody's Investors Service ("Moody's) assigned a Ba1 senior secured rating to American Airlines, Inc.'s new $1.215 billion Term Loan B due in January 2027. American Airlines Group Inc. ("Parent" and, together with American Airlines, Inc. "American") will guarantee the new loan. The proceeds will fund the repayment of the company's 2014 Term Loan B due in 2021 and transaction expenses. The Ba3 corporate family rating, which is assigned to the Parent and stable outlook on the family are unaffected by this ratings assignment.
The Parent's Ba3 corporate family rating reflects American's scale and competitive position as the world's second largest airline based on revenue, balanced by elevated financial leverage above 5x from a historically aggressive financial policy and an operating margin that continues to trail industry peers. Leverage remains elevated because of the heavy reliance on debt for repurchasing more than $11 billion of its shares while funding the majority of almost $26 billion of capital investment mainly from operating cash flow over the most recent five years. The rating also considers the company's inferior operating margin and weak free cash flow relative to its US legacy airline peers, Delta Air Lines and United Airlines. The success of the company's strategy to grow ancillary revenues, increase fees for premium seating and services and more generally, sustain annual operating margin above 11% will be important drivers of expanding free cash flow that exceeds Moody's expectations. Better than expected free cash flow generation would strengthen the positioning of the rating in the Ba3 rating category, particularly if American was to prioritize debt repayment rather than share repurchases with free cash flow when liquidity exceeds its $7 billion target. Management has stated that excess liquidity above $7 billion will be returned to shareholders.
The term loan will be secured by landing and take-off slots, foreign gate leaseholds and route authorities for American's service to and from London Heathrow and certain other cities in Europe. The appraised value of the collateral, supported by the importance of London Heathrow as a hub, provides significant cushion against the minimum collateral coverage ratio of 1.6x.
The stable outlook reflects our expectation that American will maintain its competitive network, sustain annual operating cash flow of at least $5 billion through 2020 and begin to demonstrate some progress on expanding free cash flow in the next 12 months.
The ratings could be downgraded if: 1) the company continues to emphasize share repurchases rather than begin to reduce funded debt, 2) the EBITDA margin does not strengthen above the 17.4% at December 31, 2018, 3) the aggregate of cash, short-term investments and availability on revolving credit facilities is less than $5.0 billion, 4) unrestricted cash is less than $3.5 billion, or 5) Debt to EBITDA does not decline below 5x, Funds from Operations + Interest to Interest approaches 3x or Retained Cash Flow to Debt does not exceed 15%.
The ratings could face positive pressure if funded debt approaches $15 billion (currently $25 billion), which would reduce Debt to EBITDA below 4x if the company can sustain its run rate EBITDA at or above $8 billion. Funds from Operations + Interest to Interest sustained above 5x and EBITDA margin sustained near 20% could also favorably pressure the rating.
American Airlines Group Inc. is the holding company for American Airlines, Inc. Together with regional partners, operating as American Eagle, the airlines operate an average of nearly 6,800 flights per day to nearly 365 destinations in 61 countries. The company reported revenue of $45.4 billion for the last 12 months ended September 2019.
The principal methodology used in this rating was Passenger Airline Industry published in April 2018. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.
The following rating was assigned:
..Issuer: American Airlines, Inc.
....Senior Secured Bank Credit Facility, Assigned Ba1 (LGD2)