June 19, 2008
Fitch Downgrades GOL’s IDRs to ‘BB’
Fitch has downgraded the following credit ratings of Gol Linhas Aereas Inteligentes S .A (GOL):
--Foreign and Local Currency long-term Issuer Default Ratings (IDRs) to 'BB' from 'BB+';
--USD200 million of perpetual notes to 'BB' from 'BB+;
--USD200 million seniors note due to 2017 to 'BB' from 'BB+;
--Long-term National rating to 'A+(bra)' from 'AA-(bra).
The Rating Outlook has been revised to Negative.
GOL ratings downgrades reflect the deterioration of the company's credit profile, as well as the reduction in its historical solid liquidity position. The Brazilian airline sector problems experienced in 2007 coupled with competition, losses from recently acquired VRG Linhas Aereas S.A (VRG) and rising fuel prices have resulted in negative pressure in GOL's performance. The negative outlook reflects Fitch's concerns regarding the challenges that the company is expected to face in the near-term to turn VRG into a positive cash flow generator while implementing countermeasures to mitigate cost pressures due to higher oil prices. In order to maintain its current ratings, the company will need to improve its operating performance and improve its profitability in order to more adequately align GOL's credit ratios with that of the rating category.
GOL's current ratings contemplate Fitch's expectation that the company will continue to maintain a competitive cost structure vis-a-vis the global industry and its significant market share position in the Brazilian airline sector. The ratings also incorporate the company's exposure to fuel cost volatility and other industry-related risks, such as revenue volatility, high correlation with the domestic economy, high operating leverage and competitive threats.
Management's expectation of strengthening its business with the acquisition of Varig has yet to materialize including to have VRG achieve positive earnings. Restrictions at Congonhas Airport, lower than expected feeder traffic on long-haul international route to Europe, high fuel prices, the lack of approval from the Brazilian anti-trust authorities for the integration of the two companies and the still ongoing replacement of VRG's less fuel efficient 737-300s and 767-300s with more efficient aircrafts frustrated management's initial objectives at the time of the acquisition.
In 2008, the escalation of oil prices is expected to pressure more intensely the cost structure of the airlines companies globally and Brazil will not be an exception. GOL's ability to reduce fuel consumption through more efficient aircrafts, operate efficient hedge instruments and pass-through higher costs to customers will be the predominant factors for improved profitability and credit metrics. Now that the company reports that VRG's CASK have recently reached the level of GOL's, for the success of the operations acquired an increase in yields and low factor will be key for VRG's profitability.
Recent measures taken by GOL in the strategic repositioning of VRG, continued growth of demand in the Brazilian airline sector and a more rational environment in terms of competition could favor a moderate recovery in GOL's profitability. Margin recovery, increased cash generation, preservation of liquidity and improvements in its main credit metrics will be fundamental to avoid additional rating downgrade.
During the past 15 months an imbalance between supply and demand impacted consolidated GOL's load factors and the strong competitive environment pressured its yields, translating to a fall in margins and cash generation. Besides the difficulties faced by the global and Brazilian airline industry, the growth in operations with the acquisition of VRG impacted substantially GOL's historical profitability track-record. In 2007, flight delays, cancellations and restrictions in one of Brazil's most important airports (Congonhas) restricted GOL's ability to maximize aircraft utilization and the advantages of operating with a much interconnected air transportation network. The spread between RASK and CASK was a negative BRL0.1 in 2007 and remained a negative BRL0.2 in the first quarter of 2008, compared with a historic average of BRL4,1 up to 2006.
In 2007, cash generation measured by EBITDAR totaled BRL600 million compared with BRL985 million in 2006, while Funds From Operations (FFO) decreased to BRL21 million in 2007 versus BRL583 million in 2006. GOL continued to report weak performance during the first quarter of 2008. For the 12 months ended March 31, 2008, EBITDAR was BRL565 million and FFO was a negative BRL80 million. During this period, the company reported EBITDAR margin of 10.2% compared with 12.1% in 2007 and very robust figures of 25.9% and 29.5%, respectively in 2006 and 2005.
GOL's liquidity position has deteriorated somewhat in the last 18 months but remains satisfactory. Cash and marketable securities were equivalent to BRL 1.0 billion at the end of March 2008, reaching 19% of its total revenue, compared with a historical level close to 35%. The company's iquidity position still represents 2.5 times (x) its short-term obligations. Fitch expects that GOL will preserve its liquidity at least close to its current level in order to mitigate short-term risks and sector volatility. Managements considers that the company has access to additionally liquidity with the discount of its large receivables portfolio (BRL 354 million), bank credit lines not yet drawn (some BRL 550 million), and the replacement of aircraft prepayments with letters of credit.
The company's current credit metrics remain weak for the BB rating category. For the last-twelve-months ended March 31, 2008, the company recorded an adjusted total-debt-to-EBITDAR ratio of 10.5x, adjusted net debt-to-EBITDAR of 8.7x. At the end of March, the company registered adjusted total debt of BRL5.9 billion, a growth of 92% compared to 2006 due to aircraft fleet expansion. Around BRL4.4 billion consists of aircraft lease obligations. The company's principal debts are perpetual bonds (BRL 345 million), bonds due 2017 (BRL 388 million) and pre-delivery deposits (BRL 455 million).
GOL is a holding company that controls a low cost airline, GOL Transportes Aereos S.A. (GTA), and VRG, providing frequent service on routes linking the main cities of Brazil and South America. In May 2008, GTA operated 78 Boeing 737 aircrafts with an average age of 6.8 years, and VRG, 32 aircrafts (21 Boeing 737s and 11 Boeing 767 ) with an average age of 13 years.