Fitch Ratings - Rio de Janeiro - 21 Mar 2023: Fitch Ratings has downgraded GOL Linhas Aereas Inteligentes S.A.'s (GOL) Long-Term Foreign and Local Currency Issuer Default Ratings (IDRs) to 'RD' from 'C', following is debt restructuring which Fitch considered to be a distressed debt exchange (DDE). Simultaneously, Fitch has upgraded GOL's IDRs to 'CCC+' from 'RD' to reflect its post-restructuring risk profile. In addition, Fitch has downgraded GOL Finance Inc.'s unsecured bonds to 'RD' from 'C', as well as GOL's Long-Term National Scale rating to 'RD(bra)' from 'C(bra)'. At the same time, Fitch has upgraded GOL unsecured bonds to 'CCC'/'RR5' from 'RD', as well as GOL's Long-Term National Scale rating to 'CCC(bra)' from 'RD(bra)'.
KEY RATING DRIVERS
Transaction Qualified as DDE: GOL has completed the issuance of USD1.4 billion senior secured notes due 2028 to Abra Group Limited (Abra), a new holding company established to control the operations of GOL and Avianca Group International Limited (Avianca). GOL contributed with around USD1.077 billion face value of its bonds at a USD312.6 million discount to par (USD764 million) and Abra agreed to disburse, until 2028, additional funds of up to USD451 million. The issuance is secured by first-lien on intellectual property and brand of Smiles (GOL's loyalty program), and a pari passu lien on the intellectual property, brand and spare parts of GOL. Abra has the option to request this secured notes to be replaced by an exchangeable senior secured note due 2028.
The transaction constituted a DDE under Fitch's criteria, as bondholders that accepted the deal had a haircut on its bonds (83% for 2024 bonds, 47% for 2025, 61% for 2026 and 10% for the perpetuals). Bondholders that did not accept the deal also faced material reduction in the terms of their existing notes due to the elimination of some restrictive covenants as well as structural subordination. Excluding leasings, secured debt will represent around 66% of GOL's total debt which compares to 18% before this transaction. GOL's current outstanding issuances, the senior secured notes due 2028 are USD70 million senior exchangeable notes due 2024, USD341 million for the unsecured notes due 2025, USD251 million for the 2026 notes and USD138 million for the perpetual notes.
Increased Financial Flexibility: Despite having no major benefit on capital structure and higher interest rates, the transaction improves GOL's financial flexibility. The company has secured access to new a credit line, reduced refinancing risks for 2024-2026 period and lower interest outflows in the medium term (paid-in-kind interests). GOL has access to USD451 million of new funds, that could be used f general corporate purposes, including debt prepayment, working capital needs or capex. On a pro forma basis, this new credit line enhances GOL's liquidity position and covers financial debt amortizations until mid-2025 (pro forma and excluding leasing payments). During 4Q22, GOL issued USD200 million of secured amortizing notes which were used to extend certain lease deferral obligations by an additional year to 2026 and reduced disbursements during 2023.
Operations to Improve in 2023: The solid passenger traffic levels in Brazil, elimination of PIS/Confins taxes, a reduction in fuel prices and cost structure improvements, including fleet optimization, are expected to continue to drive improvements in GOL's operating cash flow during 2023. Fitch expects GOL's adjusted EBITDA to reach BRL4.6 billion in 2023, which compares with the BRL2.9 billion of 2022. The spike in fuel prices (68%) during 2022 was only partially offset by a substantial increase in yields (47%). The yield management strategy has been supported by pent-up demand following the pandemic and a strong rebound in corporate traffic demand. Brazilian domestic market demand has rebounded strongly, with the passenger traffic during 2022 only 7% lower than pre-pandemic (2019). The rational behavior of the three largest players in the domestic market has been key for the industry recovery. In a scenario of increasing capacity for few players, traffic levels normalization and weaker macroeconomic environment yields are likely to deteriorate during 2023, but Fitch expects it remain at healthy levels.
Capex to Pressure FCF: GOL remains with the challenge to improve operating cash flow generation to cope with the scenario of higher interest rates, its leasings obligations while supports growing capex (ongoing fleet renewal). Per Fitch's calculations, the company generated positive operating cash flow during 4Q22 for the first time since the pandemic. CFFO was positive at BRL252 million, after BRL236 million of interest and BRL731 million of leasings payments in the quarter. For 2023 and 2024, Fitch forecasts GOL's FCF to be negative at BRL1.6 billion and BRL1.1 billion, considering BRL2.5 billion and BRL2.0 billion of capex, respectively. For 2022, FCF was positive at BRL226 million, after BRL857 million of capex. Fitch expects GOL's total and net leverage, per the agency's criteria, to move around 5.9x and 5.3x in 2023 and 5.2x and 4.8x in 2024.
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