Fitch Ratings has affirmed the Issuer Default Rating (IDR) of US Airways Group, Inc. (NYSE: LCC) at 'CCC'. Fitch has also made the following revisions to LCC's issue ratings:
--Senior secured credit facility rating revised to 'B+/RR1' from 'B/RR1';
--Senior unsecured rating revised to 'C/RR6' from 'CC/RR6'.
Along with the revision of LCC's senior unsecured rating, Fitch has assigned a rating of 'C/RR6' to the company's new 7.25% senior unsecured convertible notes. The new notes mature in 2014 and have an initial conversion price of approximately $4.57 per share. Proceeds from the new notes will be used for general corporate purposes. Fitch no longer has a Rating Outlook on LCC. LCC's Rating Outlook had been 'Negative.'
LCC's ratings reflect ongoing concern regarding the airline's liquidity position over the medium term, especially given the potential for prolonged weakness in demand driven by the global recession. In addition, with a relatively large stream of new aircraft deliveries due over the next several years, most of which are likely to be financed, cash obligations tied to aircraft debt service requirements are expected to rise. The steep decline in jet fuel costs has helped to offset much of the recent revenue decline, however, and near-term liquidity will be bolstered by the proceeds from the new convertible note offering, as well as cash obtained from the sale of 15.2 million shares of common stock, which was announced concurrently with the new note offering. Combined, the note and share offerings will provide LCC with an estimated $203 million in additional near-term liquidity after underwriting discounts and offering expenses.
Along with other U.S. airlines, LCC reported a sharp decline in unit revenue in the first quarter of 2009 as demand fell with the weakening of the U.S. economy. Consolidated passenger revenue per available seat mile (PRASM) declined by 11% year-over-year, although total revenue per available seat mile (RASM) declined at a lower rate, primarily due to growth in ancillary revenues tied to various new fees. Although April passenger loads appeared to suggest a moderating of demand pressure, Fitch attributes much of the relative load factor strength to the change in Easter to April this year versus March last year, and, although load factors were generally strong, yields appeared to be much lower year-over-year, suggesting airlines continue to feel pressure to use lower fares to stimulate demand.
Although liquidity continues to be somewhat tight, concerns over LCC's near-term cash position and headroom above its bank facility cash covenant have been mitigated somewhat by the new note and share issuance, as well as the airline's ability to raise $115 million in additional debt capital during the first quarter of this year. These earlier proceeds were derived from secured financings involving spare parts and landing slots, as well as a loan from an airline that operates as a US Airways Express partner. Total cash and equivalents stood at $2.1 billion on March 31, 2009, with $1.3 billion of that amount classified as unrestricted. As LCC does not have access to a revolving credit facility, its liquidity is derived entirely from its available cash and cash equivalents.
LCC's projected non-aircraft cash capital spending is estimated at $180 million in 2009, and debt maturities over the medium term are relatively light. This, along with the share sale and new financings, will provide LCC with the ability to shore up liquidity somewhat over time, particularly if the revenue environment strengthens moving into next year. However, the airline still needs to complete the financing for a portion of the Airbus S.A.S. (Airbus) aircraft deliveries scheduled for 2009. While committed financing is in place for all of the narrowbody aircraft slated for delivery in 2009, LCC has not yet reached final deals to fund the five A330 widebodies scheduled to enter the fleet this year. Management appears optimistic, however, about its ability to reach a deal with Airbus for financings on the two A330s arriving in May and June. For the remaining three A330s to be delivered this year, some alternative capital source, including the potential for a sale-leaseback, may be used.
LCC's Rating Outlook could be revised to Stable in the near to medium term if an improving economy drives a strengthening in the revenue environment and improvement in the airline's ability to generate sustained positive free cash flow. However, a concomitant rise in oil prices potentially would offset much of the revenue benefit. On the other hand, LCC's IDR could be downgraded to 'CC' if the recession proves to be longer and deeper than currently projected, which could drive demand down further and result in increased liquidity pressure going into the seasonally weak fall and winter periods. The Recovery Rating (RR) of 'RR1' reflects expectations for a recovery of 90% or more for LCC's secured bank credit facility in a distressed scenario. In addition, the RR of 'RR6' on LCC's senior unsecured obligations reflects expectations for a recovery of 10% or less in a distressed scenario.
The revisions to LCC's issue ratings follow recent changes to Fitch's ratings definitions. Fitch's updated ratings definitions specify that issuances with an RR of 'RR6' from an issuer with an IDR of 'CCC' are assigned a rating of 'C'. Prior to the update of the ratings definitions, issuances with a recovery rating of 'RR6' from an issuer with an IDR of 'CCC' could be assigned a rating of either 'CC' or 'C'. In addition the updated ratings definitions specify that issuances with an RR of 'RR1' from an issuer with a 'CCC' IDR are rated 'B+'. The prior ratings definitions specified that such issuances would be rated 'B'. For more information about Fitch's updated ratings definitions, see the Fitch Criteria Report 'Revisions to Ratings Definitions - March 2009' dated March 3, 2009, which is available on the Fitch web site at www.fitchratings.com.
Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site.
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