Fitch Rates Air Canada's Proposed Senior Secured Notes 'BB-/RR2'

  Fitch Rates Air Canada's Proposed Senior Secured Notes 'BB-/RR2'

Business Wire

NEW YORK -- June 25, 2013

Fitch Ratings has assigned ratings of 'BB-/RR2' to Air Canada's (AC) proposed
CDN$300 million senior secured notes. The Issuer Default Rating (IDR) for Air
Canada (AC) remains unchanged at 'B' with a Positive Outlook. A full rating
list is shown at the end of this release.

Proceeds from the transaction, along with the proceeds from the proposed US$1
billion term loan facility announced last week (also rated 'BB-/RR2'), will be
used to fund a tender for AC's existing $900 million first-lien and $200
million second-lien high yield notes scheduled to mature in 2015 and 2016,
respectively. The existing notes are also callable. The new notes will feature
a six-year maturity, the same as the proposed term loan. Last week AC also
announced a new $100 million senior secured revolving credit facility
('BB-/RR2') which will have a four-year maturity.

The transaction will extend the company's largest debt maturities out to 2019,
which Fitch believes is beyond the expected peak in AC's capital spending for
new aircraft. The new notes and credit facilities will also likely feature
significantly lower interest rates than the outstanding high yield notes. The
transaction could also augment AC's liquidity.

The notes, along with the credit facilities, will be secured by a first
priority lien on AC's Pacific route authorities, accounts receivable, certain
real estate, spare engines, ground equipment, and slots at LaGuardia,
Heathrow, and Washington-Reagan. This is the same collateral pool that secures
AC's existing secured notes, with the addition of 10 extra spare engines.

KEY RATING DRIVERS

The 'BB-/RR2' rating is driven by Fitch's recovery analysis, which distributes
an estimate of AC's distressed enterprise value to various classes of debt
based on a going-concern assumption. The 'RR2' rating indicates Fitch's
expectation that the secured note holders would receive superior recovery of
71%-90% of principal in a distressed scenario. Fitch also performed a recovery
analysis based on a liquidation scenario in which appraised values of the
collateral were stressed. This analysis supported the 'RR2' result in the
going-concern analysis. Per Fitch's recovery methodology, an 'RR2' rating is
notched up two levels from the underlying IDR.

Ratings on the new notes and secured credit facilities are one notch lower
than Fitch's rating for AC's existing first lien high yield notes. The
differential is driven by the increase in the total amount of debt outstanding
($300 million with the revolving credit facility) compared to a smaller
increase in the collateral pool. Recovery prospects for the 1st lien holders
are also diluted by the higher amount of first lien debt being raised compared
to the existing notes which included $200 million in second lien debt.

RATING SENSITIVITIES

The secured note ratings are tied to AC's IDR and the collateral securing the
notes. Fitch could consider a negative rating action on the notes if there
were a significant devaluation of the collateral or a downgrade of AC's IDR. A
positive rating action on the notes could follow an upgrade of AC's IDR.

AC's IDR reflects the company's leveraged balance sheet, adequate liquidity
position and high, but improving, cost structure mitigated by AC's extensive
global network and dominant market positions across all segments. The Rating
Outlook for Air Canada's IDR remains Positive, reflecting the company's
continued efforts to reduce costs, pay down debt, and expand its presence in
international markets.

The ratings of the existing first lien and second lien notes will be withdrawn
after the completion of the tender or if the notes are called.

Fitch has assigned the following ratings:

Air Canada

--CDN$ senior secured notes due 2019 'BB-/RR2'.

Fitch rates Air Canada as follows:

--Long-term IDR 'B';

--Senior secured first-lien debt 'BB/RR1';

--Senior secured second-lien debt 'BB-/RR2'.

The Rating Outlook is Positive.

Additional information is available at 'www.fitchratings.com'

Applicable Criteria and Related Research:

--'Corporate Rating Methodology' (Aug. 8, 2012);

--'Recovery Ratings and Notching Criteria for Nonfinancial Corporate Issuers'
(Nov. 13, 2012).

Applicable Criteria and Related Research:

Corporate Rating Methodology

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=684460

Recovery Ratings and Notching Criteria for Non-Financial Corporate Issuers

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=693773

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=794523

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ON THE FITCH WEBSITE.

Contact:

Fitch Ratings
Primary Analyst
Craig D. Fraser
Managing Director
+1-212-908-0310
Fitch Ratings, Inc.
One State Street Plaza
New York, NY 10010
or
Secondary Analyst
Joe Rohlena, CFA
Associate Director
+1-312-368-3112
or
Committee Chairperson
Sharon Bonelli
Managing Director
+1-212-908-0581
or
Media Relations:
Brian Bertsch, New York, +1 212-908-0549
Email: brian.bertsch@fitchratings.com
 
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