Ratings agency Fitch has downgraded the Long-Term Issuer Default Rating (IDR) of Aeroflot, Russia’s largest carrier, to ‘BB-‘ from ‘BB’, with a negative outlook.
The agency says the downgrade reflects both the updated current macroeconomic and global aviation industry expectations, and the weakening of Aeroflot’s business and financial profiles over the next four years.
With the likelihood of a deep global recession in 2020, Fitch’s baseline forecast sees a slump in air travel demand well beyond the on-going restrictions related to the Coronavirus pandemic, and the company is assuming that Aeroflot’s revenue passenger kilometres (RPKs) will recover to its 2019 levels only in 2023. This outlook will leave profit margins and credit metrics weakened compared to the previous rating level.
The agency’s negative outlook reflects the uncertainty surrounding air travel and bears in mind the continuation of social-distancing restrictions and demand recovery. The outlook also incorporates the heightened necessity for Aeroflot to adjust its operational base, its investment programme and its capital structure in a fast-evolving environment. It is estimated that the Russian flag carrier’s liquidity will be drained during 2020, but will nevertheless remain sufficient to sustain operations through the second quarter of 2020 in time for a recovery in the second half of the year.
The Russian Federation is the majority shareholder of Aeroflot Group, with 51.2 per cent direct ownership. In its deliberations, Fitch views Aeroflot’s status, its ownership and control as well as a supporting track record and expectations as strong, as is reflected in Aeroflot’s inclusion in Russia’s list of strategically important enterprises.
Meanwhile, Fitch views the socio-political implications of Aeroflot Group’s default as moderate, since the airline is important for developing connectivity among various regions in Russia and substitution is likely to lead to the temporary disruption of service.
On the plus side, Aeroflot benefits from a significant share of revenue generated in the domestic market, which is expected to recover more quickly than the international flights sector. Overall, the state support factor is responsible for a two-notch uplift in Aeroflot’s ‘BB-‘ rating status.
At the end of 2019, Aeroflot had cash and short-term deposits of RUB26 billion, plus available credit facilities of RUB101 billion, in contrast to short-term debt maturities of RUB83 billion, including RUB71 billion of leases. The group does not pay commitment fees under its credit lines but, given its state ownership, it is expected that funds from banks will be available. “We expect free cash flow to be negative in 2020 due to the impact of the pandemic disruption, which will add to funding requirements,” says the Fitch report.
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