Fitch Ratings has downgraded GOL Linhas Aereas Inteligentes S.A.'s (GOL) Long-Term Foreign and Local Currency Issuer Default Ratings (IDRs) to 'C' from 'B-'/Negative Outlook.
In addition, Fitch has downgraded GOL Finance Inc.'s unsecured bonds to 'C' from 'B-'/'RR4', as well as GOL's Long-Term National Scale rating to 'C(bra)' from 'BB+(bra)'/Negative Outlook.
The downgrades follow GOL's announcement of a new financing commitment from Abra Group Limited, a new holding company established to control the operations of GOL and Avianca Group. Fitch considers the new financing to be a distressed debt exchange (DDE) as per its criteria. The proposed refinancing would result in a material reduction in terms of structural subordination and through the elimination of some restrictive covenants for bondholders that do not accept the deal.
The transaction includes different levels of haircuts for the company's outstanding bonds, more in line with current market price trends, and is contingent upon minimum participation thresholds and exit consents to eliminate covenants.
Key Rating Drivers
Transaction Qualifies as DDE: The financing commitment will constitute a DDE under Fitch's criteria if approved, as bondholders that do not accept the deal would face a material reduction in the terms of their existing notes due to the elimination of some restrictive covenants as well as structural subordination. Bonds from the Ad-Hoc Group will be offered the following prices: 60 cents for the notes due in 2024 and 2025; 73 cents for the 2026 notes (capped at USD326 million face value); and 50 cents for its perpetual notes.
The proposed prices for creditors outside of the Ad-Hoc Group are as follows: 49 cents plus 5 for 2024 bondholders joining the agreement within 10 days; 49 cents plus 5 for 2025 bondholders joining the agreement within 10 days; 55 cents plus 5 for 2026 bondholders joining the agreement within 10 days; and 35 cents plus 5 cents for perpetual bond holders who join the Support Agreement within 10 days of this announcement. GOL's total outstanding debt per issuances are USD425 million senior exchangeable notes due 2024, USD650 million for the unsecured notes due 2025, USD650 million for the 2026 notes and USD154 million for the perpetual notes.
Transaction Overview: GOL informed the market on February 7, 2023 that the Abra Group had obtained commitments that contemplate, upon closing, an investment into GOL through senior secured notes and an exchangeable senior secured notes private placement. This issuance will be secured by the intellectual property and brand of Smiles, which is GOL's loyalty program, and a pari passu lien on the intellectual property, brand and spare parts of GOL. Third party appraisers have valued this collateral at USD3.7 billion and USD1.5 billion, respectively. A portion of the commitment comes from members of an Ad-Hoc Group of secured and unsecured GOL bondholders, who entered into the support agreement.
New Issuance: Fitch expects GOL to issue senior secured notes (SSN) due in 2028 of not less than USD1 billion to Abra. The holding company has committed to invest from time to time up to approximately USD400 million of cash in GOL that shall be used for general corporate purposes, fleet modernization and additional liability management. Additionally, the transaction incorporates the cancelation of at least USD680 million of GOL bonds that would be delivered under the transactions. Following closing, Abra will be GOL's largest secured creditor while the GOL SSNs due 2028 are outstanding.
Closing Conditions: The closing of the transactions is conditioned upon, among other things, the implementation of the corporate reorganization related to Abra and the Ad-Hoc Group and other GOL bondholders collectively providing a minimum of USD325 million in cash, and delivering no less than 50.1% of the total outstanding GOL SENs due 2024 plus the outstanding GOL SUNs due 2025 (USD539 million face value combined) and delivering no less than a simple majority of the outstanding GOL SSNs.
GOL's IDR will be downgraded to Restricted Default (RD) if the proposed transaction is successfully completed. Subsequently, Fitch will re-rate GOL's IDRs to a level that is consistent with the company's new capital structure and risk profile. Upon completion, any remaining existing unsecured bonds will likely be upgraded to levels below the new IDR due to lower levels of credit protection and priority.
Operations to Improve in 2023: The benefits related to the elimination of PIS/Confins taxes, a reduction in fuel prices from extremely elevated levels and some improvement in the cost structured are expected to drive improvements in GOL's operating cash flow during 2023. Fitch expects GOL's EBITDA to reach BRL4.4 billion in 2023, which is substantially higher than our projected EBITDA during 2022 of around BRL2.3 billion. The company's performance during 2022 largely reflects the spike in fuel prices, only partially offset by a substantial increase in yields. These figures compare with negative EBITDA during 2020 and 2021.
Derivation Summary
GOL's 'C' rating reflects the company's announcement of a new financing agreement, which Fitch considers to be a distressed debt exchange. The announcement occurs in the context of high refinancing risks and recovery from pandemic-related challenges. The company has a solid market position in the Brazilian airlines domestic market.
Key Assumptions
Pending final terms of the transaction.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive rating action/upgrade:
The completion of the proposed exchange offer will lead to a downgrade of the Long-Term IDRs to 'RD'. The IDRs would be subsequently upgraded to a rating level reflecting the post-DDE credit profile.
Factors that could, individually or collectively, lead to a negative rating action/downgrade:
An uncured payment default on any material financial obligation would lead to a downgrade of the IDRs to 'RD'.
Best/Worst Case Rating Scenario
International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579.
Liquidity and Debt Structure
Limited Financial Flexibility and Weak Cash Position: GOL's short-term maturities totaled BRL3.1 billion as of Sep. 30, 2022, consisting of BRL869 million of financial debt and BRL2.3 billion of leasing obligations. Readily available cash, per Fitch's criteria, was only BRL494 million, and represents a deterioration from June 30 2022 (BRL761 million) and December 2021 (BRL1.1 billion). GOL considers its accounts receivable (BRL951 million) and a secured issuance program as sources of liquidity.
Total debt was BRL23.4 billion composed by BRL12 billion of leasing obligations, BRL9.7 billion cross-border senior notes (BRL1,8 billion in 2024, BRL3.5 billion in 2025 and BRL3.5 billion in 2026), BRL1.1 billion in local debentures with final maturity in 2024 and BRL0.6 billion of aircraft financing.
Issuer Profile
GOL is a leading Brazilian airline, with around 32% market share in the domestic market, per revenue per RPK in 2021. As of YE 2022, GOL's fleet included 144 Boeing 737 aircraft, with 110 NGs and 34 MAXs.
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
ESG Considerations
Gol Linhas Aereas Inteligentes S.A has an ESG Relevance Score of '4' for Management Strategy due to announcement of a corruption case and charges implemented by The Securities and Exchange Commission (SEC) and Department of Justice (DOJ), in a total amount of USD31.9 million, after waivers of USD41.5 million. This has a negative impact on the ratings in conjunction with other factors.
Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg
GOL LINHAS AÉREAS INTELIGENTES S.A. 
