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[smithys2019] 18/3/2020 23:23

Moodys Review.

Their concern is if the grounding extends into Q3. There won’t be much of an economy left if this is still going on by then..

London, 17 March 2020 -- Moody's Investors Service, ("Moody's") has today placed all the ratings of International Consolidated Airlines Group, S.A. (IAG or the company) on review for downgrade. IAG's ratings comprise its Baa3 long-term issuer rating and the Baa3 ratings on its EUR 1 billion senior unsecured notes, divided in EUR 500 million series A bonds due 2023 and EUR 500 million series B bonds due 2027. The outlook has changed to ratings on review from stable.
A full list of affected ratings and entities can be found at the end of this press release.
RATINGS RATIONALE
The rapid and widening spread of the coronavirus outbreak, deteriorating global economic outlook, falling oil prices, and asset price declines are creating a severe and extensive credit shock across many sectors, regions and markets. The combined credit effects of these developments are unprecedented. The passenger airline sector has been one of the sectors most significantly affected by the shock given its exposure to travel restrictions and sensitivity to consumer demand and sentiment. Today's action reflects the impact on IAG of the breadth and severity of the shock, and the broad deterioration in credit quality it has triggered.
The rating action was prompted by the very sharp decline in passenger traffic since the outbreak of coronavirus started during January 2020, which will result in a significant negative free cash flow in 2020, a weakening liquidity profile and a significantly higher leverage. From a regionally contained outbreak the virus has rapidly spread to many different regions severely denting air travel. The International Air Travel Association's (IATA) latest scenario analysis forecasts a decline in passenger numbers of between 11% and 19% for the full year 2020.
Moody's base case assumptions are that the coronavirus pandemic will lead to a period of severe cuts in passenger traffic over at least the next three months with partial or full flight cancellations and aircraft groundings, with all regions affected globally. The base case assumes there is a gradual recovery in passenger volumes starting in the third quarter. However there are high risks of more challenging downside scenarios and the severity and duration of the pandemic and travel restrictions is uncertain. Moody's analysis assumes around a 50% reduction in IAG's passenger traffic in the second quarter and an 18% fall for the full year, whilst also modelling significantly deeper downside cases including a full fleet grounding during the course of Q2.
IAG has responded rapidly to the crisis by cancelling flights to China, other Asian routes, Italy, the US and other regions and instigated cost and cash preservation measures. The travel ban announced by the United States on non-US citizens from 26 European nations will further affect many of IAG's routes. Moody's expects travel restrictions to deepen and the extension of the travel ban to journeys from the UK to US will severely affect routes of British Airways, Plc (Baa3 under review for downgrade), which represented around 68% of IAG's adjusted operating profit in 2019.
Moody's does not expect IAG to benefit materially in 2020 from the lower oil price because it has hedged most of its expected fuel costs during the year at levels at an effective rate of around $600 per metric tonne, compared to the current price of around $420 per metric tonne. Whilst its hedging policy is relatively common across European airlines IAG does not benefit from material fuel price alleviation to the extent available to its US airline peers. Moody's considers that further actions will be required to reduce the cost base, with staff layoffs, voluntary and mandatory unpaid leave and deferrals of aircraft pre-delivery payments and deliveries to support the company through the crisis.
Moody's also anticipates that the airline industry will require continued and further support from regulators, national governments and labour representatives to alleviate pressures on slot allocations, provide indirect or direct financial support and manage airlines' cost bases. Whilst IAG's strong balance sheet means it is in less need of such support, ready access to financial markets may be required in downside scenarios. An extension of slot alleviation beyond the current provisions to June 2020 in Europe is also likely to be important.
LIQUIDITY
IAG had significant levels of liquidity at 12 March 2020 of €9.3 billion, comprising cash and short-term deposits of €7.35 billion as well as undrawn credit lines of around €1.9 billion. With total available funds representing around 36% of revenues IAG is one of the most liquid airlines globally. Under normal market conditions this would be adequate and Moody's considers IAG's liquidity capable of supporting the company for a period of partial or total aircraft grounding in line with base case assumptions. However a more severe downside with extended groundings into Q3 would likely start to pressurize the company's current resources.
Moody's expects IAG to take further actions to strengthen its liquidity and has relatively good fleet flexibility with 197 out of 598 owned aircraft at 31 December 2019 and a substantial unencumbered fleet which could be utilized to generate further funds. The profile and financial metrics of IAG in a post-crisis environment are subject to high uncertainty but Moody's expects that IAG would ultimately be in a position to gain share and recover its financial metrics over time, depending on the severity of the current crisis.
Moody's considers that IAG is more weakly positioned than British Airways, due to the weaker operating performance and lower profitability of the other airlines within the IAG group, including Iberia, Aer Lingus, Vueling and LEVEL. IAG will also need to complete and finance the €1 billion debt-funded acquisition of Air Europa during 2020, which will weaken its financial metrics. In addition the rating of IAG takes into consideration the structural subordination of issuer obligations of the IAG at the holdco level which further weakens its position relative to British Airways. Moody's does not currently notch down the IAG rating from British Airways' Baa3 senior unsecured rating however further material weakening of British Airways' rating could lead to a downgrade of IAG.
The review process will be focusing on (i) the current market situation with a review of current passenger traffic conditions and pre-booking trends for the next few weeks, (ii) the liquidity measures taken by the company and their impact on the company's balance sheet, (iii) other measures being taken by the company to alleviate balance sheet and credit metrics stress.

[spob] 18/3/2020 23:17

Lockdown not working in Italy because many people ignoring it

[milliecusto] 18/3/2020 23:05

Army called in, London being shut down..super

[m1k3y1] 18/3/2020 22:56

Peston

20,000 troops to be used to help the NHS

[smithys2019] 18/3/2020 22:56

I reckon that we will go down the route of recovered victims providing blood plasma donations, which was done during both sars and bird flu to massively cut the recovery time. There are promising results from the use of avichlor antimalarial in reducing the infectiousness. We won’t be waiting for an immunisation prior to lifting the blockade imho, we will need to find licensed and tested generic drugs which act as a treatment for the disease.

IAG took a hammering on its bond rating today. Reason they don’t want to take a government loan is to prevent a downgrade on bonds, meaning that they lose their investment grade on their loans. That will just put more pressure on cash flow.

[smithys2019] 18/3/2020 22:53

Waikenchan, don’t forget Intellectual property and Brand too. It’s an absolute goldmine. I bought in at 225 again, average down to 300 now, admittedly the fall from 430 has been painful to watch but has been a massive learning experience in how not to get in too early (hindsight and all that).

[paa65] 18/3/2020 22:44

My point wasn't about Italy's higher death rate. It was about the lockdown not working. And even if it does slow death rate eventually, how do you ever lift the lockdown without the epidemic surging again?

[montyhedge] 18/3/2020 22:37

23% of Italians over 60 years, I think more vulnerability.

[paa65] 18/3/2020 22:28

From BBC news"Italy still waiting for a sign its lockdown has workedThe dire news from Italy is that despite a lockdown that has been in place for 10 days across the country, the death toll from this virus has continued to rise and rise.It increased by 475 on Wednesday, the biggest in one day since the outbreak began, with 319 of these deaths occuring in the northern region of Lombardy, which has been the worst-affected.Italian doctors had hoped to see infections slowing after a week of lockdown but that hasn't happened. Some say that only after two weeks - believed to be the maximum time period it takes for symptoms to show - will they truly be able to see if the virus's spread has been slowed by the drastic measures taken."

[m1k3y1] 18/3/2020 22:25

the more that are tested, the lower will be the mortality rate, they say.
I don't understand why they have not yet produced a street by street, UK wide map of areas where people have contracted the virus.

[dround87] 18/3/2020 22:03

Christ guys. There was a big jump today because they tested more people! Lots of people already infected. I personally know at least 2 who almost definitely have it and 1 who actually does have it and I don't live in london. 55k is a Conservative estimate IMHO.

[waikenchan] 18/3/2020 21:40

Another 20 / 30 % would be a good margin of safety.

Remember FY19 had 4billion in cash and cash like securities. Now Mcap is valued at cash. Obviously this is a ultra Conservative valuation and it now as simplistic as that as they have other assets - eg planes, equipment.

Suspect the amount of cash will be significantly lower now.

[m1k3y1] 18/3/2020 21:27

They need to prove the theory behind immunity first.
As yet, it remains unproven.

Great shame about Stobart air but I suspect there will be more.

[loganair] 18/3/2020 21:22

Connect Airways, the holding company behind Dublin-based Stobart Air, which operates the Aer Lingus Regional service, has fallen into administration in the UK, the Irish Independent has learned.

The move is linked to the recent collapse of Flybe. UK-based Flybe was also part of Connect Airways.

The administration means that accountancy firm EY now controls Connect and 49pc of Stobart Air. The other 51pc of Stobart Air is owned by its more than 400 staff.

Yesterday, Stobart Group, whose CEO is Warwick Brady, warned investors that it’s evaluating how to manage liabilities it has to Stobart Air.

"Given the current market conditions, additional liquidity is likely to be required and the group is actively reviewing the most appropriate sources of funds to cover the period during which the airport is affected by the Covid-19 virus," the company said.

But with confirmation to the Irish Independent from EY that Connect is in administration, it means Stobart Group is now on the hook for guarantees given in relation to a number of aircraft leases.

A subsidiary of Stobart Group, Propius, engineered a sale and leaseback of eight ATR turborprop aircraft to German firm Goal in 2017. The aircraft are used for the Aer Lingus Regional service. Lease agreements under the deal total $15.4m a year and are for 10 years, it was reported at the time.

There’s an option to terminate the agreement in 2023, although the trading update issued by Stobart Group yesterday suggests that the guarantees could be significantly more material.

The current Aer Lingus Regional franchise agreement Stobart Air has with Aer Lingus ends in 2022.

Propius received $62.7m from the sale of the aircraft, according to reports when the deal was done. However, it’s unclear where those proceeds ultimately ended up following the creation of Connect Airways in 2019.

[smithys2019] 18/3/2020 21:19

If immunity lasts. They know you are still immune after 28 days. They haven’t tested anything past that. That’s why flattening the curve may actually be a very rubbish idea.

[careful] 18/3/2020 21:12

Agreed testing is critical, I was just observing that there seem to be many people who have recovered untested.
they are starting a new test to see if you have had it and are no immune with antibodies.

They will be the new super race, those that have had it cured and immune.
The ultimate qualification.

[smithys2019] 18/3/2020 21:12

Looks like Stobart are next for administration. BA are the only horse in town realistically for UK regional travel.

Feel so sorry for them. Think their boss was on wake up to money about 2 weeks ago, said they had no liquidity problems.

hxxps://www.independent.ie/business/world/stobart-air-holding-company-falls-into-administration-39055641.html

[smithys2019] 18/3/2020 21:08

We have had a doubling of cases in something like 3-4 days. If that were to continue, uk population will be infected by the end of April. Get the impression that London will be hit hard.

[m1k3y1] 18/3/2020 20:53

yes, testing is critical. They are ramping up the testing in the states also.

[careful] 18/3/2020 20:48

Look at the fatalities.
Number of cases depend upon the number of tests.
not much use, more testing=more cases.

Their worst case assumption assumes a doubling every 2 weeks.
Sensational numbers if true.
Doubt it.

[m1k3y1] 18/3/2020 20:41

apparently they are expecting 1000 cases a week.
Saw it on a briefing last two days but haven't got a link, sorry

[smithys2019] 18/3/2020 20:35

Bit of a jump today in new cases over the past few days. If it continues to grow over the next three days, something with the isolation strategy there is not working. We need to start to see more cures over and above the infection rate to know they are getting a grip. 8% of medical staff in Italy now have been infected.

[smithys2019] 18/3/2020 18:42

No, they just pay over 1 billion in income tax and national Insurance per year though. They also contribute significantly to the 2 billion raised in airline passenger duty paid to HMG too.