Fitch Ratings has assigned ratings of 'BB-'/'RR2' to
The proposed debt issuance will be secured by WestJet's loyalty program assets and brand intellectual property. The bonds will be pari passu with the term loan announced last week. Proceeds from the issuance will be used to partly refinance the company's existing term loan.
In
Key Rating Drivers
Loyalty Program Debt Rating: WestJet's planned debt issuance will be secured by a priority interest in its WestJet Rewards loyalty program and brand intellectual property. WestJet will act as a parent guarantor, while the notes will be issued by
The 'BB-'/'RR2' rating for the notes is driven by a bespoke recovery analysis. Fitch's recovery analysis is based on a going-concern scenario in which the agency uses an estimated sustainable EBITDA of
Fitch believes the core nature of the collateral represented by the loyalty program and brand IP provide compelling motivation for the airline to affirm its obligations in a bankruptcy scenario. Fitch also expects the value of the collateral to grow over time as WestJet's fleet and topline revenues grow. However, the value of the assets largely rests on WestJet continuing as a going concern. Liquidation of the airline would materially affect the collateral values and weaken recovery.
Solid Recovery in Traffic: Canadian air traffic showed solid momentum in 2023, driving much improved financial results for WestJet. Traffic first rebounded sharply in 2022 after initially lagging the recovery in the
Fitch expects Canadian air traffic growth to slow from its recent pace but to remain positive based on expectations for modest macroeconomic growth, potential improvement in business travel, and positive impacts driven by sizable levels of migration into
Credit Metrics Improving: Fitch calculates WestJet's gross EBITDAR leverage at roughly 5.6x at
Derivation Summary
WestJet's 'B' IDR is two notches below its primary domestic competitor,
Key Assumptions
Rebounding traffic in 2023, leaving total RPMs down in the single digits below 2019 levels;
Traffic continues to grow modestly in 2024 despite softer economic conditions;
Operating margins improve sequentially but remain below pre-pandemic levels through Fitch's forecast period, reflecting higher operating costs and modest assumptions about unit revenues.
Recovery Analysis
The recovery analysis assumes that WestJet would be reorganized as a going concern in bankruptcy rather than liquidated.
Fitch has assumed a 10% administrative claim.
Going-Concern (GC) Approach
Fitch has assumed a going-concern EBITDA of
Fitch's going-concern EBITDA estimate reflects a post-restructuring scenario where margins are structurally impaired, potentially by a weak operating environment, rising costs and competition, or a combination thereof. The EV multiple is reflective of prior airline bankruptcies. An EV multiple of 5.0x EBITDA is applied to the GC EBITDA to calculate a post-reorganization enterprise value. The choice of this multiple considers the historical bankruptcy case study exit multiples for peer companies ranged from 3.1x to 6.8x.
These assumptions lead to an estimated recovery of 'BB-'/'RR2' for the senior secured debt.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive rating action/upgrade:
Total adjusted debt/EBITDAR below 4.5x;
Operating EBITDAR/gross interest + rent above 2x;
EBIT margins sustained in the mid-single digits or higher;
Evidence of increasing financial flexibility, potentially including an increasing base of unencumbered assets.
Factors that could, individually or collectively, lead to negative rating action/downgrade:
Operating EBITDAR/gross interest + rent toward 1.5x;
Total adjusted debt/EBITDAR sustained above 5.5x;
Heightened liquidity risks, including cash + revolver availability falling toward
Liquidity and Debt Structure
Solid Liquidity: Fitch views Westjet's liquidity as supportive. The company ended the third quarter with
Issuer Profile
ESG Considerations
The highest level of ESG credit relevance is a score of '3', unless otherwise disclosed in this section. A score of '3' 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. Fitch's ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. For more information on Fitch's ESG Relevance Scores, visit https://www.fitchratings.com/topics/esg/products#esg-relevance-scores.
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