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The actions of the Azul (AZUL4) fall in trading this Wednesday (25), after another downgrade in risk rating. This time the Fitch cut the rating dos IDRs (Issuer Default Ratings), which refer to long-term default in foreign and local currency, from “B-” to “CCC”. The national long-term rating was changed from “BB(bra)” to “CCC(bra)”.
Fitch also downgraded Azul Secured Finance LLP's senior secured notes to 'CCC/RR4' from 'B-/RR4' and Azul Investments LLP's unsecured notes to 'CC/RR6' from 'CCC+/RR5'.
According to the agency, the downgrades reflect Azul's high refinancing risk and weaker cash flow profile, impacted by the depreciation of the real against the dollar.
“Fitch believes the likelihood of the company being able to raise the financing needed to materially improve its capital structure and/or cash flow profile at this time has been reduced, reflecting a credit risk more consistent with a 'CCC' rating.”
Reaching a solution is taking longer than the agency initially expected, in addition to proving less friendly in terms of guarantee package and financial costs, potentially leading to an unsustainable capital structure.
What is impacting Azul?
Fitch comments that the devaluation of the real, the loss of revenue of around 10% in Azul's operations in Rio Grande do Sul and the delay in receiving new aircraft are putting pressure on the generation of operating cash flow during this year.
These factors combined with the company's high interest, rent and capex payments result in negative free cash flow generation.
For the second half of the year, Fitch estimates EBITDA (earnings before interest, taxes, depreciation and amortization) at around R$3.3-5.6 billion, while lease rent, interest and capex should total R$4.1 billion.
Fitch believes that the likelihood of Azul being able to raise the financing needed to fund its cash flow burn, short-term financial debt maturities and restore its lease obligations on sustainable terms has reduced since the last review.
As of June 30, 2024, Azul had R$1.5 billion of short-term debt, with R$1.2 billion maturing in the second half of 2024, and approximately R$1.4 billion of readily available cash, according to the agency's criteria.
“According to Fitch's estimates, the company will not be able to generate sufficient cash flow or have sufficient liquidity to meet these obligations without new money. The safety margin to avoid a default process defined by Fitch has decreased given the pressure on cash flow and the renegotiations still in progress, which is consistent with the 'CCC' rating category.”
Fitch se junta a Moody’s e S&P
At the beginning of the month, the S&P Global Ratings cut its global issuer credit rating of Azul from B- to CCC+, with a negative outlook.
The change takes into account the airline's weaker-than-expected first-half results, widening the operating free cash flow deficit for the year and weakening liquidity.
The agency highlights that the depreciation of the real and the reduction in capacity and income harmed Azul's second-quarter results.
Last week, Azul had its corporate rating downgraded from Caa1 to Caa2 by Moody’s. The outlook for issuers was also changed from positive to negative.
According to the rating agency, the downgrade reflects the weaker results that the company recorded in 2024 and the cash burn resulting, which increased the liquidity risks.