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Last Trade - 13/08/20

Sector
Industrials
Size
Mid Cap
Market Cap £921.9m
Enterprise Value £8.27bn
Revenue £6.92bn
Position in Universe 370th / 1038

Fitch Downgrades Aeroflot to 'BB-'; Outlook Negative

Fri 17th April, 2020 2:23pm
(The following statement was released by the rating agency)


Fitch Ratings-Moscow-April 17: 

Fitch Ratings has downgraded Public Joint Stock Company Aeroflot - Russian 
Airlines's (Aeroflot) Long-Term Issuer Default Rating (IDR) to 'BB-' from 'BB'. 
The Outlook is Negative. A full list of rating actions is available below.

The downgrade reflects our updated macroeconomic and global aviation industry 
expectations and a weakening of Aeroflot's business and financial profiles over 
the next four years. With a deep global recession in 2020 in Fitch's baseline 
forecast hitting air travel demand well beyond the ongoing restrictions related 
to the coronavirus pandemic, we now assume Aeroflot's revenue passenger 
kilometres (RPK) to recover to its 2019 level only in 2023. This will leave 
profit margins and credit metrics weak for the previous rating level.

The Negative Outlook reflects uncertainty around air-travel and 
social-distancing restrictions and demand recovery. It also incorporates the 
heightened risk for Aeroflot to adjust its operational base, investment 
programme and capital structure in a fast-evolving environment. We estimate that 
liquidity will be drained during 2020, but will remain sufficient to sustain 
operations in 2Q20 and recovery from 2H20, assuming substantial measures to 
preserve cash.

Under Fitch's Government-Related Entities (GRE) Rating Criteria, we continue to 
apply a two-notch uplift to the group's standalone credit profile (SCP), which 
we have revised down to 'b' from 'b+'. The group is majority state-owned. Based 
on the overall support and the rating differential between Aeroflot's SCP and 
the Russian Federation (BBB/Stable), the group's rating is capped at three 
notches below the sovereign's.

Key Rating Drivers

Deep Global Recession Scenario: We assume that Aeroflot's RPKs will fall almost 
100% from April to end-June with only marginal domestic flights to remain in 
April before recovering slowly in 2H20 and beyond so that the annual decline is 
about 50% for 2020 versus 2019. We expect RPK to gradually increase to about 
2019 levels by 2022-2023. Our updated rating case reflects our updated Global 
Economic Outlook published on 2 April 2020, in which we project a deep recession 
in 2020 and expect global and European GDP to remain below 2019 levels through 
to 2021 and for airlines to experience a deeper hit due to the pandemic.

Coronavirus to Hurt Airlines Beyond 2021: We expect the recovery of the aviation 
industry to lag the broader economy's. With relaxation of lockdowns and 
social-distancing uncertain, we assume air-travel restrictions, especially on 
international flights, to remain in place well beyond 2H20. This, together with 
the economic slowdown, will affect the propensity to travel beyond 2021. We 
therefore forecast weaker passenger load factors and yields for Aeroflot. We 
believe the recovery of different travel segments will vary, with faster 
recoveries in the domestic segment, which accounted for about 40% of revenue in 
2019, and discretionary travel to remain more vulnerable, in our view.

Defensive Measures Assumed: We assume Aeroflot will reduce operating expenses 
and manage working capital outflows. It has also agreed with VTB Leasing on 
operating and finance lease payments restructuring in 2020. We also assume no 
dividends payments in 2020-2023.

Leverage to Peak in 2020: We expect Aeroflot's passenger numbers, profitability 
and therefore credit metrics to deteriorate substantially compared with our 
previous estimates. This will result in Aeroflot's funds from operations (FFO) 
adjusted gross leverage breaching our negative rating sensitivity for the 
current rating in 2020-2021, before returning close to its threshold in 2022 as 
debt-repayment capacity diminishes on weaker EBITDA and FFO compared with 
pre-pandemic levels.

High FX, Fuel Exposure: Aeroflot continues to be exposed to FX fluctuations as 
around 90% of debt and aircraft leases are denominated in foreign currencies, 
mainly US dollars. This is partially mitigated by over half of its revenue being 
generated in US dollars or euros, or linked to euros, although we expect revenue 
from international flights to be under pressure due to disruptions from the 
pandemic. Aeroflot will benefit from a decline in fuel prices, as it is not 
using fuel hedging, unlike some of its European peers.

Strong State Links: The Russian Federation is the majority shareholder of 
Aeroflot Group, with 51.2% direct ownership. Fitch views status, ownership and 
control as well as support track record and expectations as strong, in 
accordance with its GRE Rating Criteria, also reflecting Aeroflot's inclusion in 
the list of strategically important enterprises in Russia. We expect tangible 
state support for Aeroflot to be forthcoming, if needed. However, extraordinary 
financial support is not included in our updated rating-case forecast.

Socio-Political Importance: 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 temporary disruption in service. The financial implications of 
a default by Aeroflot Group for the sovereign or other GREs are weak, in our 
view.

Derivation Summary

Aeroflot benefits from a significant share of revenue being generated in the 
domestic market, which we expect to recover quicker than international flights. 
Aeroflot has a stronger business profile than GOL Linhas Aereas Inteligentes S.A 
(B/Rating Watch Negative (RWN)) and LATAM Airlines Group S.A. (B+/RWN) in terms 
of scale and diversity of operations, stronger market position and more 
favourable cost position. Aeroflot's 'BB-' rating benefits from a two-notch 
uplift for state support.

Key Assumptions

Fitch revised its rating case to reflect fast-evolving developments around the 
pandemic and our new macroeconomic scenario:

- Russian GDP in the range of -1.4% to 2.2% and CPI growth of 4%-4.7% over 
2020-2023

- RPKs will fall almost 100% from April to end-June with only marginal domestic 
flights to remain in April before recovering slowly in 2H20 and beyond so that 
the annual decline is about 50% for 2020 versus 2019. RPK to gradually increase 
to about 2019 levels by 2022-2023

- Deterioration in load factor to about 70% in 2020 before recovering close to 
2019 levels in 2023

- Oil price of USD35/bbl in 2020, USD45/bbl in 2021, USD53/bbl in 2022 and 
USD55/bbl thereafter

- Cutbacks to capex in 2020-2021

- No dividends payment

- In projections starting from 2020 (and also calculations for 2019 financials) 
we use our new criteria for leases reported under IFRS 16 based on the Corporate 
Rating Criteria from 27 March 2020. Under the new lease criteria FFO adjusted 
gross leverage is lower by about 1.5x than under our previous criteria (based on 
2018 restated financials). 

RATING SENSITIVITIES

Factors That May, Individually or Collectively, Lead to Positive Rating 
Action/Upgrade

- Upgrade: We do not anticipate an upgrade as reflected in the Negative Outlook

- Stable Outlook: A quicker-than-assumed recovery from the market shock 
supporting a sustained credit metric recovery to levels stronger than outlined 
in the negative sensitivities below would allow us to revise the Outlook to 
Stable

Factors That May, Individually or Collectively, Lead to Negative Rating 
Action/Downgrade

- Failure to adapt to changing market conditions with effective mitigation 
measures, prolonged air-travel and social-distancing restrictions, further 
substantial rouble depreciation, a protracted downturn in the Russian economy, 
weaker-than-expected yields or overly ambitious fleet expansion

- FFO adjusted gross leverage above 5.5x and FFO fixed charge cover below 1x on 
a sustained basis

- Weakening of state support

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

Manageable Liquidity: At end-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 we would expect funds from banks to be available. We expect 
free cash flow to be negative in 2020 due to the impact of pandemic disruption, 
which will add to funding requirements.

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

ESG issues are credit neutral or have only a minimal credit impact on the 
entity(ies), either due to their nature or the way in which they are being 
managed by the entity(ies). For more information on Fitch's ESG Relevance 
Scores, visit www.fitchratings.com/esg.

Public Joint Stock Company Aeroflot - Russian Airlines; Long Term Issuer Default 
Rating; Downgrade; BB-; RO:Neg

; Short Term Issuer Default Rating; Affirmed; B

; Local Currency Long Term Issuer Default Rating; Downgrade; BB-; RO:Neg

; Local Currency Short Term Issuer Default Rating; Affirmed; B

----senior unsecured; Long Term Rating; Downgrade; BB-

Contacts: 

Primary Rating Analyst

Oxana Zguralskaya, 

Director

+7 495 956 7099

Fitch Ratings CIS Ltd

Business Centre Light House, 6th Floor 26 Valovaya St.

Moscow 115054

Secondary Rating Analyst

Hugh Shim, CFA

Associate Director

+44 20 3530 1724

Committee Chairperson

Arkadiusz Wicik, CFA

Senior Director

+48 22 338 6286

 

Media Relations: Adrian Simpson, London, Tel: +44 20 3530 1010, Email: 
adrian.simpson@thefitchgroup.com; Julia Belskaya von Tell, Moscow, Tel: +7 495 
956 9908, Email: julia.belskayavontell@fitchratings.com.

Additional information is available on www.fitchratings.com

Applicable Criteria 

Corporate Rating Criteria (pub. 27 Mar 2020) (including rating assumption 
sensitivity)

https://www.fitchratings.com/site/re/10111917

Corporates Notching and Recovery Ratings Criteria (pub. 14 Oct 2019) (including 
rating assumption sensitivity)

https://www.fitchratings.com/site/re/10090792

Government-Related Entities Rating Criteria (pub. 13 Nov 2019) 

https://www.fitchratings.com/site/re/10099139

Sector Navigators-Addendum to the Corporate Rating Criteria (pub. 27 Mar 2020) 

https://www.fitchratings.com/site/re/10112524

Short-Term Ratings Criteria (pub. 06 Mar 2020) 

https://www.fitchratings.com/site/re/10112342

Applicable Model 

Numbers in parentheses accompanying applicable model(s) contain hyperlinks to 
criteria providing description of model(s).

Corporate Monitoring & Forecasting Model (COMFORT Model), v7.9.0

1-https://www.fitchratings.com/site/re/968880

Additional Disclosures 

Dodd-Frank Rating Information Disclosure Form 

https://www.fitchratings.com/site/dodd-frank-disclosure/10118536

Solicitation Status 

https://www.fitchratings.com/site/pr/10118536#solicitation

Endorsement Status

https://www.fitchratings.com/site/pr/10118536#endorsement_status

Endorsement Policy 

https://www.fitchratings.com/regulatory

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