Azul’s ratings downgraded by Fitch amid debt restructuring

Investing.com -- Fitch Ratings has lowered Azul S.A.’s Long-Term Foreign and Local Currency Issuer Default Ratings (IDRs) to ’D’ from ’CCC-’, along with the National Scale Rating, which has been reduced to ’D(bra)’ from ’CCC-(bra)’ on May 28, 2025. Azul Secured Finance LLP’s senior secured notes were also downgraded to ’C’ with a Recovery Rating of ’RR4’ from ’CCC-’/’RR4’, while Azul Investments LLP’s unsecured notes were confirmed at ’C’/’RR6’.

The downgrade to ’D’ comes after Azul announced the initiation of a debt restructuring process under Chapter 11 in the United States and a corresponding procedure in Brazil. Fitch will reevaluate and re-rate Azul once the airline concludes the administration proceedings and presents its new strategy and restructured financial profile.

Azul stated on May 28, 2025, that it had entered into Restructuring Support Agreements with key stakeholders. These include its existing bondholders, its largest lessor AerCap, which represents the majority of the company’s lease liability, and strategic partners United Airlines, Inc. (BB/Positive) and American Airlines (NASDAQ:AAL), Inc. (B+/Stable). The agreements are aimed at facilitating a full capital structure reorganization process under the Chapter 11 Process in the U.S.

Azul’s restructuring plan aims to enhance its capital structure. The plan already includes a commitment of approximately $1.6 billion in debtor-in-possession (DIP) financing throughout the process, elimination of over $2.0 billion of debt, and contemplates further equity financing of up to $950 million upon emergence. Of the DIP financing amount, $670 million will be used to bolster liquidity. This financing will be addressed through exit debt and includes a $650 million backstopped Equity Rights Offering and up to $300 million in equity from United and American Airlines, subject to the satisfaction of certain conditions.

Azul’s capital structure has become unsustainable due to high interest and rental expenses incurred as a result of multiple restructuring processes since Covid, amid high interest rates in Brazil and foreign exchange volatilities. This has led to a recurring cash flow burn. As of March 31, 2025, Azul’s total debt was BRL35.8 billion as per Fitch’s calculations.

Fitch has downgraded the rating to ’D’ as Azul has voluntarily entered administration. The recovery analysis assumes that Azul would be considered a going concern in bankruptcy and that the company would be reorganized rather than liquidated. Fitch has assumed a 10% administrative claim.

Azul’s going concern EBITDA is BRL2.5 billion, which incorporates the low-end expectations of Azul’s EBITDA post-pandemic, adjusted by lease expenses, and a discount of 20%. The going concern EBITDA estimate reflects Fitch’s view of a sustainable, post-reorganization EBITDA level on which the valuation of the company is based. The enterprise value (EV)/EBITDA multiple applied is 5.5x, reflecting Azul’s strong market position in Brazil.

Fitch applies a waterfall analysis to the post-default EV, based on the relative claims of the debt in the capital structure. The debt waterfall assumptions consider the company’s total debt as of March 31, 2025. These assumptions result in a recovery rate for the first-lien and superpriority secured bonds within the ’RR1’ range and second-lien secured notes within the ’RR2’ range. However, due to the soft cap of Brazil at ’RR4’, Azul’s senior secured notes are rated at ’C’/’RR4’. For the unsecured notes, the recovery is in the ’RR6’ range, resulting in a rating of ’C’/’RR6’.

The company is currently rated ’D’, and therefore, there can be no negative rating action on the IDR. However, Fitch will rate AZUL following its exit from the administration proceedings based on its new strategy and financial profile.

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