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Investing.com -- Fitch Ratings has lowered the Long-Term Foreign and Local Currency Issuer Default Ratings (IDRs) for Azul S.A. to ’CCC-’ from ’ CCC (WA:CCCP)’ on Tuesday. The National Scale Rating was also downgraded to ’CCC-(bra)’ from ’CCC(bra)’. Azul Secured Finance LLP’s senior secured notes and Azul Investments LLP’s unsecured notes were similarly downgraded.
The downgrades come as Azul grapples with limited financial flexibility and struggles to access liquidity outside its ongoing debt renegotiations with existing bondholders. Despite operational improvements, Azul has faced difficulties securing new sources of liquidity at more reasonable terms, which were crucial to funding its negative free cash flow in the first half of 2025.
Azul’s rating downgrade is largely due to its inability to secure necessary financing to enhance liquidity and support negative free cash flow during the first half of 2025. The company aimed to raise $200 million through a follow-on equity issuance as part of a debt restructuring plan, which included a final conversion of 12.5% of its debt. However, Azul has been unable to access relevant credit lines, including those from ABGF (Agencia Brasileira Gestora de Fundos Garantidores e Garantias), to improve its overall liquidity.
Azul has secured short-term financing of approximately BRL600 million from existing bondholders to address the expected cash burn during this first half of 2025. These proposed notes, secured by certain credit and debit card receivables generated by its passenger airline business, have a six-month maturity and are prepayable if Azul receives any public-backed financing.
Despite expected improvements in operating cash flow, Azul’s high interest and rental expenses remain a threat to its free cash flow generation in the immediate term. The recent decline in fuel prices will likely have a positive impact on results for the second half of the year.
Compared to its regional peers, Azul is in a weaker position due to its limited geographic diversification, higher operating leverage, and weaker financial flexibility. In contrast to LATAM Airlines (NYSE:LTM) Group S.A. (BB/Positive) and Avianca Group International Limited (B/Stable), Azul has not completed a debt haircut as part of its post-pandemic restructuring.
Fitch’s base case for 2025 and 2026 includes an increase in ASK by 6% and 11%, respectively, and an increase in RPK by 6% and 10%, respectively. Load factors are expected to be around 80%-81% during 2025 and 2026, with adjusted EBITDAR margins of around 30%-32% in 2025 and 2026.
In the event of a bankruptcy, Fitch assumes that Azul would be reorganized rather than liquidated. The recovery analysis reflects a 10% administrative claim and a going concern EBITDA of BRL2.5 billion.
A downgrade could occur if Fitch believes that a default or default-like process appears probable or has begun, with an announcement of debt restructuring or refinancing with weaker terms to creditors. Conversely, an upgrade of Azul’s ratings is unlikely until the company addresses its short-term refinancing needs and liquidity concerns.
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