United Airlines Holdings Inc. Downgraded To ‘BB-’ As COVID-19 Fears Spark Steep Demand Decline; On CreditWatch Negative

  • With the steep decline in airline bookings due to the coronavirus outbreak, United Airlines Holdings Inc.'s revenues and cash flow will be sharply lower than we previously expected, resulting in much weaker credit metrics in 2020 relative to 2019 and to our previous expectations.
  • United is taking various steps in response, including capacity reductions, cost savings, and liquidity initiatives, but we believe these will be insufficient to offset lower revenues.
  • As of now, we expect traffic to begin to recover in late 2020, but any delay will prolong weakness in credit metrics.
  • We are revising our liquidity assessment to adequate from strong based on the company's expected sharply reduced cash flow generation.
  • We are lowering all ratings on United, including the issuer credit rating to 'BB-' from 'BB', and placing them on CreditWatch with negative implications.
  • We are also revising our recovery rating on United's unsecured debt to a '4' from a '3'.
  • We will resolve the CreditWatch as we learn more about the timing and strength of air traffic recovery, and its impact on United's liquidity.
NEW YORK (S&P Global Ratings) March 25, 2020--S&P Global Ratings today took the rating actions listed above. We expect United's credit metrics to weaken sharply in 2020 from previous expectations due to the impact of COVID-19. While the company is reducing capacity and some associated costs, and will benefit from the steep decline in oil prices, we expect much weaker traffic to more than offset these benefits. We expect passenger traffic to begin to recover later this year, continuing into 2021.
A sharp decline in cash generation will weaken liquidity. We are revising our assessment of liquidity due primarily to our expectation of sharply lower levels of cash generation over the next 12 months; we expect sources to cover uses by about 1.3x over this period. As of March 9, 2020, the company had approximately $8 billion of liquidity, composed of about $6 billion of cash and short term investments, and revolver capacity. This includes the proceeds of a recently arranged and funded 364-day $2 billion secured term loan. It also has $20 billion of unencumbered assets, and has suspended share repurchases. The only covenant in its facilities is the requirement to maintain $2 billion of liquidity. We have not included any potential sources of additional liquidity that are not yet committed, including the sale of frequent flyer miles, secured financing, or government aid, although the company will likely be able to arrange some of these.
We expect to resolve the CreditWatch as we learn more about the impact of the coronavirus on United's financial position. We would likely lower ratings if air traffic recovery is longer than or weaker than expected, resulting in funds from operations to debt near or below 12% on a sustained basis, resulting in weaker than expected liquidity.
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