(Bloomberg) -- Azul SA’s credit score was cut one notch by S&P Global Ratings, which called the airline’s agreement with bondholders for additional financing a distressed transaction.
S&P downgraded the Brazilian carrier to CC from CCC+ with a negative outlook, according to a statement released Wednesday.
Azul inked a deal with its creditors this week for as much as $500 million in new senior secured debt, with $150 million to be provided initially and $250 million by the end of the year. Another $100 million could be unlocked at a later date, the company said in a regulatory filing.
“We view this transaction, once completed, as tantamount to default,” S&P said. “While the exchange will be at par, with no initial maturity extension or change in coupons, we believe the transaction is distressed and creditors will receive less than originally promised.”
The negative outlook signals that S&P will lower Azul’s credit rating to selective default if the deal closes under the current terms, the ratings company added.
Azul is the only one of Brazil’s three dominant air carriers to have avoided Chapter 11 since the Covid-19 pandemic upended the industry. But it has struggled to shore up its balance sheet and manage the impact of a weak Brazilian currency, even after renegotiating with aircraft lessors and pushing back debt maturities through swap transactions.
The agreement with bondholders eases some obligations the carrier has with lessors and parts suppliers in the next 18 months, which should improve Azul’s cash flow by more than $150 million, according to the company.
The parties agreed on a “collaborative effort” to improve cash flow by $100 million per year. If that goal is reached, as much as $800 million of existing debt may be converted into shares, according to the filing.
Shares, which rallied after the deal was announced, trimmed gains after the downgrade to trade for 5.84 reais.
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