Fitch Cuts GOL Linhas (GOL) IDRS to 'CCC'; Sees Weakening Results Amid Brazil's Macro Environment

Fitch Ratings has downgraded the ratings for Gol Linhas Aereas Inteligentes S.A. (NYSE: GOL) and its fully owned subsidiaries as follows:

Gol Linhas Aereas Inteligentes S.A. (GOL):
--Long-term foreign and local currency Issuer Default Ratings (IDRs) to 'CCC' from 'B-';
--Long-term national rating to 'CCC(bra)' from 'BBB-(bra)';
--USD200 million perpetual bonds to 'CCC-/RR5' from 'B-/RR4'.

VRG Linhas Aereas S.A. (VRG):
--Long-term foreign and local currency IDRs to 'CCC' from 'B-;
--Long-term national rating to 'CCC(bra)' from 'BBB-(bra)';

GOL Finance, a company incorporated with limited liability in the Cayman Islands:
--USD225 million (USD84 million outstanding) of senior unsecured notes due 2017 to 'CCC-/RR5' from 'B-/RR4';
--USD300 million (USD154 million outstanding) of senior unsecured notes due 2020 to 'CCC-/RR5' from 'B-/RR4'.

GOL LuxCo S.A.:
--USD200 million (USD35 million outstanding) of senior unsecured notes due 2023 to 'CCC-/RR5' from 'B-/RR4';
--USD325 million of senior unsecured notes due 2022 to 'CCC-/RR5' from 'B-/RR4'.

The downgrades reflect expectations of continued deterioration in GOL's credit profile driven primarily by weak operational results under Brazil's macro and business environment. Fitch considers trends in GOL's critical areas such as net revenues, cost expenses, and capital expenditures (capex) will lead to negative free cash flow (FCF) generation and liquidity deterioration during 2016.

GOL's principal credit risk is demand deterioration in Brazil, with negative trends observed in traffic and yields during the last months of 2015 continuing and worsening in 2016. Absent capital injections, Fitch views GOL's credit risk as substantial and a default or debt restructuring scenario occurring in the next 12-24 months as a real possibility.

The 'CCC-/RR5' rating of the company's unsecured public debt reflects below-average recovery prospects in the event of a default, due to the subordination of the unsecured debt to secured debt related to aircraft finance.

KEY RATING DRIVERS

Negative Trend in Revenues and Expenses:

The deterioration in Brazil's economic scenario is expected to impact the company's top line through the weakening of key variables such as total transported passengers, revenue per kilometer (RPK) and yield levels in 2016. The devaluation of the Brazilian real against the U.S. dollar narrowed GOL's capacity to benefit from lower oil prices in 2015. Fitch believes the company's operating cost per available seat kilometer (CASK) excluding fuel expenses will continue its upward trend in 2016. It will be difficult for the company to maintain expenses such as salaries and aircraft rent at current levels due to likely upward pressure on these expense lines from inflation and exchange rate trends.

Expectations on 2016 Operational Margin Revised:

In 2016, Fitch expects GOL to have a negative EBIT margin of around 3.5%. This view is supported by prospects of GOL's weakening trend in net revenues and limited capacity to keep its costs under control. GOL's operational results are highly correlated with the domestic economy. The company's business model has limited product and geographic diversification as it is primarily oriented toward Brazil's domestic passenger market. Fitch revised its Brazil growth forecasts for 2016 to negative 2.5%, with a mild recovery possible in 2017. The company's FX exposure is high. GOL generates about 90% of its revenue in Brazilian reals, while about 50% of its total costs and 80% of its total debt are denominated in U.S. dollars.

Liquidity under Pressure, High Leverage:

The company's readily available cash, measured as total cash plus marketable securities, was BRL2.2 billion as of Sept. 30, 2015. GOL's liquidity position as of Sept. 30, 2015 represents 22% of the company's LTM September 2015 revenue. GOL's 2016 FCF is expected to be negative, with an FCF margin of around negative 10% resulting in a material reduction of its cash position. GOL's gross adjusted leverage (measured as total gross adjusted debt/EBITDAR ratio) is forecast to be around 13x by year-end 2015. Further increase in GOL's gross adjusted leverage, primarily driven by weaker operational performance, is anticipated during 2016.

Capacity Reduction Key Factor in 2016:

Fitch expects GOL to reduce its total capacity, measured in available seat kilometers (ASK), during 2016 to high-single-digit levels. The company's 2016 guidance indicates a negative 4%-6% variation in capacity in Brazil's domestic market during the first half of the year. The company's capex during the first nine months of 2015 totaled BRL528 million. GOL has announced several measures for 2016, including a decline in capacity, adjustments in its aircraft delivery schedule and the sublease of some aircraft, which, if executed, should be helpful in sustaining the company's liquidity. Its capacity to manage critical areas such as traffic, yield environment, costs, and capex levels could help it to minimize cash burn during 2016.

KEY ASSUMPTIONS

Fitch's key assumptions within the rating case for GOL's ratings include:

-- 2016 consolidated RPK declines of around 3.5%;
-- 2016 consolidated ASK declines in the 5% to 6% range;
-- 2016 EBIT margin negative of around 3.5%;
-- 2016 FCF margin negative of around 10%;
-- Capital expenditure levels below BRL200 million in 2016;
-- Short-term debt consistently below BRL1.75 billion;
-- Interest coverage, measured as EBITDA/ gross interest expenses ratio, below 0.3x in 2016;
-- Gross adjusted financial leverage (total adjusted debt/EBITDAR) at levels around 15x by the end of 2016.

RATING SENSITIVITIES

Negative Rating Action: Future actions that may individually or collectively cause Fitch to take a negative rating action include:

--Weaker than expected operational performance in 2016 causing EBIT margin to be notably below Fitch's expectations;
--2016 FCF margin persistently below negative 13%;
--Readily available cash, measured as total cash plus marketable securities, consistently below 10% of the company's annual revenue;
-- Increase in short-term debt notably above levels incorporated in Fitch's expectations

Positive Rating Action: Fitch could consider a positive rating action if GOL generates operational and FCF margins consistently above than those levels incorporated in the ratings, resulting in lower financial adjusted gross leverage while keeping current liquidity profile.

LIQUIDITY

The company's readily available cash, measured as total cash plus marketable securities, was BRL2.2 billion as of Sept. 30, 2015. GOL's liquidity position as of Sept. 30, 2015 represents 22% of the company's LTM September 2015 revenue. The company's exposure to Venezuela is estimated at BRL433 million, which is excluded from Fitch's readily available cash calculation as of Sept. 30, 2015. Fitch considers trends in GOL's critical areas such as net revenues, cost expenses, and capex will result in negative FCF generation and liquidity deterioration during 2016.

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