Moody's Downgrades GOL Linhas Aereas Inteligentes SA (GOL) to 'Caa1'; Outlook Remains Negative

Moody's Investors Service (Moody's) has downgraded Gol Linhas Aereas Inteligentes S.A.- Gol's (NYSE: GOL) Corporate Family ratings to Caa1 from B3. At the same time, Moody's downgraded to Caa2 from B3 the foreign currency ratings assigned to Gol Finance's perpetual notes and senior notes due in 2017, guaranteed by Gol. The outlook for the those ratings remains negative. Moody's also upgraded the foreign currency rating assigned to Gol LuxCo S.A.'s term loan, guaranteed by Delta Air Lines, Inc. to Baa3 and changed the outlook to stable from positive.

Ratings changed:

Issuer: Gol Linhas Aereas Inteligentes S.A. (Gol)

- Corporate Family Rating: to Caa1 from B3

Outlook: negative

Issuer: Gol Finance

- 7.5% USD 225 million guaranteed senior unsecured notes due 2017: to Caa2 from B3 in the global scale

- 8.75% USD 200 million guaranteed senior unsecured perpetual notes: to Caa2 from B3 in the global scale

Outlook: negative

Issuer: Gol LuxCo S.A.

-- $300 million BACKED senior unsecured term loan due 2020: to Baa3 from Ba3 foreign currency rating

Outlook changed to stable from positive

RATINGS RATIONALE

The downgrades reflect Gol's unsustainable capital structure and insufficient liquidity to support its operations amid increasingly challenging industry dynamics and, at the same time, to address all of its debt service in the next 12 to 18 months. Accordingly, the company will need to rely either on asset sales, a capital increase or a debt restructuring to reduce debt levels that could result in higher than expected losses for the existing unsecured creditors. Moody's believes, however, that Gol's management remains fully committed to finding a solution to its unsustainable capital structure and is vigorously pursuing options to improve liquidity.

The downgrade of the corporate family rating to Caa1 reflects the low likelihood that Gol's operations and credit metrics will recover to a level commensurate with a higher rating in the next 12 to 18 months. The Caa2 rating assigned to Gol Finance's senior unsecured notes are one notch lower than Gol's corporate family ratings to reflect the structural subordination of unsecured creditors to the company's other secured obligations and the limited coverage provided by the company's residual and unencumbered assets in an event of default.

The upgrade of Gol LuxCo's $300 million senior unsecured term loan to Baa3 was prompted by the recent upgrade of the senior unsecured issuer rating of Delta Air Lines, Inc.'s to Baa3 (February 11, 2016). Moody's views the Delta guaranty for this term loan as an effective guaranty of payment of lenders in the entirety of its original promise when due, and not just a guarantee of collection after an event of default. As such, the rating on the term loan is at the same level as Delta's senior unsecured rating and the outlook is stable.

Although we believe that Gol remains well positioned in the Brazilian domestic air passenger market, supported by its strong brand name, large market share and modern operating fleet, the company's ratings are constrained by its weakened credit metrics, namely high leverage, low interest coverage and deteriorated cash flow metrics. Gol's leverage metrics, as measured by the gross debt to lease adjusted EBITDA ratio, reached 9.4 times in the last twelve months ended September 2015 (5.3 times in December 2014) while the operating profit declined to 3.9% (8% in 2014) and the interest coverage fell to 0.4 times (0.9 times in 2014).

The negative outlook on Gol and Gol Finance reflects Moody's perception that the steep drop in global jet-fuel prices and the potential improvement in yields with the announced capacity adjustments will be not enough to fully mitigate the high operating and financial costs under a prolonged scenario of devaluated local currency, which will keep the company's profitability and cash flow generation under pressure at least through 2017.

Downward pressure on Gol's ratings or the outlook will occur if credit metrics continue to deteriorate over the next few quarters without expectation of recovery. Quantitatively, negative ratings pressure increases if adjusted gross Debt to EBITDA remains above 8.0x for a prolonged period, or should cash trend towards 15% of revenues. Moody's perception of a material deterioration in the company's financial flexibility to meet capital requirements could also lead to a negative rating action for Gol. Further downward pressure on the ratings would arise with a default in interest or debt amortization, payment deferral or a larger than expected loss for creditors in a debt restructuring.

An upgrade of Gol's ratings is unlikely at this time. Positive ratings pressure requires sustained adjusted leverage below 6.0 times on a gross basis along with an EBIT interest coverage above 1.0x, and unrestricted cash that represents at least 25% of net revenues.

An upgrade or downgrade in the term-loan rating depends on changes in Delta's creditworthiness.

The principal methodology used in this rating was Global Passenger Airlines published in May 2012. Please see the Ratings Methodologies page on www.moodys.com for a copy of this methodology.

The cross-sector methodology titled Rating Transactions Based on the Credit Substitution Approach: Letter of Credit-backed, Insured and Guaranteed Debts published in March 16, was also used in this rating. Please see the Ratings Methodologies page on www.moodys.com for a copy of this methodology.

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