S&P Downgrades Allegiant Travel (ALGT) to 'BB-'; Notes Expectations of Declining Metrics

September 14, 2016 11:21 AM EDT

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S&P Global Ratings said that it has lowered its corporate credit rating on Allegiant Travel Co. (Nasdaq: ALGT) to 'BB-' from 'BB'. The outlook is stable.

At the same time, we assigned our 'BB-' issue-level rating and '4' recovery rating to the company's proposed senior unsecured notes. The '4' recovery rating indicates our expectation that lenders would receive average recovery (30%-50%; lower end of the range) in the event of a payment default.

Additionally, we lowered our issue-level rating on the company's existing senior unsecured notes to 'BB-' from 'BB'. The '4' recovery rating remains unchanged, indicating our expectation that lenders would receive average recovery (30%-50%; lower end of the range) in the event of a payment default.

"The downgrade reflects our expectation that Allegiant's credit measures will decline from their 2015 levels," said S&P Global credit analyst Tatiana Kleiman. Specifically, we believe that the company will maintain a debt-to-EBITDA metric of around 2x and a funds from operations (FFO)-to-debt ratio in the low-30% area for 2016. This compares with a debt-to-EBITDA metric of 1.36x and a FFO-to-debt ratio of 52.37% in 2015. We do not expect that the company's credit measures will return to their 2015 levels over the next two years given the combined impact from the company's elevated capital spending needs, rising operating costs, declining passenger revenue per available seat mile (PRASM), and increased capacity (due to the new aircraft being delivered in 2017). We now assess Allegiant's financial risk profile as significant.

The stable outlook on Allegiant reflects our expectation that, following a decline in its credit metrics, the company's financial risk profile will remain relatively consistent through 2017 due to the various factors associated with its fleet expansion and retirement initiatives. We expect Allegiant's FFO-to-debt ratio to decline to the mid-30% area and its debt-to-EBITDA metric to increase to the low 2x area over the next year, though a greater-than-expected level of shareholder rewards could increase the company's leverage above our expectations.

We could lower our ratings on Allegiant if the pressure on its earnings, caused by increased competition, lower utilization, greater-than-expected capacity and costs, and a higher-than-expected level of shareholder rewards, causes its FFO-to-debt ratio to decline to 20% or below and remain there on a sustained basis.

Although unlikely over the next year, we could raise our ratings on Allegiant if the company's earnings are better than we expect such that its FFO-to-debt ratio increases to more than 40% and its free operating cash flow (FOCF)-to-debt ratio increases to at least 5% and remains there on a sustained basis.

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