Westjet gets downgrade by Fitch on debt levels

Slow recovery from pandemic expected

The COVID-19 pandemic continues to weigh on Westjet Airlines Ltd., contributing to a one-notch downgrade by Fitch Ratings Inc. on the carrier’s debt and long-term default ratings.

“The downgrade is driven by a combination of pandemic impacts on Westjet’s balance sheet, expectations for a prolonged recovery due to mounting macroeconomic concerns and operational issues, and (competition) in the domestic Canadian market,” the ratings agency said Friday, adding that the outlook is stable following the rating action.

Higher jet fuel prices, a strong U.S. dollar, and concerns around a weakening macroeconomic environment are likely to delay the timeline for recovery beyond Fitch’s earlier expectations. The ratings agency said the Canadian market is also affected by aggressive competition from startup low-cost carriers, which is pressuring yields.

Westjet’s long-term issuer default ratings were downgraded a notch to B-minus from B, and the airline’s secured term loan and revolver were also downgraded one notch to B-plus/rr2.

Fitch said air traffic and profitability should continue to improve from pandemic lows when travel restrictions and other measures aimed at slowing the spread of the novel coronavirus sapped demand, but potential consumer pressures and rising costs could slow Westjet’s progress toward generating “healthy levels of profitability.”

As a result, the ratings agency expects leverage and coverage metrics to remain outside levels that would support the previous higher rating through at least the end of 2023.

The leverage measure of total adjusted debt to earnings before interest, taxes, depreciation, amortization and rent is expected to remain near eight times through the end of next year.

Fitch had previously expected leverage to be 5.5 times or below by then.

However, the ratings agency noted that Westjet’s extended loan maturity date of 2026 and “robust liquidity position” put the airline in a good position to meet near-term obligations. In addition, Fitch noted that Westjet has a low cost structure and an established position in the Canadian market.

Credit metrics are expected to improve materially after 2023, the ratings agency said, providing limited downside ratings risk following Friday’s downgrade.

“However, forecasts for 2023 and 2024 are at risk from continued inflation and general recessionary concerns,” the Fitch report noted.