LifeMiles LTD Issuer And Issue-Level Ratings Affirmed At #BB-#; Outlook Still Stable

Stocks and Financial Services Press Releases Tuesday July 3, 2018 17:49
MEXICO CITY--3 Jul--S&P Global Ratings

MEXICO CITY (S&P Global Ratings) July 2, 2018--S&P Global Ratings said today that it has affirmed its 'BB-' global scale issuer credit rating on LifeMiles LTD. At the same time, we affirmed our 'BB-' issue-level rating on the company's $395 million first-lien senior secured term facility. The outlook remains stable.

The rating affirmation reflects our view that LifeMiles has continued to post healthy operating and financial performance in line with its rating, with debt to EBITDA of about 2.3x and FFO to debt of about 39% for the 12 months ended March 31, 2018. It also reflects our view that the company will post debt to EBITDA at around 2.0x and FFO to debt above 40% in the next two years. This is mainly because of the continued expansion of the company's coalition programs and partnerships with banks, increasing co-branded cards, and the incorporation of new commercial coalitions in LifeMiles' core markets. This is despite the company's issuance of additional debt in March 2018 for $95 million, which it used to fund a dividend recapitalization aimed to optimize the company's capital structure.

LifeMiles is the largest and most well-known coalition loyalty program in Colombia and Central America. Avianca Holdings S.A. (B/Stable/--) owns 70% of the company, and Advent International (not rated) owns the remaining 30%. LifeMiles is Avianca's exclusive frequent flyer program. Over the past few years, the company has rapidly expanded its business thanks to its relationship with Avianca and to its development of an extended base of commercial partners. We expect this growth to continue, thanks to favorable demographics and a loyalty program market that has room to grow in the region.

We also consider that the company's performance will remain underpinned by Avianca's holding in the company. Avianca's growth has been driven by favorable macroeconomic conditions in its key markets, which have increased traffic, load factors, and recovery of yields. In addition, the company has continued to expand its operations through new international routes (particularly Europe and North America), the incorporation of a new fleet with higher capacity and fuel efficiency, and the deployment of routes and aircraft in line with market conditions. Avianca has a strong market position in Colombia, Peru, and Central America.

Our ratings on LifeMiles continue to reflect its limited scale with about $317.5 million in revenues for the 12 months ended March 31, 2018, high geographic concentration of operations in Colombia that account for about 53% of total sales, and limited number of partners for miles redemption. Avianca and members of the Star Alliance represent about 32% of LifeMiles' gross billings. About 50% of its gross billings comes from financial institutions and others, and 18% is sold directly to members, while about 77% of redeemed miles stems from Avianca. The rating strengths are the company's diversified and loyal network of partners, strong relationships with key partners through long-term contracts, and leading market position and brand awareness in Colombia and Central America. In addition, LifeMiles' brand recognition and efficient cost management translate into higher EBITDA margins than those of other players in the loyalty program industry.

We believe that the company will continue to generate free cash flow given the expansion of its revenue base through additional coalitions and alliances, asset-light structure, low working capital requirements, and limited capital expenditures (capex) needs. These factors should allow LifeMiles to meet its financial obligations, including debt prepayments established under the term facility documentation, while distributing any excess cash to its shareholders. We don't discard a possibility that the company would issue additional debt for dividend recapitalization, while we expect LifeMiles to maintain debt to EBITDA at around 2.0x, an ample headroom for its financial policy of target level in the 2.0x-3.0x range.

The global scale rating on LifeMiles is two notches above that on Avianca. Under our group rating methodology, LifeMiles meets all the characteristics for an insulated subsidiary based on the following factors:
  • In a hypothetical bankruptcy scenario for Avianca, LifeMiles would most likely avoid any bankruptcy proceedings that could jeopardize its operating activities or compromise its assets. On one hand, LifeMiles has protection stemming from its shareholder agreement that provides its minority shareholder (Advent) with veto rights on almost all strategic corporate decisions. Also, as long as the minority shareholder maintains at least a 10% stake in the company, Advent will have veto rights over reserved matters, which include voluntary bankruptcy filing or dissolution/liquidation of the subsidiary.
  • LifeMiles doesn't guarantee directly or indirectly any of Avianca's financial obligations.LifeMiles generates only about 25% of gross billings from the sale of miles to its parent company under a 20-year exclusive agreement, while the remaining 75% come from long-term agreements with third parties and sales direct to members. Therefore, LifeMiles' financial performance and funding prospects are independent from those of Avianca, so that even if other core entities encounter severe setbacks, LifeMiles' relative strengths of would remain nearly intact.
  • LifeMiles' board of directors is composed of seven members, three of whom are independent, three are from Avianca, and one from Advent, which has veto rights on mostly all corporate strategic decisions on the company.
  • We believe that Avianca has a compelling economic incentive to preserve LifeMiles' credit strength, because the subsidiary is an important source of passenger traffic for the airline.

The stable outlook reflects our view that LifeMiles will continue to deliver double-digit growth in the next 12 months, while it maintains its adjusted EBITDA margins at around 50% and a debt to EBITDA ratio at around 2.0x. We expect growth to continue coming from expansion of the company's loyalty program among the rising middle class in Colombia and Central America, whose consumption habits are increasingly driven by credit and debit card usage, as well as from new alliances and co-branded products with financial institutions and businesses. The outlook also considers that potential recapitalizations or a more aggressive dividend policy won't hike the debt-to-EBITDA ratio above 3.0x. The stable outlook incorporates our assessment of LifeMiles' arms-length relationship with Avianca and that the existing insulation features will continue to support the company's two-notch rating differential above that of its parent.

A negative rating action in the next 12 months could result from one or more of the following factors. First, a downgrade of Avianca due to adverse industry conditions that would weaken its operating margins and lead to a revision of its liquidity assessment to a weaker category. Second, LifeMiles faces significant member or partner losses, reducing its operating margin and cash flow generation. Finally, it pursues a more-than-expected aggressive financial policy in relation to the use of debt, leading to a debt to EBITDA consistently above 4.0x.

Additionally, we could lower the rating by two notches if we were to revise our assessment of LifeMiles' insulated subsidiary status. Such an event could follow a change in LifeMiles' ownership structure, with Advent reducing its current stake position or if Avianca's financial policy toward LifeMiles changes significantly.

Although unlikely in the next 12 months, a one-notch upgrade of LifeMiles would be dependent on a similar rating action on Avianca. This scenario could occur if Avianca's operations outperform our expectations, which would result in a debt to- EBITDA ratio well below 5x and FFO to debt above 12% on a sustained basis, or if it strengthens its business profile by expanding its operations and competitive position, which could result from strategic alliances or organic growth.

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