Latam Airlines Group SA, the most indebted major carrier relative to cash flow, forecasts debt ratios to recover by the first half of next year as it strives to regain an investment-grade rating lost after buying Tam SA.
Latam, formed (TAM:US) in June by a tie-up between Chile’s Lan Airlines SA (LAN) and Brazil’s Tam, expects to return to a positive ratio of free-cash flow to total debt and have its credit rating upgraded next year as the merger cuts costs and boosts sales, Chief Financial Officer Alejandro de la Fuente said in an interview today in Santiago. Latam will reduce dividends to minimum levels and may sell stock, he said.
Latam Airlines has the worst ratio of free cash flow to total debt among carriers with a market value of at least $5 billion, according to data compiled by Bloomberg. Latam’s negative 0.16 compares with a positive 0.19 for Ryanair Holdings Plc, which leads the ranking, the data show. The world’s biggest airline by market value is confident of reaching its target of $700 million in savings and extra sales in four years, Lan Chief Executive Officer Ignacio Cueto said in the same interview.
“We still feel comfortable with the estimate number as in the first 45 days after the merger, we are doing OK,” Cueto said. “We need to have the most up-to-date figures and then we’ll have the details of when we’ll reach the final number of synergies and revenues.”
Fitch Ratings lowered Latam by two notches to BB+, one level below investment grade, from BBB on June 22 when the transaction was completed. Feller Rate, a local affiliate of Standard & Poor’s, cut its rating to A-, the seventh-highest of 10 possible investment grade ratings, from A.
Before the tie-up Lan distributed half of its profit in dividends. Latam will pay out 30 percent for the next 6 to 10 months, the minimum percentage allowed in Chile, De la Fuente said.
Cueto, whose family is the largest shareholder in Latam, said Tam “is not going to lose money” even amid a slowing economy and “unbelievably” high costs in Brazil.
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