Brazilian airline Azul S.A. downgraded to ‘SD’ following distressed debt exchange

S&P Global Ratings took the ratings actions described above. On Jan. 28, 2025, the company announced the settlement of the exchange of 99.7% of its 2028 first priority senior secured notes, 98.02% of its 2029 senior secured notes, and 94.4% of its 2030 senior secured notes. The notes are being exchanged for new first-lien senior secured 11.9% notes due 2028, new second-lien 11.5% notes due 2029, and 10.875% notes due 2030, respectively, which include indenture amendments.

We view these transactions as distressed rather than opportunistic since--absent the exchanges--a conventional default or bankruptcy filing would have been a possibility due to the company's tight liquidity before the restructuring and challenging financial market conditions.

The new super priority funding will be ahead of the existing 2028, 2029, and 2030 notes in priority of payment from the shared collateral. Additionally, holders that did not participate in the exchange offers and consent solicitations would remain with existing 2028, 2029, and 2030 notes, but these will become unsecured. Finally, the new 2029 and 2030 notes also contemplate a conversion into equity in stages and dependent on specific milestones.

We believe the company improved its liquidity position and reduced short-term refinancing risks through the issuance of the new superiority notes. These notes will immediately provide an additional $350 million (on top of the $150 million already received in 2024 through bridge notes).

Additionally, the exchanges provide for conversion into equity of a portion of the new 2029 and 2030 notes in the short term, which adds to the conversion of about Brazilian real (R$) 3.4 billion of leases. At the same time, Azul has negotiated with lessors and original equipment manufacturers to bring additional savings and improve cash flows.

However, we expect leverage to remain high and free operating cash flow after lease payments to remain tight in a scenario of a more depreciated Brazilian real, which could add volatility to results.