Standard & Poor’s placed its single-‘B’-plus rating on RG Receivables Co.
Ltd.’s $100 million 9.6% credit card-backed notes on CreditWatch with
The negative CreditWatch placement follows the disclosure that the
underlying generator of the transaction’s assets, Viacao Aerea
Rio-Grandense S.A. (Varig), breached an interest coverage covenant in the
first quarter of 2001 that could lead to an early amortization of the
transaction’s outstanding balance. In addition, Varig’s financial
performance in the first several months of 2001 deteriorated as a result of
the more difficult operating conditions in Brazil this year, with further
adverse results expected in the second half of 2001.
Varig’s performance has been hurt by a drop in both domestic and
international air travel in Brazil this year, as well as a significant
decline in the local currency and higher interest rates and jet fuel costs.
Although the company is attempting to cut costs, results beyond those
already realized in a similar restructuring effort in 1999 may be difficult
to achieve. Varig’s management has completed a refinancing of some
short-term debt and may derive some additional relief from the sale of a
stake in its cargo transport business, but financial flexibility
nonetheless remains limited.
The RG Receivables notes are secured by the proceeds of credit and
charge card receivables generated by the sale of airline tickets in the
U.S. to Varig customers flying between Brazil and the U.S. The transaction
is structured to capture offshore U.S. dollar-denominated payments
generated from the sale of tickets on Varig flights between Brazil and the
U.S. and between the U.S. and Tokyo, Japan.
To date, the transaction has performed well despite a challenging
operating environment in Brazil at various times over the past three years.
Cash flow coverage currently remains in excess of three times quarterly
debt service, and Varig has not yet attempted to reduce the frequency of
flights between Brazil and the U.S.-routes that are critical to the
generation of foreign charge card receipts. Moreover, the transaction
performed as designed in 1999 despite similar financial pressures and a
broad restructuring of Varig’s debt undertaken at that time with the
company’s other creditors.
Nevertheless, the CreditWatch placement reflects uncertainty
surrounding the near-term actions of investors who, given the interest
coverage covenant breach, currently have the right to accelerate the
amortization of the transaction notes. In addition, Standard & Poor’s
remains concerned that the economic outlook in Brazil over the remainder of
2001 remains challenging and could lead Varig’s management to reduce flight
frequencies to the U.S., thus, negatively impacting the transaction.
Standard & Poor’s has also noted that an early amortization of the RG
Receivables notes-whether triggered by the interest coverage covenant or
some other transaction covenant-could have a significant negative impact on
Varig’s liquidity and, consequently, its overall credit profile to which
the transaction rating is directly tied. Standard & Poor’s believes that
the transaction rating could come under near-term downward pressure from
either investor actions that accelerate the transaction’s amortization or
from a prolonged economic slowdown in Brazil that further impairs Varig’s