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Rating Action: Moody's affirms Air New Zealand's Baa2 issuer rating; outlook stableGlobal Credit Research - 31 Mar 2022Sydney, March 31, 2022 -- Moody's Investors Service has today affirmed Air New Zealand Limited's (Air NZ) Baa2 issuer rating and the airline's ba1 Baseline Credit Assessment (BCA). The rating outlook is stable."IMPORTANT NOTICE: MOODY'S RATINGS AND PUBLICATIONS ARE NOT INTENDED FOR USE BY RETAIL INVESTORS. SUCH USE WOULD BE RECKLESS AND INAPPROPRIATE. SEE FULL DISCLAIMERS BELOW."RATINGS RATIONALEAir NZ's Baa2 issuer rating reflects its ba1 Baseline Credit Assessment (BCA) and a three-notch uplift due to the support for the company from the Aaa-rated New Zealand government (the Crown). The issuer rating then includes a one-notch downward adjustment to reflect the subordinated position of Air NZ's unsecured creditors, given the airline's secured aircraft financing.Management has announced its intention to complete an equity capital raising and bond issue before 30 June 2022. Given the critical role the company plays in New Zealand's economy and society, the government has confirmed that, subject to the offer proceeding in accordance with the offer size, pricing, structure and timetable set out in the offer materials, it will participate to maintain its majority shareholding in Air NZ. Further, the company has confirmed the intention of the Crown to put in place a new NZD400 million revolving credit facility, which is expected to remain undrawn at close and will provide additional liquidity cushion until underlying operating conditions improve.Post the equity raising, the reset balance sheet and improved liquidity position will provide adequate cushion for the business until earnings-based credit metrics are restored to pre-pandemic levels. It is Moody's base-case assumption that this is achieved in the fiscal year ended 30 June 2024, with leverage (debt/EBITDA) to return to around 3.3x.Moody's believes an analysis on the key airline industry credit metrics will provide little value in fiscal 2022 given the significant impact of COVID on earnings-based metrics. Rather, the rating agency will continue to focus on Air NZ's liquidity, business profile, and financial policy.FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGSIn March 2020, Moody's changed Air NZ's BCA to ba1 from baa3 to reflect the incremental credit risk on a standalone basis as a result of the pandemic. The rating agency now expects that during fiscal 2024, Air NZ's credit metrics will once again look comparable to when the BCA and scorecard indicated outcome were baa3.At this stage, Moody's would not consider raising the BCA back to baa3 given the ongoing risks related to the timing of the restoration of the airline's credit profile. However, Moody's will consider upgrading the BCA once the EBITDA and cash flow growth are likely to support a return to Air NZ's publicly articulated debt/EBITDA target of 2x-3.3x.Moody's could downgrade the BCA if the government is unwilling to support Air NZ. This would likely result in multiple notch downgrades to the issuer rating given the 3 notches of uplift currently applied to the ba1 BCA to derive the issuer rating.Moody's could downgrade the issuer rating if the implied level of government support appears to have declined, although this is not the rating agency's expectation given the government shareholding, statements, and support to date.LIQUIDITYAs of 25 March, Air New Zealand had approximately NZD1.396 billion of short-term liquidity made up of NZD246 million in cash, NZD150 million of undrawn Crown standby facility and NZD1 billion of available redeemable shares.ENVIRONMENTAL, SOCIAL AND GOVERNANCE (ESG) CONSIDERATIONSAir NZ's ESG Credit Impact Score is Moderately Negative (CIS-3). This reflects limited credit impact to date, but the potential for carbon transition and related social risk factors to pressure the rating over time. Carbon transition risk reflects Moody's view that current aircraft propulsion technologies and very limited supply of sustainable aviation fuel will not support a rapid carbon transition scenario for the airline industry. Potential policy responses, including more onerous regulations, are a possible social risk. However, the credit risk to airlines is long term in nature.Air NZ has good corporate governance practices and a publicly articulated financial framework that has been followed for several years. It has a publicly articulated debt/EBITDA target of 2x-3.3x, which was set to line up with Moody's upgrade and downgrade thresholds that were in place prior to the pandemic. As Air NZ will be 51% owned by the New Zealand government after the equity raising, Moody's provides an uplift to the credit rating due to the rating agency's expectation that the government will provide assistance to prevent a default. This was demonstrated through arms-length loans during the pandemic to ensure sufficient liquidity and the government's commitment to maintaining its equity stake in the capital raising.PRINCIPAL METHODOLOGYThe methodologies used in these ratings were Passenger Airlines published in August 2021 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1277191, and Government-Related Issuers Methodology published in February 2020 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1186207. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of these methodologies. COMPANY PROFILEAir New Zealand is New Zealand's leading domestic and international airline. It provides passenger and cargo transportation services within New Zealand as well as overseas. For fiscal 2019 (pre-COVID), the airline generated revenues of NZD5.8 billion.REGULATORY DISCLOSURESFor further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at http://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1288235.At least one ESG consideration was material to the credit rating action(s) announced and described above.The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the UK and is endorsed by Moody's Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating. Ian Chitterer VP - Senior Credit Officer Corporate Finance Group Moody's Investors Service Pty. Ltd. 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