Struggling Argentine airline, Aerolineas Argentinas S.A., began 2000 with a seagull in its engine, after Standard & Poor's downgraded its "Aerocard" ticket receivables securitization program. The rating agency knocked the two deals issued under the program by a huge five notches from A-minus on the local scale to BB citing Aerolineas' deep financial troubles.

"We believe that the deterioration in Aerolineas' creditworthiness and financial outlook, and the adverse macroeconomic factors that it had to face during 1999, puts its operating capacity into question," explained Juan Pablo de Mollein, analyst with S&P in Buenos Aires.

The transactions were both worth $50 million, arranged by Citibank and are backed by ticket sales charged to American Express, DinersCard, Visa and MasterCard. Aerocard I was launched in 1997 and Aerocard II followed in July 1998 (ASRI 7/27/98 p. 1 and ASRI 11/30/98 p. 7); both were aimed at local investors.

Citing the same reasons as S&P, Fitch IBCA followed suit, albeit more cautiously, downgrading the notes to BBB-minus on the local scale from A, weeks after it had affirmed the ratings for the notes. "The situation of the airline is very precarious, but we want to wait and see what develops before we downgrade the notes any further, " said Eduardo D'Orazio, analyst with Fitch in Buenos Aires.

Officials at Citibank declined to comment.

However, the Argentine market was shocked by the downgrades, with local pension funds, in particular, left reeling.

According to Argentine regulations, local deals have to be rated by two rating agencies. In the event that one of the two agencies downgrades the notes to below investment-grade levels, pension funds have to deduct 50% of the paper's book value and have 18 months to sell it.

"This downgrade means that we stand to lose half of our investment in the Aerocard notes, so this is very bad news for us," said Daniel Cagnoni, chief investment officer at Maxima, a local pension fund. "Because of the complexity of securitized deals we rely heavily on the rating agencies' opinion. We will be much more demanding on asset-backeds in the future."

Unsurprisingly, the main question in the market was why did S&P take such a sudden and drastic decision given the carrier's long history of mismanagement and losses.

Some experts suggested that the airline's precarious finances only became known late in 1999, saying that Aerolineas is not quoted on Argentina's stock exchange and so it has no obligation to present quarterly information, only yearly reports.

However, an airline official insisted that Aerolineas had been open with the rating agencies and therefore they had no cause for such drastic action. "Aerolineas provides the rating agencies with all relevant information they request," he said. "I think that Standard & Poor's was doing trimestral analysis of the Aerocard notes without paying enough attention to what was happening to the company."

Undoubtedly, the story told by the 1999 report was bleak. Existing financial problems, exacerbated by a regional recession, mounting local competition, an aggressive investment plan and bad management decisions, led to losses of $125 million.

The picture is further complicated by another ticket receivables program, arranged by Citibank for the airline (ASRI 8/9/1999 p. 1). The program, called "Condor", is backed by ticket sales in North America, Europe, Japan and Australia.

It is aimed at international investors and launched its inaugural deal in July 1999, with a $100 million offering. Though the deal was placed internationally it was only given local ratings BBB from Fitch IBCA and A-minus from Duff & Phelps Credit Rating Co. (DCR) as it was privately placed. S&P did not rate it.

However, because of its financial troubles, Aerolineas was unable to comply with certain specification written into the deal, forcing it to accelerate payment for Condor last November, just a few months after the notes were placed. The notes are now expected to pay down by December 2000, rather than in 2006.

All this led DCR to downgrade the Condor notes from A-minus to BBB. "We decided to downgrade the notes based on the weakened financial situation of the company," explained Carina Lopez, analyst with DCR in Buenos Aires. "We are waiting to see the results of the meetings between Aerolineas and its partners that are taking place before we make other rating decisions."

Standard & Poor's didn't rate Condor, but the acceleration of payments was cited by the agency as another reason to downgrade the Aerocard notes. "Funds are being directed towards these payments," said de Mollein. "And that implies less liquidity for the company at the time it needs it the most."

In addition, Aerolineas also suffered significant internal upheaval in the last quarter, with suggestions that AMR Corp., the parent company of American Airlines, would sell its 10% stake in Aerolineas, despite pledges that it would buy the rest of the company or find another interested party by December 31, 1999. That would leave Sociedad Estatal de Participaciones Industriales (SEPI), the

Spanish industry ministry's holding company that owns 85% of the airline, as Aerolineas' sole strategic partner.

"American Airlines is not complying with the committed capital infusion," said de Mollein. "Although it is expected that if SEPI continues bringing financial support, the company should face their financial obligations even in a deep liquidity problem situation."

The Aerolineas official, however, argued that the departure of American Airlines is not certain. "The situation is still being discussed and there are many possible scenarios," he said. "Standard & Poor's concern is based on what was speculated by the local press and not on professional criteria."

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