TORONTO - Air Canada's already weakened shares fell 10 per cent on Tuesday shortly after the debt rating for the country's largest airline was lowered by Moody's Investor Service.
The company's B shares backed off nine cents to 84 cents near midday on the Toronto Stock Exchange shortly after Moody's said there's an increased possibility the airline (TSX:AC.B) could default on its debt obligations.
The new Moody's rating is Caa1, which is applied in situations where the company that issued the debt may have trouble meeting all its obligations to debt holders -- although it's still expected to do so.
Under the Moody's rating scale, Air Canada's debt securities were previously rated B3 -- already below what many funds would consider investment grade.
In Air Canada's case, the rating agency notes the airline's spending on new planes will increase and the cap on its pension contributions will end in the next two years -- putting additional demands on its financial resources.
On the positive side for Air Canada, Moody's says the airline's large size and leading market share will probably provide its with enough cash flow to meet its current obligations to debt holders.
Darren Kirk, a vice-president with Moody's, said the rating was lowered because the Montreal-based company's adjusted leverage throughout 2012 will be higher than previously expected.
"We are concerned with the company's ability to absorb higher capital expenditures for new planes and additional funding requirements for its sizeable pension shortfalls beginning in 2014," Kirk said
Air Canada's stock has been battered over the past year as it endured higher fuel prices and tense negotiations with labour unions.
The company's shares are near the 52-week low of 78 cents, with a high of $2.49 reached last summer.
Air Canada's shares have been listed in the current form since November 2006, two years after the company emerged from court protection from bankruptcy. They were relisted at $17 and have seldom traded above that amount.
