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WestJet is already constrained by weakened profitability in its most recent fiscal year, due to rising labour and fuel costs as well as negative free cash flow.

Ben Nelms/Reuters

Credit rating agencies have placed WestJet Airlines Ltd.’s debt under review for possible downgrades after Onex Corp.’s friendly $3.5-billion bid to take the Calgary-based carrier private.

Moody’s Investors Service Inc. said it expects Onex will push some of its acquisition costs down to WestJet, increasing its debt levels. As it stands, the carrier has no room in its current rating for an increase in leverage.

WestJet is already constrained by weakened profitability in its most recent fiscal year, due to rising labour and fuel costs as well as negative free cash flow as it invests in the expansion of its aircraft fleet and destination network.

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WestJet has $400-million in debt due in July. It has another US$400-million in bonds due in 2021, which contain a change-of-control clause expected to result in WestJet offering to buy them back at a slight premium.

Its current ratio of debt to earnings before interest, taxes depreciation and amortization is 3.6 times, up from 2.5 times in 2015. Moody’s currently rates WestJet at Ba1, which is below investment grade.

Standard & Poor’s, meanwhile, said it put WestJet’s debt on credit watch with negative implications, reflecting the possibility that the deal’s close could reduce its rating by more than one notch. S&P currently rates the carrier at BBB-minus.

WestJet said on Monday its board had approved the takeover offer of $31 a share from Toronto-based Onex, worth $5-billion, including debt.

Ed Sims, WestJet chief executive officer, said on Tuesday the new ownership structure will give it the opportunity to carry out long-term expansion plans without having to explain performance, quarter by quarter, to public investors. That suits the nature of the business, in which aircraft run for between 20 and 25 years, he said.

Part of the commitment to retain the current staff extends to the management team, which Mr. Sims said comes with years of experience in numerous markets around the world.

“So what we are clear on with Onex is that they’ve not spent $5-billion on this entity to try to shrink their way to prosperity. They have a growth agenda. They believe we have a growth agenda,” he said at the company’s Calgary headquarters. “They’re looking to expand our operations. And they understand, as I understand, that this highly volatile industry sometimes requires evaluation of our work force around areas like productivity and efficiency. But that is not on their agenda in this transaction.”

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