NEW YORK--()--Fitch Ratings assigns the following ratings to American Airlines Inc.'s (AA, rated 'D') proposed Pass Through Trusts Series 2013-1:
--$506.7 million Class A certificates (A-tranche) with an expected maturity of July 2025 'BBB+';
--$156.6 million Class B certificates (B-tranche) with an expected maturity of January 2021 'B'.
The final legal maturities are scheduled to be 18 months after the expected maturities.
Fitch has also placed both the AA 13-1 Class A and Class B certificates on Rating Watch Positive reflecting Fitch's expectation that both tranches will likely be upgraded once AA exits from Chapter 11 and completes its proposed merger with US Airways (LCC, rated 'B-'; Rating Watch Positive).
The proceeds of the certificates will be used to acquire the class A and class B equipment notes (notes), i.e. the aircraft mortgage obligation issued by AA. AA may subsequently offer additional subordinated class C certificates at a future date, as per the transaction documents.
As part of its reorganization plan, AA intends to finance 13 aircraft through the proposed 2013-1 EETC transaction, making it the first EETC issued while an airline is operating under Chapter 11 court supervision. Accordingly, the new Equipment Notes (and thereby the certificates) will qualify as 'post-petition' secured DIP financing as per the court-approved DIP order, and thereby grant creditors stronger downside protection while AA is still in Chapter 11. These stronger provisions are not incorporated in Fitch's ratings, as they 'fall-away' upon emergence when the contractual terms revert to standard EETC documentation, which forms the basis of Fitch's ratings analysis.
The collateral package comprised predominantly of Tier 1 (93% of collateral value) and Tier 2 aircraft, includes the following fleet types, all of which are core to AA's fleet on a standalone basis, and which Fitch expects continue to be when combined with LCC:
--Four Tier 1 777-300ERs (2013 deliveries) representing 73% of initial collateral value;
--Eight Tier 1 737-800s (7 2000 vintage; 1 2001 vintage) representing 20% of initial collateral value;
--One Tier 2 777-200ER (2000 vintage) representing 7% of initial collateral value;
PREFUNDING CONSIDERATIONS: AA 13-1 will follow a standard prefunding structure with proceeds from the transaction initially held in escrow with a designated depository, Natixis (rated 'A+/F1+'/Negative) and withdrawn from time to time to acquire Equipment Notes, i.e., the underlying aircraft mortgage obligation issued by AA, as collateral aircraft become available. The aircraft being refinanced (8 737-800s, and 1 777-200ER) are currently unencumbered or pledged to various private loans, and become available when the existing mortgages mature between March - July 2013, while the new aircraft (4 777-300ERs) are available upon delivery scheduled between April - July 2013. Once issued, these Equipment Notes will be the primary assets of the AA 13-1 Pass-through Trusts.
POST-PETITION STATUS: Under the proposed AA 2013-1 EETC transaction, AA will re-execute new Equipment Notes (in the form of mortgage) underlying the new certificates to be issued by a newly formed trust while AA is under court supervision. Consequently, the new Equipment Notes (and thereby the certificates) will qualify as 'post-petition' secured DIP financing as per the court-approved DIP order. Creditors in the AA 13-1 EETC will not only continue to hold a first priority claim to the pledged assets but also continue to have their debt-service payments qualify as an 'administrative expense' similar to holders of the existing EETCs that have been affirmed and therefore, also been elevated to an administrative expense status.
However, unlike existing or pre-petition EETC holders, creditors in this new, post-petition AA 13-1 EETC have better downside protection during the course of this Chapter 11, as any future event of default (such as a liquidation of AA) on the new notes would permit creditors to exercise remedies (such as enforce security by repossessing/selling collateral) during the bankruptcy period itself without having to wait the customary 60 days that apply under Section 1110. This five day notice window is purportedly shorter than usually seen in standard DIP financing documents and is thus, subject to court approval to ensure protection against future challenges to stay this remedy. It should be noted though that several of these stronger provisions (such as an additional triggers/events of default that apply during duration of the bankruptcy) 'fall-away' upon emergence when the contractual terms revert to that of a standard EETC documentation.
STANDARD EETC STRUCTURAL ENHANCEMENTS (UPON EMERGENCE): Once AA emerges from Chapter 11 (expected later this year), Section 1110 and the standard features of the EETC template will govern the certificates. Similar to other recent EETCs, AA 13-1 includes a dedicated liquidity facility provided by Natixis for both Class A and B certificate holders that guarantees three consecutive interest payments over a period of 18 months in a potential default scenario. AA 13-1 also includes the customary cross-collateralization and cross-default features that treat all aircraft as one as one pool of assets and limit AA's ability to cherry-pick assets within a EETC in a future bankruptcy.
The ratings for Class B certificates for AA 13-1 reflect exceptions to Fitch's EETC criteria which did not anticipate this type of DIP-type aircraft financing when written, as AA 13-1 marks the first time an airline has launched a EETC while operating under court supervision. Ratings are also constrained by AA's current 'D' designation and do not incorporate the transaction's post-petition status but rather rely on the standard EETC enhancements that govern the certificates upon emergence. Fitch's ratings also do not incorporate AA's standalone credit quality, nor does it reflect the improved credit quality of the carrier after it merges with LCC as planned.
A-TRANCHE: The 'BBB+' rating for the senior 'Class A certificates' is assigned per Fitch's EETC methodology which prescribes a 'top-down' analysis for the senior tranche ratings that focuses primarily on the collateral, the structure's ability to withstand severe stresses, and legal (Section 1110) and structural (cross-default and cross-collateralization) with a secondary dependence on the airline issuer default rating (IDR). Although the AA 13-1 A-tranche comfortably passes Fitch's A ratings category stresses (with max stress LTV of 95%), Fitch has assigned 'BBB+' reflecting max stress LTV of 89% based on the general uncertainty typically associated with Chapter 11 reorganization.
That said, AA has completed the Section 1110 bankruptcy process which removes most of the uncertainty with regards to the company's fleet planning on standalone basis. AA's pending merger with LCC is not expected to affect the collateral in this transaction, as the 777-300ERs, which represent 73% of collateral value over the next six years and 100% thereafter, are expected to play a vital role in the combined entity's international fleet. Importantly LCC's current fleet does not have any widebodies of this size (LCC is predominantly a domestic carrier) and its first A350-800/900 (a smaller widebody and hence not comparable) does not arrive until 2017. Fitch expects that the AA 13-1 Class A certificates will likely be upgraded upon AA's emergence from Chapter 11, which is the rationale for the Rating Watch Positive.
B-TRANCHE: The 'B' rating for the subordinate 'Class B certificates' is assigned by notching up from AA's current IDR designation of 'D' based on the high post-emergence Affirmation Factor, as per Fitch's EETC criteria but also incorporates the strong collateral package and post-emergence structure (as described above) and the initial LTV (72% as per prospectus, 76% as per Fitch estimates). However, the six-notch uplift from the IDR to 'B' also reflects an exception to Fitch's criteria which currently prescribes a maximum of four notches from the airline's IDR, which in this case would be 'CCC'. Fitch believes that a 'B' rating is more appropriate given the inherent credit quality of the Class B certificates based on both the strength of the underlying collateral, AA's better than expected operating profile during Chapter 11, and the fact that the aircraft have been affirmed.
The rating on the Class B certificates also does not reflect AA's much improved credit profile once it completes its merger with LCC. The proposed merger, which requires approval of the bankruptcy court (hearing scheduled for March 27) and the Department of Justice, is not expected to close until third quarter 2013. Fitch will monitor the progress as more information becomes available, but the full rating review will focus on the combined capital structure, a more detailed analysis of proposed synergies (equivalent to 2.7% of pro forma combined revenues), and the competitive positioning of the new airline relative to peers. The current terms of the merger suggest a high potential for full recovery for AA unsecured creditors, as holders of existing AA equity interests are expected to receive a 3.5% ownership stake of the combined company. This type of recovery potential is unusual in Chapter 11, and unprecedented in airline restructurings.
KEY RATING DRIVERS:
The collateral pool initially consists of 13 aircraft, all (except for the 777-200ER) classified as Fitch Tier 1, with a weighted average age of 3.0 years including four new 777-300ERs with expected deliveries from April through July of 2013 and nine vintage aircraft (one 777-200ER and eight 737-800s) that AA currently owns. The vintage aircraft drop out of the collateral pool over the life of the transaction - the lone 777-200ER in 2021 and the 737-800s in 2019 - thereby reducing the average age and improving the overall collateral quality over time. The tail risk of this transaction is supported by the youngest and highest quality aircraft type, i.e. the 777-300ER.
777-300ER (73% of initial collateral pool value): The 777-300ER, classified as solid Tier 1 collateral, is making its debut in a EETC transaction. Launched in 2004 by Air France the 777-300ER has replaced the larger, less efficient 747-200s with much better operating economics. With a single engine type (GE), the 777-300ER is the best-selling widebody aircraft of its size (365 seats in a typical three-cabin configuration) with a global fleet of 360 aircraft operated by 28 carriers around the world. The backlog remains solid with 271 units and with no aircraft currently parked.
The average age of the global fleet is only 3.5 years, making it a relatively young fleet type. The 777-300ER currently has no direct competition; Airbus ended the A340 program in 2011, the current A330 variants are smaller with less range, and the pending A350-1000 is not expected to be launched for another few years (2017 earliest assuming no production delays). At some point later in the decade, the 777-300ER will likely be supplanted by a 777-X, but Boeing has yet to announce such a program.
Historically, widebody aircraft values have been more volatile than narrowbody in aviation downturns. This is a concern for the 777-300ER, but it is largely mitigated by the current state of the widebody market in general, which appears to be more favorable than narrowbody aircraft, and the limited supply of the 777-300ER specifically. High transition and freighter conversions cost are also long-term concerns which could pressure residual values. However, Fitch expects demand for this aircraft type, underpinned by lucrative international routes, to remain strong over the next decade supporting secondary market values. Even in a distressed scenario, Fitch expects the 777-300ER values to fare better than other widebody aircraft, as evidenced in its resilience during the credit crisis. Accordingly, Fitch applies the middle of the Tier 1 stress range for the 777-300ERs in this deal.
737-800s (20% of initial collateral pool value): Fitch views the 737-800s as one of the most popular narrowbody aircraft currently in operation and classifies it as top quality Tier 1 aircraft due to its market depth and desirability among 141 global operators. The 737-800s in AA 2013-1 enter the deal at an advanced age (12-13 years) and quickly migrate to Tier 2 starting in 2015. At that point, Fitch's base analysis starts applying faster depreciation rates, while its stress analysis also haircuts the collateral value by higher, Tier 2 stresses until these aircraft drop out of the collateral pool in 2019.
777-200ER (7% of initial collateral pool value): The lone, vintage 777-200ER in this portfolio is initially classified as high quality Tier 2 collateral due to its advanced age as it enters the transaction, and migrates to Tier 3 within four years. Accordingly, Fitch applies the low-end of the stress ranges for the respective tiers which Fitch considers appropriate for this fleet type. Despite longer term concerns of being supplanted by the more economical and longer range 787-9 (initial launch expected in 2014) Fitch believes that demand for the 777-200ER will remain healthy over the next decade supported by second and third users around the globe. Furthermore, as mentioned above, the relative strength of the widebody market in general, and the limited number of 777-200ER (only one aircraft currently stored) available should support secondary market values for this aircraft.
COLLATERAL APPRAISAL: Total appraised value for all aircraft in the portfolio is $921 million as per the prospectus (lesser of the average and median values provided by three independent appraisers), which is approximately 6% higher than the values used in Fitch's analysis from an independent third party appraiser not included in the transaction documents.
COLLATERAL COVERAGE (LTV - BASE CASE): Fitch estimates the initial LTV at 58.7% for the A-tranche and 76.9% for the B-tranche. Initial LTV's cited are calculated as of the first distribution date after all aircraft have been delivered. Fitch's base LTVs are higher than the prospectus LTVs of 54.8% and 71.7% for the A and B tranches, respectively reflecting its more conservative valuation for the aircraft portfolio. Neither Fitch's base LTV nor the prospectus base values assume any draw on the liquidity facility.
Fitch also calculates Base LTVs through the life of the transaction using conservative depreciation assumptions (a blended rate of 5%-7% through the life of the transaction vs. 3%-5% in the offering memorandum) creating a steeper depreciation curve than what is provided in the prospectus. Fitch estimates Base LTV's rise slightly through the first several years of the transaction primarily due to our higher depreciation rates for the vintage 737-800s and the 777-200ER, but are expected to gradually decline after the older aircraft drop out of the transaction starting in 2019.
COLLATERAL COVERAGE (LTV - STRESS CASE, RATIONALE FOR A-TRANCHE RATINGS): Fitch's stress case simulates a severe downside scenario which assumes aircraft rejection during a downturn in a potential bankruptcy scenario. Fitch puts the aircraft collateral and structure through different ratings stress scenarios based on Fitch's aircraft Tier classification, and recalculates collateral coverage after applying these stresses to determine the highest rating category where the senior A-tranche LTV does not exceed 100%, as per Fitch's EETC criteria. This downside case reflecting a severe global aviation downturn is what drives Fitch's senior tranche rating methodology.
Accordingly, in its stress case, Fitch assumes:
--A full liquidity draw that adds 6.5% LTV as the senior most claim;
--5% repossession and remarketing costs;
--The application of various stresses (according to aircraft tier classification as described above) to the aircraft collateral to determine the highest rating category where the senior A-tranche LTV does not exceed 100%.
Fitch's stress scenario identifies rating for the A-tranche in the 'A' rating category where max LTV is 95%, reflecting the structure's ability to withstand severe stresses (20%-25%) and suggesting par recovery for senior tranche holders with significant headroom. However, since the rating does not incorporate the post-petition status of the underlying equipment notes, but rather the general uncertainty around Chapter 11, Fitch considers 'BBB+' rating to be more appropriate. The max LTV for the A-tranche is 89% for BBB-category stresses in the 15-20% range.
THE (POST-EMERGENCE) AFFIRMATION FACTOR
The Affirmation Factor, i.e., Fitch's assessment of the likelihood of an airline affirming its aircraft obligations in a potential default, does not currently apply to AA 13-1 as all aircraft in this transaction have not just been affirmed, but the underlying mortgages qualify as post-petition debt. Nonetheless, Fitch's ratings analysis takes into consideration the post-emergence Affirmation Factor, i.e. the likelihood of AA affirming its aircraft obligations in this deal in a potential future bankruptcy scenario, based on the strategic importance of the aircraft in this deal, and structural provisions.
Despite the smaller size of the collateral pool (13 aircraft, or equivalent to 2% of AA's standalone fleet) the post-emergence Affirmation Factor of AA 13-1 is considered to be high due to the inclusion of the 777-300ER, AA's new flagship aircraft. The high capacity and long range capabilities of this plane make it ideal to serve slot constrained airports such as Heathrow, JFK, and Tokyo Narita. AA views this aircraft's ability to add incremental capacity into these constrained markets as a key advantage.
Furthermore, AA has made significant investments in its 777-300ERs. Both First and Business Class cabins will feature fully lie-flat seats with aisle access from every seat, and a walk-up bar, the first for an American carrier. The main cabin seating also offers slightly more legroom and features AC and USB power outlets at every seat, with personal in-seat HD entertainment with a wide array of movie, audio and entertainment selections. The 777-300ER also has international Wi-Fi capability, and unique mood lighting to enhance the on-board experience. These features will help distinguish AA's premium and international product offering relative to peers. Notably, AA is the only U.S. carrier to fly the 777-300ER.
The 777-300ERs are expected to represent approximately 10% of AA's standalone widebody fleet over the next few years and importantly the only +300 seat aircraft in its widebody line-up. Fitch expects the 777-300ERs to remain core to AA's fleet even when combined with LCC once the proposed merger closes. As a predominantly domestic carrier, LCC's international and widebody fleet is limited and currently does not have an aircraft of this size, and its first A350, which is smaller widebody aircraft, does not arrive until 2017. On a combined basis, Fitch estimates the 777-300ER will constitute approximately 8% of the combined entity's fleet. The standard cross provisions (which limits AA's ability 'cherry-pick' assets in a future bankruptcy) and low coupons expected for the transaction also strengthens the Affirmation Factor for this deal.
Unlike prior mergers which were predicated on significant capacity cuts, the proposed LCC-AMR combination currently does not contemplate any significant downsizing of network capacity. Although Fitch could see some parts of the network restructured overall capacity for the combined entity (and the industry) is not expected to be materially lower, mitigating the risk of major fleet rationalization. However, the combined entity may look to simplify certain fleet types, most likely in the narrow-body side. For example, the inclusion of LCC's A320 fleet may accelerate the retirement of AA's MD-80 fleet which would constitute approximately 18% of the combined narrowbody fleet.
The Rating Watch Positive on the AA 13-1 Class A and Class B certificates reflects Fitch's expectation that both tranches will likely be upgraded once AA exits from Chapter 11 and completes its proposed merger with LCC.
Fitch has assigned the following ratings:
American Airlines Pass Through Trusts 2013-1
--Series 2013-1 class A certificates 'BBB+';
--Series 2013-1 class B certificates 'B'.
Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
Applicable Criteria and Related Research:
--'Rating Aircraft Enhanced Equipment Trust Certificates' (Sept. 14, 2012);
--'Corporate Rating Methodology' (Aug. 8, 2012);
--'Recovery Ratings and Notching Criteria for Non-Financial Corporate Issuers' (Nov. 13, 2012).
Applicable Criteria and Related Research
Rating Aircraft Enhanced Equipment Trust Certificates
Corporate Rating Methodology
Recovery Ratings and Notching Criteria for Non-Financial Corporate Issuers