CHICAGO--(BUSINESS WIRE)--Fitch Ratings assigns the following ratings to Hawaiian Airlines' (HA: Issuer-Default Rating 'B' with a Stable Outlook by Fitch) proposed pass-through trusts series 2013-1:
--$328.3 million Class A certificates (A-tranche) with an expected maturity of January 2026 'A-';
--$116.3 million Class B certificates (B-tranche) with an expected maturity of January 2022 'BB'.
The final legal maturities are scheduled to be 18 months after the expected maturities. HA may subsequently offer additional subordinated class C certificates at a future date, as per the transaction documents.
For more information on HA's ratings please see the press release 'Fitch Assigns Initial 'B' IDR to Hawaiian Airlines; Outlook Stable', dated May 7, 2013 at www.fitchratings.com.
The ratings are primarily supported by the quality of the collateral pool underlying the transaction, a significant amount of overcollateralization, and a high affirmation factor. The collateral pool consists of six new delivery A330-200s, which Fitch considers to be Tier 1 aircraft. The wide user base, versatility, and the lack of an immediate direct competitor for the A330-200 should support its position as a popular wide body choice for many airlines in the intermediate term. The initial A-tranche LTV, as cited in the prospectus, is 56% and Fitch's maximum stress case LTV (primary driver for the A-tranche rating) through the life of the transaction is 92%. This level of overcollateralization provides a significant amount of protection for certificate holders and for A-tranche holders in particular.
Fitch also considers the affirmation factor (i.e. the airline's likelihood to affirm the aircraft in the case of a bankruptcy) for this collateral pool to be high, as these six A330s will make up a core part of Hawaiian's wide body fleet. The ratings are also supported by typical EETC structural features including an 18-month liquidity facility, cross-collateralization and cross-default features, and the benefit of section 1110 of the bankruptcy code.
HA plans to raise $444.5 million in an EETC transaction to fund six new Airbus A330-200s scheduled for delivery in 2013 and 2014. The proceeds of the certificates issued in this transaction will be used to acquire class A and class B equipment notes, i.e., the aircraft mortgage obligations issued by HA, to finance its upcoming deliveries. HA 2013-1 will include two tranches of debt, a senior A-tranche and a subordinate B-tranche. Hawaiian Airline Inc.'s payment obligations under these notes will be fully and unconditionally guaranteed by its parent company Hawaiian Holdings, Inc.
The A-tranche will be sized at $328.3 million with a 12.6 year tenor, a weighted average life of 9.0 years, and an initial LTV of 52.8% (per the prospectus). Fitch calculates the initial LTV at 56.0% using values provided by an independent appraiser not included in the transaction documents.
The subordinate B-tranche will be sized at $116.3 million with an 8.6 year tenor, a weighted average life of 6.9 years, and an initial prospectus LTV of 71.5%. Fitch calculates the initial LTV at 75.9%.
Collateral Pool: The transaction will be secured by a perfected first priority security interest in six new A330-200s which are classified as Fitch Tier 1 collateral. Fitch considers these aircraft to be core to Hawaiian's fleet renewal plan as well as its growth strategy as the carrier looks to expand its presence in Asia.
Prefunded Deal: Proceeds from the transaction will be used to pre-fund deliveries between November 2013 and October 2014. Accordingly, proceeds will initially be held in escrow by the designated depository, Natixis (rated 'A+'/'F1+' with a Negative Outlook), until the aircraft are delivered.
Liquidity Facility: The Class A and Class B certificates benefit from a dedicated 18-month liquidity facility which also will be provided by Natixis.
Cross-default & cross-collateralization provisions: Each Equipment Note will be fully cross-collateralized and all indentures will have immediate cross-default provisions, which limit HA's ability to 'cherry-pick' aircraft within an EETC in a potential insolvency.
KEY RATING DRIVERS
A-Tranche: The A-tranche rating is primarily supported by a significant amount of overcollateralization which allows the structure to withstand a harsh downside scenario while maintaining a full expected recovery for the senior tranche holders. The ratings are also supported by the inclusion of new delivery aircraft, which are core to Hawaiian's fleet, and constitute a major part of its fleet renewal and growth plans, as well as the support of an 18 month liquidity facility, and the legal protection afforded by Section 1110 of the U.S. bankruptcy code. The tail risk for the A-tranche is comparable to many recently issued EETC's with an expected pool balance of 39% as of the final distribution date. This compares to pool factors from the low 30% to mid-40% range seen in recent transactions. Within the 'A' rating category, the assigned rating of 'A-' incorporates the credit quality of Hawaiian Airlines, which Fitch rates 'B'.
Overcollateralization: The A-tranche in HA 2013-1 is significantly over-collateralized, with an initial LTV of 56.0%, using adjusted aircraft values provided by Fitch's independent appraiser. This is roughly in-line with the majority of recent EETC transactions that have come to market. The initial LTV is also the maximum LTV that is expected through the life of the transaction. LTVs are expected to decline steadily as the A-tranche amortizes, declining to as low as the upper 30% to mid- 40% range by maturity.
Stress Case: Overcollateralization in a stress scenario is the primary driver for the senior tranche rating. Fitch's stress case utilizes a top-down approach assuming a rejection of the entire pool in a severe global aviation downturn. The stress scenarios incorporate a full draw on the liquidity facility, an assumed 5% repossession/remarketing cost, and a 30% stress to the value of the collateral. These assumptions produce a maximum stress LTV of 92.0%, suggesting full recovery for the A-tranche holders. The highest stress LTVs are experienced early in the life of the transaction and are expected to decline quickly as the deal amortizes. Fitch expects stress LTVs to drop below 90% by 2016.
Collateral Quality: Fitch considers the A330-200 to be a good quality Tier 1 or 2 aircraft. The aircraft in this transaction are classified by Fitch as Tier 1 aircraft because of their age. The A330-200 is a highly capable aircraft that has outperformed its rival 767 over the last decade, and maintained a healthy backlog despite the long-awaited arrival of the 787. The plane has a wide user base and is expected to remain a popular choice for medium density, medium to long-haul routes through the life of this transaction. As of March 31, 2013 there were 466 A330-200s in service world-wide, with a total of 88 operators. Per Airbus, there are currently 81 A330-200s on order.
However, in the longer-term, the model does face pressure from the 787-8 and 787-9 which will bracket the A330-200 in terms of capacity, but will feature a longer range, and from the A350-800, although there is some question about when the A350 will enter service. Within the A330 family, market preferences have shifted to the higher capacity A330-300, causing some softness in leasing/remarketing rates for the A330-200. Per the appraisals included in the prospectus, 17 of these aircraft are currently listed as for sale or lease representing around 3% of the worldwide fleet, compared to zero for the -300 model. Accordingly, Fitch applies the high end of its stress range (20-30%) to A330-200 values in its top-down analysis.
High Affirmation Factor: Fitch believes there is a high likelihood that the aircraft in this transaction's pool would be affirmed in a bankruptcy or restructuring scenario. The A330s in this transaction represent a key part of Hawaiian's fleet renewal plan as well as its strategy to expand into new long-haul markets. Hawaiian is in the process of retiring the majority of its fleet of 767-300ERs, most of which are pre-1999 vintage. The A330s will fill the role of the 767s while delivering better unit cost performance and a significantly longer range. The lower unit costs of the A330s are also essential to Hawaiian's strategy of adding new markets in Asia. Hawaiian has added nine new international destinations since 2010 and will add its 10th with Beijing, China in 2014. While Hawaiian's old 767s are capable of flying long-haul routes to Asia, the superior operating economics of the newer A330s help to make these routes more profitable.
The affirmation factor is also supported by the size of the collateral pool relative to Hawaiian's overall fleet. On an absolute basis, this pool is considerably smaller than most recent EETCs that Fitch has rated which tend to have at least 10 aircraft, but in some cases contain more than 20 aircraft. However, these six A330s will make up roughly 12% of Hawaiian's fleet by aircraft count, compared to 2-4% for most recent transactions.
Looking only at HA's wide-body aircraft, Fitch estimates the six aircraft in this transaction's pool will account for approximately 20% of HA's wide-body aircraft at the end of 2014 by aircraft count. Fitch believes that in a hypothetical restructuring scenario in which HA pulled back from its international strategy and reduced the size of its wide-body fleet, the A330s in this transaction would likely be affirmed, as HA would likely reject or restructure its 767's and other A330's (including leased aircraft) while retaining its newer (mostly owned) A330s. At the end of 2014 Fitch expects HA to have 10 767s remaining in its fleet, as well as 19 A330s, seven of which will be leased aircraft.
The affirmation factor is somewhat limited by the concentrated use of the A330s on routes to Asia and other long-haul markets. If HA were to re-trench from its growth strategy, the wide-body A330s could have a more limited use elsewhere in the carrier's fleet, as they may prove to be too large to serve some of Hawaiian's U.S. West Coast markets. Additionally, Hawaiian's small size compared to other carriers may make it more difficult to reposition these aircraft if it were to change its growth strategy or if there were a major market disruption in Asia.
Structural enhancements: The ratings also benefit from structural enhancements inherent in most modern EETCs. Structural features include an 18 month liquidity facility for both the A and B-tranche, which will cover missed interest payments in the event of non-payment by Hawaiian, cross-default and cross-collateralization provisions that are present from start of the transaction, and the benefits afforded by Section 1110 of the U.S. bankruptcy code.
B-Tranche: The 'BB' rating for the subordinate B-tranche is assigned by notching up from HA's IDR of 'B' based on the Affirmation Factor as per Fitch's EETC criteria. The three notch uplift (Fitch's methodology prescribes a 2 - 4 notch uplift when the likelihood of affirmation is considered to be above 50%) reflects a high Affirmation Factor as discussed above, somewhat mitigated by the concentrated use of HA's A330s on its long-haul routes and the small overall size of Hawaiian's fleet. While overall the affirmation factor is considered to be high, Fitch's EETC criteria stipulates that the maximum four notch uplift be reserved for the strongest deals. Due to the risk factors mentioned, a more moderate three notch uplift has been applied to this transaction.
Potential ratings concerns for the senior tranche primarily consist of unexpected declines in aircraft values. Concerns for the A330-200 include new competition from the 787-8 and 787-9 as well as the introduction of the A350-800. These concerns are mitigated by the scarce availability for slots for the 787 and some doubts surrounding the timing of the entrance of the A350. In addition, recent improvements to the A330-200 have increased its range to nearly compete with the 787-8, while the A330 maintains a lower price. The actual impact of the 787 and the A350 on the market prices of the A330-200 are difficult to predict; however, Fitch expects the A330 to remain a popular wide-body for the intermediate term.
Potential concerns for the B-tranche are tied to the credit quality of the underlying airline. As Fitch views subordinated EETC tranches as being tied to the issuer IDR, a downgrade of Hawaiian would result in the B-tranche being downgraded. Likewise, the B-tranche could be upgraded if a positive rating action was taken on HA's IDR.
Fitch has assigned the following ratings:
Hawaiian Airlines 2013-1 pass-through trust
--Series 2013-1 class A certificates 'A-';
--Series 2013-1 class B certificates 'BB'.
Fitch currently rates Hawaiian as follows:
Hawaiian Holdings, Inc.
--IDR 'B'; Outlook Stable.
Hawaiian Airlines, Inc.
--IDR 'B'; Outlook Stable.
In accordance with Fitch's policies the issuer appealed and provided additional information to Fitch that resulted in a rating action that is different than the original rating committee outcome.
Additional information is available at 'www.fitchratings.com'.
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 Nonfinancial 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