Fitch Affirms Air Canada 2015-1 and 2013-1 EETCs

CHICAGO--()--Fitch Ratings has affirmed the ratings for the Air Canada 2015-1 and 2013-1 series of enhanced equipment trust certificates as follows:

--2015-1 class A certificates due 2027 at 'A';

--2015-1 class B certificates due 2023 at 'BBB-';

--2015-1 class C certificates due 2020 at 'BB'.

--2013-1 class A certificates due 2025 at 'A';

--2013-1 class B certificates due 2021 at 'BBB-';

--2013-1 class C certificates due 2018 at 'BB'.

KEY RATING DRIVERS

Senior tranche ratings are primarily driven by a top-down analysis which evaluates the level of overcollateralization maintained in these transactions through a series of stress tests. Both the Air Canada 2013-1 and 2015-1 class A certificates remain sufficiently overcollateralized to pass Fitch's 'A' level stress tests when incorporating the latest available aircraft appraisal data. This suggests that senior tranche debt holders would be expected to achieve full principal recovery prior to the expiration of the transaction's liquidity facility even in a harsh downturn scenario.

Loan to value ratios in the 2013-1 transaction, which is secured by five 777-300ERs, have weakened marginally over the past year due to heavier than expected value depreciation of that aircraft. 777 values are experiencing some softness for various reasons including the introduction of Airbus' A350 family, the pending introduction of the 777x (scheduled for the 2020 timeframe), and in anticipation of a number of 777-300ERs scheduled to come off of their initial leases over the next several years. Despite recent valuation softness, the transaction remains heavily overcollateralized, producing a maximum stressed LTV of 81.6% in Fitch's 'A' level stress test.

There have been no material changes to asset values or loan-to-value ratios for the 2015-1 transaction since it was launched less than one year ago. The transaction is backed by one 787-8 and 8 787-9s, which continue to be highly sought after aircraft. Fitch's 'A' level stress scenario produces a maximum LTV of 82.4% through the life of the transaction.

Subordinated tranche ratings are notched up from the underlying airline rating based on three primary factors: 1) the likelihood that the collateral would be affirmed in a potential bankruptcy (0-3 notches), 2) the presence of a liquidity facility (1 notch) and 3) recovery prospects. Fitch continues to view both of these transactions as having a high likelihood of affirmation (+3 notches) given the importance of the 777-300ER and the 787 family to Air Canada's fleet renewal efforts and international expansion strategy. Air Canada's IDR remains 'B+/Rating Outlook Stable'.

KEY ASSUMPTIONS

Fitch's key assumptions within the rating case for both transactions include:

--Asset values in-line with those provided by Fitch's independent aircraft appraiser;

--Asset value depreciation for collateral aircraft at roughly 5%/year;

--Asset value stresses in line with those detailed in Fitch's EETC criteria.

RATING SENSITIVITIES

A tranche ratings are primarily driven by the value of the underlying collateral. The ratings for the 2013-1 class A certificates could be considered for a negative action if market values for the 777-300ER were to experience an unexpected and severe decline. Similarly, the 2015-1 class A certificates could be considered for a negative action if 787 values were to experience an unexpected and severe decline. A positive rating action is not expected at this time.

The B and C tranche ratings are linked to the underlying airline Issuer Default Rating (IDR). Therefore if Air Canada's IDR were to be downgraded, the B and C tranches would likely be downgraded in tandem. However, if Fitch were to upgrade the IDR to 'BB-', the subordinated tranches may not be upgraded as the agency's EETC criteria provides for some ratings compression when airline IDRs are in the 'BB' category.

Additional information is available on www.fitchratings.com

Applicable Criteria

Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage (pub. 17 Aug 2015)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=869362

Rating Aircraft Enhanced Equipment Trust Certificates (pub. 13 Oct 2015)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=871079

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=999812

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=999812

Endorsement Policy

https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

Contacts

Fitch Ratings
Primary Analyst
Joe Rohlena, CFA
Director
+1-312-368-3112
Fitch Ratings, Inc.
70 W. Madison St.
Chicago, IL 60602
or
Secondary Analyst
Craig Fraser
Managing Director
+1-212-908-0310
or
Committee Chairperson
David Peterson
Senior Director
+1-312-368-3177
or
Media Relations:
Alyssa Castelli, +1-212-908-0540
alyssa.castelli@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Joe Rohlena, CFA
Director
+1-312-368-3112
Fitch Ratings, Inc.
70 W. Madison St.
Chicago, IL 60602
or
Secondary Analyst
Craig Fraser
Managing Director
+1-212-908-0310
or
Committee Chairperson
David Peterson
Senior Director
+1-312-368-3177
or
Media Relations:
Alyssa Castelli, +1-212-908-0540
alyssa.castelli@fitchratings.com