NEW YORK--(BUSINESS WIRE)--Fitch Ratings assigns the following ratings to Air Canada's (AC, IDR 'B'/Positive Outlook) proposed Pass Through Trusts Series 2013-1:
--$424.4 million Class A certificates (A-tranche) with an expected maturity of May 2025 'A';
--$181.9 million Class B certificates (B-tranche) with an expected maturity of May 2021 'BB+'.
The final legal maturities are scheduled to be 18 months after the expected maturities. AC may subsequently offer additional subordinated class C certificates at a future date, as per the transaction documents.
TRANSACTION OVERVIEW
The structure of AC's debut EETC transaction mirrors the post-2009 EETC template utilized by U.S. carriers with similar terms and structural enhancements (with the exception of an intermediary SPV). However, instead of Section 1110, which is available only to U.S. air carriers, the legal protection for AC 2013-1 certificate holders is provided by the Cape Town Convention, which Canada implemented as federal, provincial and territorial law in all applicable provinces and territories effective as of April 1, 2013.
Collateral Pool: The transaction will be secured by a perfected first priority security interest in five new 777-300ERs with higher maximum take-off weight (MTOW) than the standard model, classified as Fitch Tier 1 collateral, and considered a vital addition to AC's fleet as it looks to strategically grow in international markets.
Prefunded Deal: Similar to recent U.S. EETCs, proceeds from the transaction will be used to pre-fund deliveries between June 2013 and February 2014. Accordingly, proceeds initially will be held in escrow by the designated depository, Natixis ('A+'/'F1+'/Negative Outlook) acting through its New York branch, until the aircraft are delivered.
Liquidity Facility: Class A and Class B certificates benefit from a dedicated 18-month liquidity facility which also will be provided by Natixis.
Conditional Sale Agreement (CSA): The structure of this transaction features an intermediary SPV (Loxley Aviation, a Canadian Orphan SPV) between the airline and the loan trustees. Importantly, the CSAs in this transaction benefit from the protections available under Cape Town Alternative A. CSA structures are common in aircraft financing.
Cross-default & cross-collateralization provisions: Importantly, each Equipment Note will be fully cross-collateralized and all indentures and CSAs will have immediate cross-default provisions, which limit AC's ability to 'cherry-pick' aircraft within an EETC in a potential insolvency, offering the same level of creditor protection as modern (post-2009) EETCs issued in the U.S.
Cape Town Convention and its Aircraft Protocol (CTC): On April 1, 2013, CTC was implemented as federal law and also incorporated in most of its provinces and territories, including Quebec where AC is headquartered. Importantly, Canada has adopted CTC in the manner that is intended to be most favorable to EETC holders in a potential default with all the key declarations including: (i) Alternative A which essentially 'exports Section 1110' into foreign jurisdictions with the same 60-day stay period following an insolvency event (ii) self-help remedies, (iii) an Irrevocable De-Registration and Export Request Authorization (IDERA) registration, which obligates AC and the Canadian government to assist creditors in the deregistration and export of the aircraft, and (iv) choice of law. CTC Alternative A also requires AC to maintain and preserve the aircraft and its value in accordance with the financing agreement during the 60-day stay period, which is an additional enhancement over Section 1110.
Rating Rationale
Fitch's ratings for all tranches are based on the following key factors:
Strong Collateral Pool (Tier 1 aircraft)
Fitch views the 777-300ER as high-quality Tier 1 collateral. With a single engine type (GE), the 777-300ER is the best-selling widebody aircraft of its size, and a relatively young fleet type with an average age of 3.75 years for the global fleet. Notably, there are no 777-300ERs currently parked and the backlog continues to strengthen with an increasing number of both orders and operators. The fleet type currently has no direct competition since Airbus ended the A340-600 program in 2011, but will compete head-to-head with Airbus' A350-1000 when it is launched over the next few years (assuming no production delays).
Boeing also envisions a next-gen 777-X, which will eventually supplant the 777-300ER, but has yet to formally launch the program. High transition costs, typical of most large widebodies, could pressure values over time. Still, the outlook for the 777-300ER remains solid in the near-to-intermediate term as Fitch expects demand for this aircraft type, underpinned by lucrative international routes, to remain strong, supporting secondary market values even in a downturn.
Higher MTOW for AC's 777-300ERs
The five 777-300ERs included in this deal have a higher MTOW than the standard 777-300ER, which enables AC to more passenger and cargo capacity (in the belly of the aircraft), thereby increasing the revenue potential of these aircraft, while lowering unit costs, and marginally increasing trip costs. AC's 777-300ERs also feature additional enhancements including a larger cargo door, flight crew and attendant rest areas, which add incremental value to these assets as per the appraisers in the offering memorandum, as well as Fitch's independent appraiser not included in the deal.
High Affirmation Factor
The 777-300ERs in the collateral pool play a vital role in AC's fleet to support the airline's strategic focus on international, capitalizing on sixth freedom traffic and its extensive network. Overall, AC is looking to revamp its widebody fleet by growing its 777 fleet and inducting 787s to replace the older 767s that will be transferred to rouge, AC's new low-cost subsidiary for international leisure markets. When the five aircraft from this deal are combined with the 12 777-300ERs that AC already operates, the 777-300ER will represent 28% of AC's widebody fleet by year-end 2014. Importantly, the 777-300ERs in the collateral pool not only represent the youngest vintages of this fleet type in AC's fleet, but the higher revenue generation capability (from the new LOPA reconfiguration) in addition to lower operating unit costs sets them apart from other 777s that AC currently operates.
This is also AC's first EETC, and would be the first pool of aircraft with the standard cross-default and cross-collateralization provisions, so AC would have to make an 'all-or-nothing' decision in regards to these aircraft, versus having to make a decision on a plane-by-plane basis as would be the case for the majority of its remaining fleet in a potential insolvency. Although Fitch expects AC to return to the EETC market in the next couple of years, future AC EETCs would likely include the 787s (which serve different international markets) based on the current order book, which does not have any firm orders for the 777. AC does have purchase rights for 13 more 777-300ERs, but the next available delivery slots for the 777-300ERs are limited.
Cross-default and Cross-collateralization Provisions
All equipment notes are fully cross-collateralized, and all indentures and CSAs will be cross-defaulted, which restricts AC's ability to 'cherry-pick' aircraft within this EETC.
Legal Creditor Protection Provided by CTC
Fitch views the creditor protection provided by CTC Alternative A in Canada to be the same as the legal protection provided by Section 1110 in the U.S. The CTC has yet to be tested in Canadian courts, which adds some uncertainty, but Fitch does not view this as a significant concern in Canada given the reliability of its legal system. However, it could be an issue in other CTC jurisdictions along with the political risk inherent in some countries. The general insolvency regime in Canada is strong, with case law precedent from AC's 2003 CCAA filing in favor of the aircraft lessor. The CTC fortifies the existing legal framework by expanding the scope of eligible financing instruments to include leases as well as mortgages, and CSAs.
Canada has also adopted the CTC in its best possible form. As implemented, CTC Alternative A takes priority over any other inconsistent law in the country (with some limited exceptions). Furthermore, Canada has a solid standing in the international arena with a long history of honoring statutory law and treaties. Accordingly, Fitch believes that the enforceability of the CTC Alternative A will be similar to Section 1110 in the U.S. with incrementally stronger provisions due to the requirement to maintain the aircraft and preserve its value during the initial 60-day stay period, a broader scope and a quicker deregistration process. Fitch's rating process for AC 2013-1 treated the CTC in Canada as having parity with Section 1110.
Senior Tranche Rating
The proposed rating of AC 2013-1 Class A certificates also is supported by the following, as per Fitch's EETC criteria:
Significant Overcollateralization (OC) (Fitch's base case LTV): The A-tranche in AC 2013-1 is significantly over-collateralized, with initial LTV of only 49.5%, using adjusted aircraft values provided by Fitch's independent appraiser. It also reflects the lowest LTV for an A-tranche that Fitch has rated in the past year, or A-tranches in general when compared to initial LTV in the 55%-57% range for the majority of A-tranches issued by U.S. carriers.
The initial LTV is also the max LTV for the A-tranche in Fitch's base case, as LTVs remain flat the first five years, as scheduled amortization payments nearly match Fitch's depreciation assumptions, which are more conservative than the offering memorandum. The LTV gradually declines to 42.4% by the expected maturity date. The final balloon payment of approximately 48% of the original loan amount is higher than some recently rated deals but is in line with CAL 12-2A (also rated 'A'). Importantly, the higher tail risk is mitigated by the young vintage and solid outlook of this fleet type.
Significant OC even in a severe downturn (Fitch's stress LTV): The A-tranche also is significantly over-collateralized in a potential distress scenario as reflected in a maximum LTV of 78% in Fitch's stress case. Fitch's stress case assumes a rejection of the entire pool in a severe global aviation downturn and includes (i) a full-draw of the liquidity facility, (ii) 5% remarketing costs, and (iii) a 25% A-category value stress to the aircraft collateral. The 78% max LTV suggests the structure can withstand acute stresses even in a severe downturn with full recovery for Class A certificate holders with significant headroom. The maximum stress LTV for AC 2013-1 A-tranche is also the lowest LTV by a wide margin when compared to any of the other A-tranches (typically in high 80%-90% range) Fitch has rated. The low leverage in this transaction is a key factor that differentiates it from recent deals.
Liquidity Facility: The credit support from the liquidity facility which covers interest payments for 18 months in a potential default scenario also is factored into the ratings for the A-tranche.
Subordinated Tranche Rating
The 'BB+' rating for the Class B certificates is assigned by a four-notch uplift (the maximum per Fitch's EETC criteria) from AC's IDR of 'B' based on the high affirmation factor for this collateral pool, as per Fitch's EETC criteria. Although not reflected in the rating, the AC 2013-1 B-tranche also benefits from over-collateralization as reflected in Fitch's base LTV of 70.3%, and creditor protection from the liquidity facility.
Fitch has assigned the following ratings:
Air Canada Pass Through Trusts Series 2013-1
--Class A certificates 'A';
--Class B certificates 'BB+'.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Rating Aircraft Enhanced Equipment Trust Certificates' (Sept. 14, 2012).
Applicable Criteria and Related Research
Rating Aircraft Enhanced Equipment Trust Certificates
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=688711
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=789459
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