Fitch Rates Continental's Proposed 2012-3 Class C Ctfs 'BB-'
NEW YORK -- December 12, 2012
Fitch Ratings assigns a 'BB- 'rating to Continental Airline's (CAL) proposed
$425 million of Class C Pass Through Certificates, Series 2012-3 with a bullet
maturity in April 2018. CAL is a primary operating subsidiary of United
Continental Holdings, Inc. (UAL).
The proceeds of the Class C Certificates (C-tranche) will be used to acquire
the Series C Equipment Notes (i.e. the underlying mortgage) issued by CAL and
secured by 42 Boeing aircraft included in the previously issued Series 2012-1
and Series 2012-2. The Series 2012-3 C-tranche is being structured as a 'Super
C-tranche' as the primary assets of the Series 2012-3 Class C Trust will
include Class C Equipment Notes from two separate deals instead of one.
Collateral aircraft between the two deals consists of 35 737-900ERs (17 from
Series 2012-1 and 18 from Series 2012-2) and seven 787-8s (four from Series
2012-1 and three from Series 2012-2). All aircraft, classified as Fitch Tier
1, are core to UAL's fleet as both fleet types represent the youngest vintages
and most fuel-efficient aircraft in UAL's armada for the next several years.
Thus far, CAL has taken delivery of 23 aircraft (20 from Series 2012-1 and
three from Series 2012-2). CAL has added all aircraft from Series 2012-1 in
its fleet, except for the final 787-8 which is scheduled for delivery later
this month. Aircraft previously delivered from Series 2012-1 include 17
737-900ERs (three 2009 vintage, 14 delivered new in 2012) and three new 787-8s
delivered earlier this year. From Series 2012-2 CAL has taken delivery of
three new 737-900ERs year-to-date, with one more scheduled for delivery in
Dec. 2012, and 14 between Jan-Jul 2013. Upcoming deliveries for Series 2012-2
also include two 787-8s slated for delivery later this month and one in Jul.
CAL has set up a standard prefunding structure for the 19 aircraft that are
expected to be delivered between Dec. 2012 and Jul. 2013. Accordingly, a
portion of the proceeds from this transaction will initially be held in escrow
and deposited with the designated Depositary, Natixis S.A. (rated 'A+/F1+'
with a Negative Outlook by Fitch) and withdrawn to purchase the notes as the
aircraft are financed upon delivery. Approximately $199 million of the Series
2012-3 C-tranche will be held in escrow until the aircraft are delivered,
assuming that all 21 aircraft under Series 2012-1 are financed by the Class C
Certificate issuance date.
The Series 2012-3 Class C Certificates will rank junior to the previously
issued Class A and Class B Certificates in their respective deals, and the
cash flows will follow the waterfall of the individual deals, both before and
after an event default. Please see ratings for the Series 2012-2 Class A and B
Certificates at the end of release. Fitch does not rate the Series 2012-1
Class A and B Certificates.
The 'BB-' rating on the 2012-3 C-tranche is assigned a modest two notch uplift
from CAL's IDR of 'B', based on the strong Affirmation Factor (i.e. Fitch's
assessment of the strategic importance of the collateral aircraft and the
likelihood of affirmation in a bankruptcy scenario) as per Fitch's EETC
criteria. The rating is based on Fitch's analysis of the C-tranches
individually as the most subordinate class within its respective deals, and
also incorporates structural enhancements unique to this particular tranche,
specifically an additional cross-collateralization feature that improves
ultimate recovery for bondholders in this particular tranche relative to other
C-tranche investors. The rating also incorporates UAL's credit profile
supported by its leadership positions across its extensive global route
network, strong liquidity profile and growing unencumbered asset base.
Like the senior tranches, the C-tranche benefits from Section 1110 (which
Fitch believes effectively lowers the probability of default (PD) compared to
CAL's PD). However, it lacks the credit support from a liquidity facility
(unlike the more senior A and B tranches) and collateral coverage through the
most subordinate tranche is considered weak. The initial loan-to-value for the
C-tranche is 82.0% as per the prospectus (as of the first distribution date),
and 91.4% as per Fitch estimates using more conservative aircraft values from
an independent appraiser not included in the transaction documents.
Fitch considers the Affirmation Factor (the primary rationale for C-tranche
ratings) for Series 2012-3 C-tranche to be very high based on the strategic
importance of both aircraft types in UAL's fleet, standard cross-default and
cross-collateral provisions under each of the Series 2012-1 and Series 2012-2,
and the low funding cost expected for this transaction. In addition, the
incremental cross-collateralization between Series C equipment notes
strengthens the Affirmation Factor for both Series 2012-1 and Series 2012-2.
The 737-900ER is the premier narrowbody of choice for UAL (and a few of its
U.S. peers including Delta and Alaska) and is expected to become the backbone
of its domestic narrowbody fleet, as they replace the aging 757-200s. The
company's commitment to this aircraft was recently evidenced when it placed a
firm order for 50 737-900ERs (with options for 60 more) in July, in addition
to its order for 100 737 MAX aircraft. The 737-900ER currently represents 5%
of UAL's narrowbody fleet but is expected to constitute a much larger portion,
estimated at 9% by the end of 2013 as new orders are delivered. The range of
the 737-900ER makes it an ideal plane for longer distance domestic routes,
while incorporating significantly lower trip costs than the less fuel
The 787-8s are expected to revamp UAL's international fleet, allowing UAL to
serve city pairs that were not previously accessible with older 767s. In
addition the 787-8 features significantly lower estimated costs, including 20%
lower fuel consumption, and 30% lower airframe maintenance costs, compared to
similarly sized aircraft. Notably, UAL is the first U.S. carrier, and the only
one for the next several years to fly this aircraft.
Furthermore, each equipment note is cross-collateralized and cross-defaulted
(immediately upon filing) within each of the Series 2012-1 and Series 2012-2
deals. Taken together, these provisions treat all the aircraft as one pool of
assets supporting the transaction, effectively limiting CAL's ability to
'cherry-pick' aircraft in a potential restructuring scenario. Fitch believes
these provisions, which are standard enhancements of the modern EETC template,
significantly increase the likelihood that CAL would affirm these notes and
the underlying aircraft and continue to make payments on the equipment notes
in a potential bankruptcy scenario.
In addition to being cross-collateralized within their respective deals, the
42 Series C Equipment Notes held in the Series 2012-3 trust are also
cross-collateralized. In the event of a potential bankruptcy and a rejection
of the aircraft relating to either the Series 2012-1 or Series 2012-2 deals, a
shortfall realized on the Series C Equipment Notes on one deal may be covered
by the other deal that is not in default (but only after the A, B and C
Equipment Notes have been paid in full in accordance with the applicable
Importantly, the Series C Equipment Notes relating to Series 2012-1 are not
cross-defaulted to Series C Equipment Notes relating to Series 2012-2.
Accordingly, in a potential Chapter 11 scenario, a default on the Series C
Equipment Notes from one deal will not trigger a default on the performing
Series C Equipment Notes and Senior Equipment Notes of the other deal.
Consequently, the recovery of a shortfall available under
cross-collateralization could be delayed for the Class C certificate holders
until the maturity date and full payment of the performing deal.
Notwithstanding the above, a default is triggered and liens will not be
released on the aircraft relating to the performing deal upon full repayment,
if the shortfall relating to the other Series C Equipment Notes has not been
paid in full.
Fitch believes the additional cross-collateralization between the Series C
equipment notes improves the expected recovery for Series 2012-3 Class C
certificates. However, the benefit of this enhancement is limited given
inclusion of the same aircraft types and vintages in both deals, and more
importantly the lack of over-collateralization for the most subordinate class
of debt, in Fitch's view. That said, the additional cross-collateralization
strengthens the Affirmation Factor for both Series 2012-1 and Series 2012-2 as
CAL would likely have to make a decision collectively on both deals in the
case of a bankruptcy, i.e. 42 aircraft instead 21, all of which are core to
the airline, in Fitch's view.
Fitch has assigned the following rating:
Continental Airlines 2012-3 Pass Through Trust
--Series 2012-3 Class C Certificates 'BB-'
Fitch previously assigned the following ratings:
Continental Airlines 2012-2 Pass Through Trust
-- Series 2012-2 Class A Certificates 'A';
-- Series 2012-2 Class B Certificates 'BBB-'.
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. 18, 2012);
--'Global Rating Criteria for Aircraft Operating Lease ABS' (April 17, 2012).
Applicable Criteria and Related Research:
Rating Aircraft Enhanced Equipment Trust Certificates
Corporate Rating Methodology
Global Rating Criteria for Aircraft Operating Lease ABS
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