Fitch Rates Air Canada's Proposed 2013-1 EETC Class C Certs 'BB-
NEW YORK -- April 24, 2013
Fitch Ratings assigns the following rating to Air Canada's (AC, IDR
'B'/Positive Outlook) proposed Pass Through Trusts Series 2013-1:
--$108.3 million Class C certificates (C-tranche) with a bullet maturity of
May 2018 'BB-'.
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
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.
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
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.
The 'BB-' rating of the Class C certificates is assigned by a two-notch uplift
(the minimum per Fitch's EETC criteria) from AC's IDR of 'B' based on the
collateral pool's high affirmation factor. The rating for the AC 2013-1
C-tranche takes into consideration the modest OC with Fitch's base LTV of
83.8%, no enhancement from a liquidity facility, and the following key
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
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 rating:
Air Canada Pass Through Trusts Series 2013-1
--Class C certificates 'BB-'.
Earlier today Fitch 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.
Applicable Criteria and Related Research
Rating Aircraft Enhanced Equipment Trust Certificates
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