Fitch Rates Proposed British Airways' 2013-1 Class A Ctfs 'A' & Class B Ctfs
NEW YORK -- June 25, 2013
Fitch Ratings expects to assign the following ratings to British Airways'
proposed Pass Through Trusts Series 2013-1:
--$721.6 million Class A Certificates (A-tranche) with an expected maturity of
June 2024 'A';
--$207.0 million Class B Certificates (B-tranche) with an expected maturity of
June 2020 'BBB-'.
The ratings reflect the application of Fitch's criteria for rating aircraft
enhanced equipment trust certificates (EETC). Key ratings considerations
include the quality of the aircraft collateral, significant
overcollateralization, the UK insolvency regime coupled with the transaction's
underlying lease structure, the liquidity facilities, British Airways' (BA,
not rated) credit quality, and various additional structural elements.
The ratings also capture the wide-body concentration in the collateral pool
and the fact that this transaction is the first EETC to rely on the UK
insolvency regime, which is different in key aspects compared to the Section
1110 and Cape Town Convention legal frameworks seen in most EETCs.
This will be BA's first EETC, and the structure largely follows the U.S. EETC
template (pass-through SPV, debt tranching, liquidity facility,
cross-provisions, etc.) with aircraft collateral and LTVs comparable to recent
The proceeds of the proposed transaction will be used to pre-fund the purchase
of 14 new aircraft (6 787-8s, 6 A320-200s, and 2 777-300ERs) scheduled to be
delivered between June 2013 and June 2014. Accordingly, proceeds will
initially be held in escrow by Landesbank Hessen-Thuuringen Girozentrale
(rated 'A+'/F1+' with a Stable Outlook), the designated depository, until the
aircraft are delivered.
The A-tranche will feature an 11-year tenor and an initial LTV (per the
prospectus) of 55.2%. Fitch calculates the initial LTV at 56.3% using its own
depreciation assumptions. The B-tranche will feature a seven-year tenor and an
initial prospectus LTV of 70.6%. Fitch calculates the initial B-tranche LTV at
Key Rating Drivers
A-Tranche: The A-tranche rating is primarily driven by a top-down analysis
which evaluates the level of overcollateralization and likely recovery in a
stress scenario. The initial prospectus loan-to-value ratio (LTV) is listed at
55.2%, and the maximum LTV produced by Fitch's stress scenario is 86.3%, which
implies a significant amount of cushion for senior tranche certificate
holders. The ratings are also supported by a strong collateral package
consisting of all new-delivery Tier 1 aircraft, an 18-month liquidity
facility, cross-collateralization/cross-default features, and Fitch's
assessment of the UK insolvency regime. The rating incorporates a secondary
dependence on the credit quality of BA as the obligor under the leases.
Stress Case: Fitch's stress analysis assumes that all aircraft are rejected in
a severe global aviation downturn. The analysis incorporates a full draw on
the liquidity facilities (increasing the LTV by roughly 5.9%) and an assumed
repossession/remarketing cost of 5% of the total portfolio value.
Various haircuts are then applied to the aircraft values according to Fitch's
assessment of the quality of the collateral. As all aircraft in this
transaction are considered to be Tier 1 collateral, the Fitch's analysis
incorporates a value stress range of 20-30%.
The 787-8s, which represent 54.7% of the collateral pool, receive a 20% value
stress reflecting Fitch's view of the 787-8 as a top quality aircraft. Boeing
has built a significant backlog of 478 787-8s with nearly 50 customers through
May 2013. The larger 787-9 has a backlog of 355 aircraft, and Boeing recently
launched the 787-10 with commitments for 102 aircraft. The superior operating
economics and lack of available near-term delivery slots for the 787 series
should support market values for the foreseeable future in Fitch's view.
The 777-300ERs (25.5% of the collateral pool) receive a 25% haircut, or the
mid-point of the Tier 1 stress range. Fitch considers the 777-300ER a solid
Tier 1 aircraft, but applies a harsher stress level to account for the greater
historical volatility experienced by wide-body jets compared to the most
popular narrow bodies. The 777-300ER is the best-selling aircraft of its size
with a diverse base of global operators, solid backlog and limited
competition. Notably, there are no 777-300ERs currently parked. With an
average age of 3.7 years, the 777-300ER is relatively young in its life cycle,
with no replacement aircraft in near to intermediate term.
The A320-200s (19.8% of the collateral pool) also receive a 25% haircut.
Although Fitch considers the A320-200 to be a top quality aircraft due to its
wide user base and significant market penetration (more than 3,000 aircraft in
service with roughly 240 operators), the middle of the Tier 1 stress range is
applied to reflect recent market weakness in A320 lease rates and a relatively
high number of aircraft listed as parked compared to the rival 737-800.
These assumptions produce a maximum stress LTV of 86.3% throughout the life of
the transaction, suggesting full recovery for the A-tranche holders. The
highest stress LTVs occur roughly four years into the transaction, as Fitch's
assumed depreciation rates (5%/year for Tier 1 aircraft) initially outpace the
scheduled A-tranche amortization. Thereafter LTVs are expected to slowly
decline through maturity.
B-Tranche: The 'BBB-' rating for the B-tranche is based on a ratings uplift
compared with BA's stand-alone credit profile, largely based on a high
Affirmation Factor, as discussed below. The affirmation factor for this pool
is considered high as all three aircraft types in the transaction are core to
BA's fleet plan. Fitch believes that the likelihood of these aircraft being
affirmed in a restructuring scenario effectively reduces the B-tranche
probability of default compared to BA's credit profile.
Affirmation Factor: Fitch considers all three aircraft types included in this
transaction to be strategically important to BA and key to the airline's fleet
renewal program, making it highly unlikely that the pool would be rejected in
a restructuring scenario.
The 787 will play a significant role in BA's growth plan. The combination of a
long-range but relatively small size of the plane will open new markets for
BA. The 787 will be particularly effective in serving fast-growing Asian
markets as BA looks to increase its presence in the East. The 787 also serves
as a replacement for BA's aging 767-300ERs.
As with the 787, the 777-300ER will play an important role in replacing some
older aircraft in BA's fleet, in this case BA's fleet of 747-400s used on
routes that do not require an aircraft of the 747's size (301 seats vs. 416).
The 777 is also more fuel efficient than the heavy 747, creating favorable
The A320 family has provided the backbone of BA's short haul fleet out of
Heathrow for more than a decade when they began replacing older 737-400's. As
the remaining 767-300s are retired, BA's entire short haul fleet out of
Heathrow will consist of the A320 family, making these aircraft an integral
part of BA's European operations.
This transaction will combine two common aircraft finance structures, the EETC
and the JOLCO (Japanese operating lease with call option), which together will
provide the proceeds to purchase the aircraft collateral. In the event JOLCO
equity is unavailable for an aircraft, a finance lease will be put in place.
The aircraft will be leased to BA, which is the underlying corporate credit in
this transaction. The lease payments are at least equal to the debt service
requirements and ongoing transaction expenses. The lease payments fully
amortize the A and B tranches before the end of the leases, and BA has an
option to buy the aircraft in the 11th year of the leases.
The proceeds of the rated certificates will be used to purchase equipment
notes issued by Speedbird 2013 Limited. The certificates and notes are subject
to New York Law. Speedbird will use the proceeds from the notes to purchase
mortgage bonds (or secured loans in the case of a finance lease) issued by the
owner of the aircraft. The owner will enter into conditional sale agreements
(CSA) with special purpose vehicles established to lease the aircraft. The
aircraft will be purchased from Airbus and Boeing with the proceeds of the
mortgage bonds and the initial CSA payments. The lessors are owned by JOLCO
investors, and the required CSA payments are funded by the lease payments from
BA and the initial equity infusion by the JOLCO investors. The leases are
subject to English law.
The leases, CSA interests, and aircraft mortgages are assigned as security, so
in the event that BA defaults on the leases, the certificate holders should be
able to take possession of the aircraft as the owners unless BA continues to
make the contractual lease payments.
Liquidity Facilities: The Class A and Class B certificates will benefit from
18-month liquidity facilities provided by Landesbank Hessen-Thuuringen
Cross-default & cross-collateralization provisions: Each note will be fully
cross-collateralized and all indentures and leases will be fully
cross-defaulted from day one, limiting BA's ability to 'cherry-pick' aircraft
in a potential restructuring.
UK Insolvency Law
Bankruptcy/insolvency law is a foundation of Fitch's aircraft EETC rating
methodology. Fitch's EETC rating approach largely rests on creditors' ability
to quickly repossess aircraft, and the influence this has on airlines'
incentive to affirm aircraft in bankruptcy (while paying all interest and
principal on time and in full). Section 1110 of the U.S. Code (which offers
unique legal protection to aircraft creditors in U.S.) and the Cape Town
Convention (CTC, which incorporates most elements of Section 1110 protection
in countries that have ratified the treaty) are two examples of legal
frameworks applied in Fitch's EETC rating methodology.
Neither Section 1110 nor the CTC applies for BA 2013-1 as the leases are
governed by English Law. As a result, Fitch's legal analysis for this
transaction relied on the general insolvency regime in the UK, which Fitch
considers to be strong for creditors in general, but notes that there are no
special carve-outs for aviation assets similar to 1110 or the CTC. However,
the creditor-friendly nature and reliability of the UK legal regime, precedent
under UK law, and several structural elements of the transaction provide
significant credit protection, making possible the application of Fitch's EETC
criteria to this transaction.
There is strong precedent under English law for court approval to provide
leave for creditors to repossess and liquidate security, or to require the
continuation of rental payments in full on a timely basis. If BA were to
become subject to insolvency proceedings (assumed to be administration rather
than liquidation), Fitch believes that if the company and its administrator
desired to keep the aircraft, it is probable that BA would have to continue
paying (so the certificates should be current). In other words, although UK
insolvency laws do not include a specific provision geared to protecting the
interests of aircraft finance creditors, Fitch believes the UK regime has the
same practical effect: administration will not necessarily result in a default
on the certificates.
If BA rejected the aircraft or did not pay the required lease payments, the
certificate holders should be able to repossess the aircraft in a timely
Fitch believes the UK legal framework is slightly less beneficial to the
certificate holders than Section 1110 or the CTC, although the ratings were
not affected. Fitch notes several differences between the UK regime and
Section 1110/CTC. First, the timing of repossession is less certain under
English law than under Section 1110 and CTC, although there is the possibility
that repossession or payment could occur earlier than under Section 1110.
Also, the UK legal framework in this transaction is not as definite as Section
1110 or the CTC in that the relevant UK law is based on general practices and
precedents, not codified actions. Finally, the UK framework is not specific to
aircraft, while 1110 and CTC apply to aircraft and some other aviation
While Fitch concluded that with BA 2013-1's specific structure the EETC would
work in the UK, Fitch believes that this type of structure would not likely
work in other countries with less proven, more debtor-friendly legal systems.
Potential ratings concerns for the senior tranche primarily consist of
unexpected declines in aircraft values. For the 787-8, concerns primarily
involve the possibility for future technical problems resulting in further
groundings or production delays. A320-200 values could be affected by the
entrance of the A320 NEO and the 777-300ER will eventually face competition
for market share from the A350-1000. Fitch does not expect these risks to have
material impact on market values in the near-to-intermediate term.
The subordinated tranche ratings are influenced by BA's credit quality. A
negative rating action could be considered if Fitch believes BA's credit
Fitch has assigned the following ratings:
British Airways 2013-1 Pass=-Through Trusts
--Series 2013-1 Class A Certificates 'A';
--Series 2013-1 Class B Certificates 'BBB-'.
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).
Applicable Criteria and Related Research:
Rating Aircraft Enhanced Equipment Trust Certificates
Corporate Rating Methodology
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Craig D. Fraser, +1-212-908-0310
Fitch Ratings, Inc.
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For British Airways
Angelina Valavina, +44 (0) 20 3530 1314
Stephen Brown, +1-312-368-3139
Brian Bertsch, +1-212-908-0549
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