MOODY'S REVISES RATINGS PRACTICE ON AIRLINE EQUIPMENT TRUST AND PASS THROUGH OBLIGATIONS, PLACES ALL EXISTING ETC AND PASS THROUGH SECURITIES UNDER REVIEW FOR POSSIBLE UPGRADE
New York, 01-19-95 -- Moody's Investors Service said that it is revising its ratings practice on airline equipment trust and pass through obligations and will consider assigning ratings that could be as high as two notches above the issuing airline's long term senior unsecured debt rating to all qualifying securities issued to finance new aircraft. At the same time, Moody's has placed under review all existing airline ETC and pass through obligations for possible upgrade. These rating actions are in response to the cumulative affect of a variety of changes affecting these instruments, including the October 22, 1994 revisions to U.S. bankruptcy law that expand and strengthen the rights of creditors in aircraft leasing and financing transactions (section 1110 of the U.S. Bankruptcy Code).
For aircraft first placed in service after October 22, 1994, the Bankruptcy Reform Act of 1994 extends section 1110 protection, the right to repossess aircraft from a bankrupt airline, to any lender with a security interest in the aircraft. Previously, such protection was extended only to lenders with purchase money equipment security interests, lessors with true leases, and conditional vendors. In addition, for aircraft in service prior to enactment of the new law, the new law reduces the uncertainty regarding the "true" lease issue by defining a lease as including agreements where the parties state that the agreement is to be treated as a lease for Federal income tax purposes. In both cases, the new law increases the certainty of section 1110 protection and lessens the potential threat of legal challenge over ambiguous commercial law regarding definition of true lease. While the new law will not eliminate all potential legal challenges to section 1110, Moody's believes it significantly strengthens what had been an emerging body of legal precedent established in past airline bankruptcies over rights to and enforcement of section 1110.
In circumstances where there is this stronger debt protection, qualifying securities issued to finance aircraft placed in service after October 22, 1994 could be assigned a rating up to two notches higher than the airline's senior unsecured rating, particularly where superior legal and economic protection is offered in relation to an airline's unsecured debt. Equipment trust and pass through certificates issued to finance equipment placed in service on or prior to October 22, 1994 have been placed under review for possible upgrade, pending an analysis of the lease and, accordingly, the debt protection provided by each issue under the new law, as well as the security provide in each transaction.
Issues under review are:
Airline Security Amount Rating
Alaska Airlines, Inc. Equipment trust and pass
through certificates $99 million Baa3
American Airlines, Inc. Equipment trust, secured
equipment, and pass
through certificates $2,133 million Baa1
Delta Air Lines, Inc. Equipment trust certificates $2,593 million Baa3
Federal Express Corp. Pass through certificates $919 million Baa1
Secured loan certificates $110 million Baa2
Southwest Airlines Co. Pass through certificates $402 million A3
United Airlines, Inc. Equipment trust and pass
through certificates $1,635 million Baa2
USAir, Inc. & Piedmont Equipment trust and pass
Aviation, Inc. through certificates $1,658 million B2
The following issues are not under review: NWA Trust Nos. 1 and 2 and Jet Equipment Trust Series 1994-A. Ratings on enhanced aircraft financings will continue to be assigned on a case-by-case basis.
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