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Rating Action:

Moody's affirms United Airlines Holdings' Ba2 corporate family rating, outlook negative; assigns A3 rating to UAL 2020-1 EETC

19 Oct 2020

New York, October 19, 2020 -- Moody's Investors Service ("Moody's") affirmed its debt ratings for United Airlines Holdings, Inc. and United Airlines, Inc. (together "United"), including the Ba2 corporate family, Ba2-PD probability of default, Ba1 senior secured and Ba3 senior unsecured. The ratings outlook is negative.

Moody's also assigned an A3 rating to United Airlines, Inc.'s Pass Through Certificates, Series 2020-1 that the company announced earlier today: $3 billion Class A with a legal final maturity of April 15, 2029 ("the Certificates"). The final scheduled payment date precedes the respective legal final maturity date by 18 months. The Certificates' proceeds will pay-off the $2.75 billion aggregate outstanding amount of the company's three separate term loan facilities that mature in March or April 2021. The aircraft, spare parts and spare engine collateral that will secure the company's obligations under the transaction's equipment notes are currently pledged to these respective term loans. Substantially all of the airline's spare parts, 352 mainline aircraft and 99 spare engines will secure the Certificates.

The affirmation of the ratings reflects Moody's belief that United's liquidity will remain sufficient to outlast the wait for coronavirus vaccines and their broad dissemination. Moody's also expects that United will prioritize debt reduction in the post-coronavirus years to restore its credit metrics to pre-coronavirus levels. The negative outlook reflects the potential for greater than currently anticipated impacts of the coronavirus, which would likely lead to faster consumption of the company's liquidity, the delay of the pace and scope of the recovery in demand, the retirement of debt and the strengthening of credit metrics versus Moody's current expectations.

RATINGS RATIONALE

The Ba2 corporate family rating reflects United's favorable business profile as the third largest US and global airline based on revenue, the potential to restore its operating and credit profiles once a sustained, broad-based recovery of demand for air travel begins, now not likely before 2022 in Moody's view and its good liquidity. The improvements in service delivery and operational reliability that United achieved in the 24 months through the end of 2019, the increased variable cost structure and expectations that United will effectively deploy capacity relative to demand should promote improving financial performance through a recovery from the coronavirus. The Ba2 rating also reflects the expectation that management will prioritize debt repayment to restore the balance sheet in upcoming years. Credit metrics, including debt-to-EBITDA of 2.7x and free cash flow to debt of about 9.5%, heading into 2020 provided a cushion for the Ba2 corporate family rating.

The A3 rating of the Certificates reflects the credit quality of United; the typical benefits of Enhanced Equipment Trust Certificates ("EETCs"), including the applicability of Section 1110, an 18-month liquidity facility provided by Goldman Sachs Bank USA; cross-subordination pursuant to the Intercreditor Agreement; and Moody's belief that the collateral will remain important to United's network during the transaction's seven-year term, notwithstanding the advanced age of the majority of the aircraft in the transaction. The certificate's terms provide for subsequent issuances of junior tranches.

The 352 aircraft in the collateral span 11 different models with an average age of about 19 years, the youngest a 10-year old 737-800, the oldest several 25-year-old, 757-200s. The 757-200, 757-300, 767-300ER, 767-400ER, 777-200, 777-200ER, 737-700, 737-800, 737-900ER, A319 and A320 are the aircraft models in the collateral. The aircraft in the collateral represent 43% of United's mainline fleet at December 31, 2019, many of which will remain parked through 2021 and possibly for much of 2022, given the uncertain pace of recovery in air travel demand. United disclosed on its Q3 earnings call that it has no near-term plans to retire any aircraft in its fleet. The 352 aircraft are split into two tiers, Tier I and Tier II, differentiated by age with Tier II having the oldest aircraft. The equipment note debt attributable to each Tier II aircraft is scheduled to be repaid in full by the payment due in October 2024. At or after that time, these aircraft may be released from the collateral. There will be separate semi-annual LTV ratio tests for each of the three collateral groups (spare engines and spare parts, Tier I aircraft, Tier II aircraft). United will also have the right to substitute aircraft engines and or airframes and to release these types of collateral pursuant to the transaction's terms.

This transaction is the first of its kind; whereby aircraft, spare parts and aircraft engines are commingled in one EETC. There will also be only one equipment note, obviating the need for cross-default and cross-collateralization (together "crossing") relative to a traditional transaction with as many notes in a class as the number of aircraft in a transaction. Crossing with the Class A will remain intact for subsequently issued junior classes, if any.

Moody's believes the inclusion of the spare parts and engines helps mitigate the financial risk associated with the advanced age of the aircraft collateral. Pursuant to FAA regulations, aircraft can only be dispatched for a flight if they meet airworthiness standards. Without access to spare parts, an airline would likely have difficulty meeting FAA regulations, impairing its ability to conduct flight operations. Moody's believes this factor indicates a lower probability of disaffirmation of the transaction under a United Airlines' bankruptcy scenario versus a transaction that would be secured only by the 352 aircraft.

Moody's estimates the peak loan-to value (LTV) at about 60%, before priority claims for repossession and remarketing costs and of liquidity providers, which occurs at the transaction's inception. The amortization profile is steeper than that of recent EETC transactions secured by new or recent deliveries of in-demand aircraft models, providing for an increase in the equity cushion with each quarterly payment. Moody's projected LTVs at October 2022, 2024 and 2026 are 47%, 32% and 34%, respectively. These compare to 51% at inception, and 40%, 28% and 30% at these same periods, respectively in the prospectus. The modest increase in LTV after October 2024 reflects the assumed release of the Tier II aircraft from the transaction. Moody's discounted the equipment appraisal values by 15% when projecting LTVs for the transaction, based on its comparison of various appraisers' opinions of aircraft values. Moody's estimated the collateral value at $4.943 billion at inception, $5.035 billion in October 2022, $4.215 billion in October 2024 and $2.369 billion in October 2024. These estimates are 15% below those in the prospectus. The increase in estimated value reflects changes to maintenance adjustments for aircraft and engines.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS

The ratings could be downgraded if Moody's believes that liquidity will become insufficient for United to support itself well into 2022 while the recovery of demand awaits coronavirus vaccines through 2021. Aggregate of cash and available revolver approaching $8 billion could pressure the ratings as could clear expectations that United will not be able to timely restore its financial profile once the virus recedes. For example, if debt-to-EBITDA is sustained above 4x or funds from operations plus interest-to-interest is sustained below 4.5x beyond 2022. There will be no upwards pressure on ratings until after passenger demand returns to pre-coronavirus levels and United maintains liquidity above $6 billion, and key credit metrics improve, as indicated by EBITDA margins above 18%, debt-to-EBITDA below 3x and funds from operations plus interest-to-interest of about 6x.

The pace and extent to which long-haul international and business travel returns will influence the pace at which the credit profile will be restored. Downwards rating pressure could build if the coronavirus proves to deal a strong secular blow to these segments of travel demand, for which United is not able to mitigate the financial impacts. Delays in availability of vaccines could also lead to ratings downgrades.

Changes in the EETC ratings can result from any combination of changes in the underlying credit quality or ratings of United, in Moody's opinion of the importance of the collateral to the airline's network, or in Moody's estimates of equipment market values, which will affect estimates of loan-to-value.

The principal methodologies used in rating United Airlines, Inc., United Air Lines, Inc., and United Airlines Holdings, Inc. were Passenger Airline Industry published in April 2018 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1091811 and Enhanced Equipment Trust and Equipment Trust Certificates published in July 2018 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1125852. The principal methodology used in rating Mileage Plus Holdings, LLC was Business and Consumer Service Industry published in October 2016 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1037985. The principal methodology used in rating CLEVELAND (CITY OF) OH, Denver (City & County of) CO, Hawaii Department of Transportation, Houston (City of) TX, and NEW JERSEY ECONOMIC DEVELOPMENT AUTHORITY was Passenger Airline Industry published in April 2018 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1091811. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of these methodologies.

COMPANY PROFILE

United Airlines Holdings, Inc. is the holding company for United Airlines, Inc. United Airlines and United Express operated an average of 5,000 flights a day to 362 airports across five continents prior to the coronavirus. Revenue was $43.2 billion in 2019 and $22.8 billion for the last 12 months ended September 30, 2020. Moody's estimates full year 2020 revenue will be about $14.5 billion.

The following rating actions were taken:

Assignments:

..Issuer: United Airlines, Inc.

....Senior Secured Enhanced Equipment Trust, Assigned A3

Affirmations:

..Issuer: CLEVELAND (CITY OF) OH

....Senior Unsecured Revenue Bonds, Affirmed Ba3 (LGD5)

..Issuer: Denver (City & County of) CO

....Senior Unsecured Revenue Bonds, Affirmed Ba3 (LGD5)

..Issuer: Hawaii Department of Transportation

....Senior Unsecured Revenue Bonds, Affirmed Ba3 (LGD5)

..Issuer: Houston (City of) TX

....Senior Unsecured Revenue Bonds, Affirmed Ba3 (LGD5)

..Issuer: NEW JERSEY ECONOMIC DEVELOPMENT AUTHORITY

....Senior Unsecured Revenue Bonds, Affirmed Ba3 (LGD5)

..Issuer: Mileage Plus Holdings, LLC

....Senior Secured Bank Credit Facility, Affirmed Baa3

....Senior Secured Regular Bond/Debenture, Affirmed Baa3

..Issuer: United Air Lines, Inc.

....Senior Secured Pass-Through, Affirmed Ba1

..Issuer: United Airlines Holdings, Inc.

.... Corporate Family Rating, Affirmed Ba2

.... Probability of Default Rating, Affirmed Ba2-PD

....Senior Unsecured Shelf, Affirmed (P)Ba3

....Senior Unsecured Regular Bond/Debenture, Affirmed Ba3 (LGD5)

..Issuer: United Airlines, Inc.

....Senior Secured Bank Credit Facility, Affirmed Ba1 (LGD3, from LGD2)

....Senior Secured Enhanced Equipment Trust, Affirmed A1

....Senior Secured Enhanced Equipment Trust, Affirmed Baa1

....Senior Secured Enhanced Equipment Trust, Affirmed Baa2

....Senior Secured Enhanced Equipment Trust, Affirmed Baa3

....Senior Secured Enhanced Equipment Trust, Affirmed Ba1

....Senior Secured Equipment Trust, Affirmed Ba1

....Senior Secured Equipment Trust, Affirmed Baa3

Outlook Actions:

..Issuer: Mileage Plus Holdings, LLC

....Outlook, Remains Stable

..Issuer: United Airlines Holdings, Inc.

....Outlook, Remains Negative

..Issuer: United Airlines, Inc.

....Outlook, Remains Negative

REGULATORY DISCLOSURES

For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Jonathan Root, CFA
Senior Vice President
Corporate Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Russell Solomon
Associate Managing Director
Corporate Finance Group
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

No Related Data.
© 2020 Moody's Corporation, Moody's Investors Service, Inc., Moody's Analytics, Inc. and/or their licensors and affiliates (collectively, "MOODY'S"). All rights reserved.

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