New York, August 12, 2022 -- Moody's Investors Service ("Moody's") has completed a periodic review of the Enhanced Equipment Trust Certificate ratings that are associated with the same analytical units for the rated entity(entities) listed below.
The review was conducted through a portfolio review discussion held on 5 August 2022 in which Moody's reassessed the appropriateness of the ratings in the context of the relevant principal methodology(ies), recent developments, and a comparison of the financial and operating profile to similarly rated peers. A possible outcome from periodic reviews is a referral of a rating to a rating committee.
This publication does not announce a credit rating action and is not an indication of whether or not a credit rating action is likely in the near future. Credit ratings and outlook/review status cannot be changed in a portfolio review and hence are not impacted by this announcement.
Key Rating Considerations
The principal methodologies used for this review were Passenger Airlines published in August 2021 and Enhanced Equipment Trust and Equipment Trust Certificates published in July 2018. Please see the Rating Methodologies page on https://ratings.moodys.com for a copy of these methodologies.
Key rating considerations on a forward-looking basis may include but are not limited to the following summarized below.
Scale: Scale is an indicator of a company's revenue-generating capability and its resilience to shocks, such as sudden shifts in demand or rapid cost increases. Large companies within the industry generally have more flexibility to manage their businesses under different demand and cost scenarios, an important consideration in an industry that is highly cyclical. A large revenue base also can lead to economies of scale, for example, in terms of aircraft purchases and to improvements in the value and reliability of services. Revenue is an indicator of scale.
Business Profile: The business profile of a passenger airline is a consideration because it greatly influences its ability to generate sustainable earnings and operating cash flows. Core aspects of an airline company's business profile are its market position and network strength, which can reduce volatility through economic cycles. Concentration in a limited type of service offering can expose a company to losses related to changes in passenger behavior. Operating within a large and diverse network spread over many countries or regions lessens the impact of geopolitical events (including terrorism and civil war), natural disasters, competitors' actions and other operational event risks that could significantly curtail operations.
Profitability and Efficiency: Profits are considered because they are needed to generate sustainable cash flow and maintain a competitive position, which includes making investments in service offerings to attract customers and in the fleet to meet capacity plans by adding or reconfiguring aircraft. EBIT Margin is an indicator of profitability.
Leverage and Coverage: Leverage and cash flow coverage measures provide an important indication of how much financial risk an airline company is willing to undertake. These metrics are also indicators of the company's ability to sustain its competitive position, invest in growth opportunities and service debt. Indicators of leverage and coverage include ratios such as: Debt/ EBITDA, Retained Cash Flow/ Debt and Funds from Operations plus Interest Expense/ Interest Expense.
Financial Policy: Financial policy encompasses management and board tolerance for financial risk and commitment to a strong credit profile. It is an important rating determinant, because it directly affects debt levels, credit quality, the future direction for the company and the risk of adverse changes in financing and capital structure. Financial risk tolerance serves as a guidepost to investment and capital allocation. Liquidity management is an important aspect of overall risk management and can provide insight into risk tolerance.
Other Rating Considerations: Other considerations may include but are not limited to: financial controls and the quality of financial reporting; corporate legal structure; the quality and experience of management; assessments of corporate governance as well as environmental and social considerations; exposure to uncertain licensing regimes and possible government interference in some countries. Regulatory, litigation, liquidity, technology, and reputational risk as well as changes to consumer and business spending patterns, competitor strategies and macroeconomic trends also affect ratings.
Enhanced Equipment Trust and Equipment Trust Certificates
Corporate Family or Senior Unsecured Rating of the Obligor of the Underlying Financing: The analysis begins with an assessment of the credit quality of the underlying airline and is a critical difference relative to structured finance transactions (not covered by this rating methodology), which typically involve pools of aircraft leased to multiple airlines. We believe the concentration of risk with a single underlying obligor is a key credit consideration in relation to default probability, and less so to expected loss. Cash flows from the underlying obligor are the sole source of funding to the pass-through trusts that fund distributions on the Certificates while the underlying obligor is not in default. Furthermore, the aircraft that comprise the collateral do not change over time and are the sole source of security under an EETC default scenario.
Legal Framework: We consider the legal framework that will apply to the financing. For Certificates whose underlying financings are subject to the Cape Town Convention or other non-U.S. insolvency regimes, we form an opinion of the extent to which the applicable legal regime contributes to lower expected probability of default and lower expected loss relative to that under Section 1110. A country's historical compliance with international treaties and its domestic laws, including regarding owner's rights to repossess their assets following a lessee default, will be a key consideration in our assessment of Certificate transactions subject to laws other than Section 1110. We also consider the institutional strength of the country of domicile of non-US EETC issuers according to our sovereign ratings teams when assessing the legal jurisdiction.
Liquidity Facilities: Liquidity facilities for EETCs are typically sized to fund three semi-annual (or six quarterly) interest payments due on the underlying equipment notes that fund an EETC's pass-through trust following a payment default on one or more underlying financing instruments. Contractual terms of Certificates define a default as the non-payment by the Pass-Through Trustee of a scheduled interest payment or non-payment of the pool balance ("principal") then outstanding at the legal final maturity date. The liquidity facility is a key feature that sets EETCs apart from ETCs or PTCs. These facilities defer, if not prevent, a default of an EETC whose underlying financing(s) have been disaffirmed by the carrier that has filed for bankruptcy protection.
Collateral Attributes and Valuation: We evaluate the nature of the collateral and the amount of over-collateralization in each tranche of a transaction and consider qualitative features of the collateral and quantitative measures of loan-to-value (LTV) to determine the number of notches above the airline's underlying rating that we believe is appropriate for the instrument rating. We use the peak LTV over the life of a transaction when applying our LTV grids. We consider recent third-party appraisals, valuation guides prepared by ISTAT-certified appraisers and other market intelligence when estimating market values of aircraft when assigning and monitoring our Certificate ratings.
Loan-to-Value Assessment: Our loan-to-value notching grids for EETCs suggest the standard maximum number of notches a rating committee might consider when assigning EETC ratings. The models, vintages, and exposure to technological replacement of aircraft that comprise the collateral of two distinct Certificates with similar LTVs can meaningfully differ as can our estimates of future market values.
Terms of Equipment Note Indenture and Other Underlying Financing Instruments: The terms of related EETC trust documents, indentures of underlying equipment notes and intercreditor agreements have become mostly uniform. The additions of leases or conditional sale agreements (CSAs) to the structure of a particular EETC transaction have not in and of themselves resulted in notching differentials, relative to our practice for rating traditional mortgage financing EETCs, all else equal. To support ratings assignments and to minimize notching discounts relative to our ratings practice for EETCs, we look for the leases or CSAs to also be cross-defaulted.
This announcement applies only to Rated Entities with EU rated, UK rated, EU endorsed and UK endorsed ratings. Rated Entities, with Non EU rated, non UK rated, non EU endorsed and non UK endorsed ratings may be referenced herein to the extent necessary, if they are part of the same analytical unit.
Please see the Issuer page on https://ratings.moodys.com for each of the ratings covered, most updated credit rating action, rating history, and Credit Rating action Press Release including the rating rationale and factors that could lead to a rating upgrade or downgrade.
List of Issuers/Rated Entities
Air Canada EETCs
American Airlines Group Inc.'s EETCs
British Airways, Plc EETCs
Delta Air Lines, Inc.'s EETCs
DNA Alpha Limited EETCs
Hawaiian Holdings, Inc. EETCs
JetBlue Airways Corp. EETCs
Turk Hava Yollari Anonim Ortakligi EETCs
United Airlines Holdings, Inc.'s EETCs
This publication does not announce a credit rating action.
For any credit ratings referenced in this publication, please see the issuer/deal page on https://ratings.moodys.com
for the most updated credit rating action information and rating history.
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