13 aircraft to be financed with approximately $719 million of new rated enhanced equipment trust certificates
New York, December 07, 2017 -- Moody's Investors Service ("Moody's") has assigned ratings to Air Canada's
Pass Through Certificates (EETCs), Series 2017-1 the company
offered earlier today: $400.108 million Class AA with
a legal final due date of July 15, 2031 at Aa3, $172.198
million Class A with a legal final due date of July 15, 2031 at
A2 and $146.875 million Class B with a legal final due date
of July 15, 2027 at Baa3 (together, the "Certificates").
The scheduled maturity dates precede the respective legal final due dates
by 18 months. The proceeds of the Certificates will help fund the
purchase of 13 newly-manufactured aircraft that will deliver to
Air Canada between January 2018 and May 2018. The Corporate Family
Rating (CFR) of Air Canada is Ba3 and is unaffected in this rating action.
The rating outlook on the Certificates and on Air Canada is stable.
RATINGS RATIONALE
The ratings of the Certificates reflect the credit quality of Air Canada,
the credit benefits of the typical features of Enhanced Equipment Trust
Certificates ("EETCs"), including the applicability of the Cape
Town Convention as implemented in the federal and provincial laws of Canada,
cross-default and cross-collateralization of the equipment
notes, separate 18 month liquidity facilities on each class,
and cross-subordination pursuant to the Intercreditor Agreement.
Moody's believes that the nine Boeing 737 MAX 8 and the four Boeing
B787-9 aircraft models will remain core to Air Canada's network
throughout the financing's 12-year term, making it
likely that Air Canada would affirm this financing in an insolvency scenario.
In Canada, The Cape Town Convention provides certificate holders
the ability to timely repossess the aircraft collateral under a certificate
default scenario. New York law mortgages and Quebec law mortgages
(hypothecs) that secure Air Canada's obligations under the equipment
notes will be registered in the International Registry, where international
interests created pursuant to the Cape Town Convention on International
Interests in Mobile Equipment and the Protocol to the Convention on International
Interests in Mobile Equipment on Matters Specific to Aircraft Equipment
(together "Cape Town")) are recorded. Cape Town became
part of Canadian federal, provincial and territorial law on April
1, 2013. Canada elected 60 days for the Alternative A Waiting
Period when adopting Cape Town, same as the 60-days afforded
by Section 1110 of the US Bankruptcy Code. Irrevocable De-registration
and Export Request Authorizations (IDERAs) are also incorporated in Canadian
Cape Town legislation. These will be included as part of the security
package, supporting the expectation of timely repossession of the
aircraft under a certificate default scenario.
The respective notching on the three classes of certificates is nine,
seven and three notches above Air Canada's Ba3 CFR. Moody's
estimates the respective peak loans-to value (LTV) at about 41%,
58% and 73% (before priority claims: repossession
and remarketing costs and liquidity facilities) which support the notching
of each tranche. The estimated LTVs are proximate to other recent
EETC transactions.
The peak LTVs occur in January 2019, at the time of the first scheduled
amortization payment and repeat six months later. The amortization
profile is modest, more so for the Class AA and Class A than the
Class B, making for relatively flatter LTV curves compared to transactions
before 2015 when the Class AA tranche was introduced. The projected
LTVs fall to 39%, 56% and 66%, respectively
in January 2023. The notching for each class reflects Moody's belief
of the importance of the aircraft to the network and the expected relatively
attractive coupons of the to-be-issued certificates which
together drive up the probability of affirmation under an Air Canada insolvency.
Additionally, the equity cushions are sufficient to balance the
relative risk of the flatter curves. Moody's estimates LTVs using
its estimates of market values, which are informed by estimates
made by different appraisal firms than those included in the prospectus.
Moody's estimates the aggregate market value of the 13 aircraft at about
$1.005 billion at the issuance date, about $788
million in January 2023 and about $477 million at the scheduled
maturity in January 2030. These values compare to about $1.012
billion, $863 million and $650 million, respectively,
of maintenance-adjusted base values disclosed in the offering memorandum.
The gap grows with the passage of time as Moody's reduces values faster
than the three percent standard used in EETC offerings; specifically,
7.5% in year 1, 5% in year 2 and 4%
per year thereafter for the B737 MAX 8s and 7.5% in year
1 and 5% per year thereafter for the B787-9s.
Air Canada ordered 61 Boeing MAX aircraft. The second delivered
on December 4, 2017; 59 were on order as of that date.
The nine MAX 8s in this transaction will be older than the average age
of the MAX aircraft that Air Canada will operate over the life of the
transaction. Nevertheless, the fuel efficiency of this model
and its younger average age relative to the company's existing narrowbody
fleet comprised of Airbus A319s, A320s and A321s (all current engine
option) make retention of the aircraft in the Series 2017-1 EETC
highly likely. The company has seven 787-9s on order as
of the end of October and 22 already in the fleet. The four aircraft
in this transaction will be younger than the average age of this model
in the fleet over the transaction's 12-year term.
The 787-9 will serve some of the company's longest long-haul
routes, including the latest new route of Vancouver to Melbourne
Australia, which commenced service on December 1, 2017.
The fuel efficiency and flexibility of the 787 further burnish the importance
of the collateral in this transaction to Air Canada, supporting
the expectation of a very likely affirmation of the transaction under
an insolvency scenario.
The terms of the Intercreditor agreement restrict the minimum proceeds
for which an aircraft or equipment note may be sold during the first nine
months following a Certificate default. Specifically, 75%
and 85% of the then appraised current market value for the sale
of an aircraft or an equipment note, respectively. This restriction
and the cross-subordination provisions of the Intercreditor agreement
should support recovery on the Class AA and Class A certificates under
a certificate default scenario. The Baa3 rating of the Class B
certificates reflects the support of the structural elements of EETCs
and the modest equity cushion.
Any combination of future changes in the underlying credit quality or
ratings of Air Canada, unexpected changes in Air Canada's
route network that de-emphasizes long-haul operations,
unexpected material changes in the market value of the aircraft or Canadian
case law that weakens the expected benefits of Cape Town as implemented
in Canada could cause Moody's to change its ratings of the Certificates.
Headquartered in Saint-Laurent, Quebec, Air Canada
is Canada's largest domestic and international airline serving 216 airports
on six continents. Canada's flag carrier is among the 20 largest
airlines in the world and in 2016 served close to 45 million customers.
Air Canada provides scheduled passenger service directly to 64 airports
in Canada, 60 in the United States and 98 in Europe, the Middle
East, Africa, Asia, Australia, the Caribbean,
Mexico, Central America and South America. The company reported
CN$13.8 billion of revenue in the last twelve months.
The methodologies used in these ratings were Enhanced Equipment Trust
and Equipment Trust Certificates published in December 2015, and
Global Passenger Airlines published in May 2012. Please see the
Rating Methodologies page on www.moodys.com for a copy of
these methodologies.
The following rating actions were taken:
Assignments:
..Issuer: Air Canada Series 2017-1 Pass Through
Trusts
....Senior Secured Enhanced Equipment Trust
Class A, Assigned A2
....Senior Secured Enhanced Equipment Trust
Class AA, Assigned Aa3
....Senior Secured Enhanced Equipment Trust
Class B, Assigned Baa3
Outlook Actions:
..Issuer: Air Canada Series 2017-1 Pass Through
Trusts
....Outlook, Assigned Stable
REGULATORY DISCLOSURES
For ratings issued on a program, series or category/class of debt,
this announcement provides certain regulatory disclosures in relation
to each rating of a subsequently issued bond or note of the same series
or category/class of debt 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.
Regulatory disclosures contained in this press release apply to the credit
rating and, if applicable, the related rating outlook or rating
review.
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
VP - Senior Credit Officer
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
Robert Jankowitz
MD - Corporate Finance
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
