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Rating Action:

Moody's rates Air Canada's Series 2015-2 EETC, Class AA at A1, Class A at A3, Class B at Ba1

01 Dec 2015

Ratings assigned to approximately $537 million of new enhanced equipment trust certificates

New York, December 01, 2015 -- Moody's Investors Service assigned ratings to Air Canada's Series 2015-2 Enhanced Equipment Trust Certificates (EETCs): $295.022 million Class AA with a legal final due date of June 15, 2029 at A1, $121.035 million Class A with a legal final due date of June 15, 2029 at A3 and $121.035 million Class B with a legal final due date of June 15, 2025 at Ba1 (together, the "Certificates"). The scheduled maturity dates precede the respective legal final maturity dates by 18 months. The proceeds of the Certificates will help fund the purchase of five newly-manufactured wide-body aircraft that will deliver to Air Canada in April or May 2016. The Corporate Family Rating (CFR) of Air Canada is B1. The rating outlook on the Certificates and on Air Canada is stable.

RATINGS RATIONALE

The ratings of the Certificates consider the credit quality of Air Canada as the obligor of the equipment notes, the instruments whose cash flows will fund the pass-through trusts. "Moody's believes that the Boeing B787-9 and B777-300ER will remain integral to Air Canada's network over the transaction's 12-year term, which supports its expectation that Air Canada would affirm this transaction if an insolvency of Air Canada was to occur," said Moody's Senior Credit Officer, Jonathan Root. The ratings of the Certificates also reflect the credit benefits of the typical features of EETCs, including cross-default and cross-collateralization of the equipment notes, 18 month liquidity facilities, and cross-subordination pursuant to the Intercreditor Agreement. The assigned ratings reflect Moody's opinion that the Pass-Through Trustees will make timely distributions of interest and the ultimate distribution of principal on the final scheduled regular distribution dates of December 15, 2027, December 15, 2027 and December 15, 2023 for the Class AA, Class A and Class B certificates, respectively.

The Cape Town Convention, as implemented by Canada, 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 a 60-day waiting period for Alternative A when adopting Cape Town, same as the 60-day waiting period of 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 A1 rating of the Class AA certificates is nine notches above Air Canada's B1 CFR. Moody's opinion that the B787-9 and B777-300ER will remain the backbone of Air Canada's wide-body fleet over the transaction's twelve year term. A peak loan-to value (LTV) of the AA-tranche of about 39% (before priority claims including of the liquidity facility providers and inclusive of a one percentage point benefit for cross-collateralization) support the notching of the Class AA tranche, similar to other recent transactions. An LTV of 39% is approximately 17 percentage points below the median LTV of senior tranches of EETCs that have been issued since 2007. Moody's estimates LTVs using its estimates of market values, which are informed by estimates made by different appraisal firms than those used by the issuer for the transaction. Moody's estimates the aggregate market value of the five aircraft at about $750 million at the issuance date, about $539 million in December 2023 and about $440 million in December 2027. These values compare to $756 million, $586 million and $495 million, respectively, of maintenance-adjusted base values included in the offering memorandum. The gap grows with the passage of time as Moody's uses a faster depreciation rate than the three percent standard used in EETC offering memorandums. Moody's base case assumptions contemplate a reduction in the LTV to about 30% at the scheduled maturity date in 2027.

Moody's estimates the peak LTV of the Class A tranche at about 56% (before priority claims). The plus seven notching for this tranche to A3 reflects Moody's belief that the probability of default of this financing is low as well as the sizeable equity cushion. The holders of this tranche have the right to buy-out the AA tranche at par following a certificate default scenario where Air Canada files for bankruptcy and does not affirm its obligations under the transaction during the 60-day Cape Town Alternative A waiting period. The holders of the Class B certificates have similar buy-out rights for all of the respective senior tranches in the transaction. 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 A certificates under a certificate default scenario. The Ba1 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 B777-300ER or court rulings or changes to Canadian law that weaken or remove Cape Town or Alternative A could cause Moody's to change its ratings of the Certificates.

The methodologies used in these ratings were Global Passenger Airlines published in May 2012, and Enhanced Equipment Trust And Equipment Trust Certificates published in December 2010. Please see the Credit Policy page on www.moodys.com for a copy of these methodologies.

Headquartered in Saint-Laurent, Quebec, Air Canada is Canada's largest domestic and international airline serving more than 200 airports on six continents. Canada's flag carrier is among the 20 largest airlines in the world and in 2014 served more than 38 million customers. Air Canada provides scheduled passenger service directly to 63 airports in Canada, 55 in the United States and 86 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.

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 rating action on the support provider and in relation to each particular 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 rating action, and whose ratings may change as a result of this 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: 212-553-0376
SUBSCRIBERS: 212-553-1653

Robert Jankowitz
MD - Corporate Finance
Corporate Finance Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

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

Moody's rates Air Canada's Series 2015-2 EETC, Class AA at A1, Class A at A3, Class B at Ba1
No Related Data.
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