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Rating Action:

Moody's rates British Airways' 2018-1 EETC, Aa2 to Class AA, A3 to Class A

14 Mar 2018

11 aircraft to be financed with approximately $609 million of new rated enhanced equipment trust certificates

New York, March 14, 2018 -- Moody's Investors Service ("Moody's") has assigned ratings to British Airways, Plc's new Pass Through Certificates (EETCs), Series 2018-1 to be issued by British Airways Pass Through Trust 2018-1AA and British Airways Pass Through Trust 2018-1A, respectively that the company offered earlier today: $409.783 million Class AA at Aa2 and $198.957 million Class A at A3, both with a legal final due date of March 20, 2033 (together, the "Certificates"). The final scheduled payment dates precede the respective legal final due dates by 18 months. The Long Term Issuer Rating of British Airways is Baa3 and is unaffected in this rating action. The rating outlook on the Certificate Trusts and on British Airways is stable.

The Certificate proceeds will help fund the purchase of 11 aircraft newly-manufactured for British Airways, one of which delivered in September 2017 with the remainder to deliver between March and October 2018.. The financing will utilize a leveraged, Japanese Operating Lease structure. The transaction is a US dollar transaction with protective structural features that are similar to those in each of the EETC transactions that have come to market since 2009. The transaction will be subject to insolvency law of England and Wales, including the Cape Town Convention as implemented by the United Kingdom on November 1, 2015. The leases in the transaction will represent International Interests as defined by the Cape Town Convention and will be subject to a 60-day waiting period for an insolvency, same as that of Section 1110 of the US Bankruptcy Code, the law that governs EETCs issued by US airlines.

RATINGS RATIONALE

The ratings of the Certificates reflect the credit quality of British Airways; the credit benefits of the typical features of Enhanced Equipment Trust Certificates ("EETCs"), including 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; attractive aircraft collateral and a legal jurisdiction that supports timely repossession following a payment default by British Airways.

Seven Airbus A320neo narrowbodies, and two Boeing B787-8 and two 787-9 widebodies will secure the transaction. These models will remain important in British Airways' fleet throughout the financing's 13-year term, making it unlikely that British Airways or an insolvency administrator would reject this financing in an insolvency scenario. These aircraft will also be younger than the average age of the company's respective narrow and widebody fleets during the life of the transaction.

The respective notching on the Class AA and Class A Certificates is seven and three, respectively, above the Baa3 long-term issuer rating of British Airways. Moody's estimates the respective peak loan-to value (LTV) for the Class AA at about 50% and for the Class A at about 74% (before priority claims: repossession and remarketing costs and liquidity facilities). These occur before 2020, early in the transaction's life. The leases are full-payout leases, amortizing the equipment notes, and thus the Certificates, to zero upon the final minimal lease payment. This structure results in meaningfully larger equity cushions over the last five years of the transaction relative to those in most other EETC transactions, which only partially amortize equipment note balances to rather significant balloon payments at the final scheduled repayment dates. The full payout structure de-risks this transaction relative to other EETCS and supports the notching of each tranche.

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 certificates under a certificate default scenario.

Moody's estimates LTVs using its estimates of initial market values, which are informed by estimates made by different appraisal firms than those included in the offering memorandum. The projected LTVs for the Class AA and Class A fall to about 43% and 64%, respectively, in March 2023 and to about 23% and 34%, respectively, in March 2028. The notching for each class reflects the trend and sufficient size of the equity cushions, Moody's belief of the importance of the aircraft to the network and the anticipated competitive coupons of the to-be-issued certificates which together lower the probability of rejection under an insolvency scenario.

Moody's estimates the aggregate market value of the 11 aircraft at about $851 million at the issuance date, about $665 million in January 2023, about $477 million in March 2028 and about $285 million when the equipment notes for the first aircraft are paid off in March 2030, 18 months prior to the maturity of the equipment notes for the last aircraft in the transaction. These values compare to about $858 million, $733 million, $604 million and $552 million, respectively, of maintenance-adjusted base values disclosed in the offering memorandum. The gap grows with the passage of time because Moody's reduces values faster than the three percent standard used in EETC offerings; specifically, 7.5% in year 1, 5% in year 2 for all aircraft and 4% per year thereafter for the A320neos and 5% per year thereafter for the B787s. These rates are applied to Moody's estimates of initial market values.

British Airways has 25 Airbus A320neos on order including the seven in this transaction. These aircraft will replace mostly the company's smaller, Airbus A319s, of which there are presently 44 in the fleet and possibly some of its A320ceos, of which there are 67 presently. Although the A320neos in the transaction will be the oldest neos in the fleet, they will be younger than the average age of the company's narrowbodies. The 787s in the transaction will be younger than the average age for each of its 787 fleets. Based on the current orderbook, British Airways will have 12 787-8s and 18 787-9s; the tail numbers in this transaction will be the last to deliver, making them the youngest of these models in the fleet. The company also has 12 787-10s and 18 Airbus A350-1000s on order. These new technology wide-bodies, which are larger than the 787-9 will likely replace the company's Boeing B747 or Boeing B777-200 aircraft, not affecting the fleet profile of the aircraft in the 2018-1 EETC. The younger ages of the aircraft in the transaction and their better fuel efficiency make retention of the aircraft in the Series 2018-1 EETC highly likely, which further supports the ratings assignment.

Any combination of future changes in the underlying credit quality or ratings of British Airways, unexpected changes in its fleet that de-emphasizes the models in this transaction or unexpected material changes in the market value of the could cause Moody's to change its ratings of the Certificates.

Based in Harmondsworth, UK, British Airways (BA) is Europe's third-largest airline carrier in terms of revenues, and flies to more than 400 destinations worldwide. For the fiscal year ending December 2017, the company reported revenues of GBP12.226 billion and an operating profit of GBP1.680 billion, respectively.

The following ratings were assigned:

Assignments:

..Issuer: British Airways Pass Through Trust 2018-1A

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

..Issuer: British Airways Pass Through Trust 2018-1AA

....Senior Secured Enhanced Equipment Trust, Assigned Aa2

Outlook Actions:

..Issuer: British Airways Pass Through Trust 2018-1A

....Outlook, Assigned Stable

..Issuer: British Airways Pass Through Trust 2018-1AA

....Outlook, Assigned Stable

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.

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

No Related Data.
© 2018 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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