The A-tranche ratings are primarily driven by a top-down analysis incorporating a series of stress tests which simulate the rejection and repossession of the aircraft in a severe aviation downturn. The 'A' level rating is supported by a high level of overcollateralization (OC) and high quality collateral which support Fitch's expectations that A tranche holders should receive full principal recovery prior to default even in a harsh stress scenario. The ratings are also supported by the inclusion of an 18-month liquidity facility, cross-collateralization/cross-default features and the legal protection afforded by Section 1110 of the U.S. bankruptcy code. The structural features increase the likelihood that the Class A certificates could avoid default even if American were to file bankruptcy and subsequently reject the aircraft.
The initial A-tranche LTV, as cited in the prospectus, is 54.2%, and Fitch's maximum stress case LTV (the primary driver for the A-tranche rating) through the life of the transaction is 89.2%. This level of OC provides a significant amount of protection for the A-tranche holders.
The 'BBB-' rating for the B-tranche represents a four-notch uplift (maximum is five per Fitch's EETC criteria) from American's Issuer Default Rating (IDR) of 'B+'. The four-notch uplift primarily reflects Fitch's view of the affirmation factor for this collateral pool (the likelihood that American would choose to affirm the aircraft in a potential default scenario). Secondary factors for the B tranche rating include the presence of an 18-month liquidity facility and Fitch's view of recovery prospects in a stress scenario. Fitch considers the affirmation factor for this pool of aircraft to be high, as all of the aircraft included in the pool are considered important to American's ongoing re-fleeting effort. The affirmation factor is also a supporting consideration for the A-tranche rating.
American plans to raise
The A-tranche will be sized at
The subordinate B-tranche will be sized at
Liquidity Facility: The Class A and Class B certificates benefit from a dedicated 18-month liquidity facility which will be provided by
Cross-default & Cross-collateralization Provisions: Each note will be fully cross-collateralized and all indentures will be fully cross-defaulted from day one, which Fitch believes will limit American's ability to 'cherry-pick' aircraft in a potential restructuring.
Depositary: Unlike many recent transactions that Fitch has rated, this will not be a pre-funded deal. The collateral pool consists of aircraft that are currently in-service rather than future deliveries. However, the deal will still feature a depositary (Credit Agricole) which may hold the funds in escrow for a short amount of time until the individual aircraft mortgages are executed. Counterparty risk in this transaction will be short-term, compared to pre-funded transactions where the funds may be held by the depositary for a year or more until collateral aircraft are delivered.
KEY RATING DRIVERS
Stress Case: The ratings for the Class A certificates are primarily based on collateral coverage in a stress scenario. The analysis utilizes a top-down approach assuming a rejection of the entire pool in a severe global aviation downturn. The analysis incorporates a full draw on the liquidity facility, and an assumed repossession/remarketing cost of 5% of the total portfolio value. Fitch then applies immediate haircuts to the collateral value.
The 777-300ERs in this pool receive a 25% haircut representing the middle of Fitch's Tier 1 stress range of 20%-30%. The 25% stress rate reflects our view that the 300ER is a high-quality aircraft while incorporating the historical volatility of widebody planes. Both the A319s and A321s receive 30% value stresses reflecting Fitch's view of these aircraft as borderline Tier 1/2.
These assumptions produce a maximum stress LTV of 89.4%, suggesting full recovery for the A-tranche holders. The highest stress LTVs are experienced early in the life of the transaction and are expected to decline gradually as the deal amortizes. Although Fitch considers both the A319 and A321 to be good quality aircraft, stress scenarios were run as a test, that account for both the A321 and A319 as Tier 2 aircraft. Those scenarios incorporate stress rates of up to 40% and a higher annual depreciation rate. Even under those assumptions, which Fitch considers to be onerous, the maximum LTV for the senior tranche does not exceed 100% at any point in the transaction, which further supports the 'A' rating for the Class A certificates.
High Collateral Quality: The quality of the collateral pool underlying the transaction is considered solid.
777-300ER (59% of the collateral pool based on Fitch's third party appraiser): Fitch considers the 777-300ER to be a solid Tier 1 aircraft, but applies the middle of the Tier 1 stress range (25% for A-category stress), as widebodies have typically proven to be more volatile than narrowbody aircraft in prior downturns. That said, Fitch expects widebody values to hold up better in a near-term aviation downturn given the relative strength of the widebody secondary market. Furthermore, the 777-300ER is the best-selling aircraft of its size with a diverse base of global operators, solid backlog and limited competition. Notably, there are no 777-300ERs currently parked. With an average age of four years, the 777-300ER is relatively young in its life cycle, with no replacement aircraft in near term.
The A350-1000 will compete with the 300ER and will feature a longer range and lower fuel consumption. However, the entrance of the A350 is still a couple of years away. The first delivery for the A350-1000 is not expected until 2017. Even at that point it will take time for the A350 to build up enough deliveries to seriously compete with the 300ER. Boeing officially launched the replacement to the 777-300ER, dubbed the 777X, at the
A321-200 (28%): Fitch considers the Airbus A321-200 to be a good-quality, borderline tier 1/2 aircraft. A321-200 has been gaining popularity in the recent years as several airlines started replacing A320s with the A321-200 following the industry-wide trend towards upgauging. Secondary-market values for the A321-200 are supported by the aircraft's wide user base and geographic diversity. Airbus also has a sizeable backlog of A321s totaling roughly 1,300 aircraft including the NEO (new engine option) variant, illustrating the popularity of the model.
Market values of the A321 face some risk from the introduction of the A321neo program. Airbus announced the neo program in 2010, which will include three variants, the A319neo, the A320neo, and the A321neo intended to replace the A319, A320, and A321-200, respectively, over time. The introduction of the new models will likely place pressure on secondary-market values, but Fitch views that as a bigger threat to older generation aircraft rather than the aircraft in this portfolio given that they are some of the youngest vintage.
A319-100 (13%): Fitch also considers the A319 to be a borderline Tier 1/2 aircraft. The model's desirability is apparent by the size of its active worldwide fleet, and its large number of operators. Through
Affirmation Factor: Fitch considers each aircraft type in this pool to be strategically important to American, which supports a high affirmation factor. The 777-300ERs represent American's flagship international product and feature its fully lie-flat seats and aisle access in both first and business class. The 300ERs also feature international wi-fi capability and a walk-up bar. American utilizes its highly updated first and business class sections to compete on premier routes such as
Like the 300ERs, the A321s in this fleet are key assets used to attract high-paying business travelers. American operates a relatively small sub-fleet of 17 A321s in a 'transcontinental' configuration of which seven are featured in this collateral pool. These are newer delivery aircraft which feature a three-class cabin including full lie-flat first and business class seats. These operate solely on the
The A319s in the collateral pool are also unlikely candidates to be rejected in a future bankruptcy scenario, as they offer compelling operating economics on routes that do not have the demand to fill a larger A320 or 737, but still benefit from high frequencies. Importantly, American still operates a sizeable fleet of older MD-80s that it is actively trying to replace. American would be much more likely to reject those older aircraft if it were trying to downsize in bankruptcy than it would be to reject these newer generation A319s.
In addition to the operating economics and strategic benefits of each of these aircraft types, the affirmation factor of this pool is also supported by the likelihood that this transaction will achieve a relatively low overall cost of funding. The EETC market is currently favorable, as illustrated by the recent pricing of United's 2014-2 senior tranche at below 4%.
B-Tranche: The 'BBB-' rating for the subordinate B-tranche is assigned by notching up from AAL's IDR of 'B+'. Fitch notches subordinated tranche ratings from the airline IDR based on three primary variables; 1) the affirmation factor (0 - 3 notches), 2) the presence of a liquidity facility, (0 - 1 notch), and 3) recovery prospects. In this case, Fitch has assigned a three-notch uplift (the maximum) based on a high affirmation factor (as discussed above) and a one-notch uplift reflecting the liquidity facility.
Fitch generally only assigns an additional one notch of uplift for recovery prospects in situations where recovery is expected to be significantly better than for comparable existing B-tranches. In this case, recovery is roughly in-line with many recently issued B-tranches (in the 'RR1 - RR2' range in a stress analysis), thus no additional uplift has been assigned.
Senior tranche ratings are primarily based on a top-down analysis based on the value of the collateral. Therefore, a negative rating action could be driven by an unexpected decline in collateral values. Potential risks for the A320 family aircraft include the introduction of the updated NEO models, which could pressure secondary-market values. Likewise, values for the 777-300ER could be impacted over the longer term by the entry of the 777X, which is scheduled to enter into service in 2020. Senior tranche ratings could also be affected by a perceived change in the affirmation factor or deterioration in the underlying airline credit.
Subordinated tranche ratings are based off of the underlying airline IDR. As such, Fitch would likely downgrade the B tranche to 'BB+' if American's IDR were downgraded to 'B'. Subordinated tranche ratings and the airline IDR may experience some compression as the IDR moves up the rating scale. As such, if Fitch were to upgrade American's IDR to 'BB-', the subordinated tranche ratings would likely be affirmed at 'BBB-'.
Fitch has assigned the following ratings:
American Airlines pass through trust 2014-1:
--Series 2014-1 Class A certificates 'A (EXP)';
--Series 2014-1 Class B certificates 'BBB- (EXP)'.
Fitch currently rates American as follows:
American Airlines Group, Inc.
--Senior secured credit facility 'BB+/RR1'.
--Senior unsecured notes 'B+/RR4'.
--Senior secured credit facility 'BB+/RR1'.
The Rating Outlook is Stable.
Additional information is available at 'www.fitchratings.com'
--'Rating Aircraft Enhanced Equipment Trust Certificates' (
--'Corporate Rating Methodology' (
Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage
Rating Aircraft Enhanced Equipment Trust Certificates
Source: Fitch Ratings
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OCTOBER 31, 2014
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