Fitch Ratings has taken rating actions on American Airlines enhanced equipment trust certificates(EETC) transactions. The rating actions (listed below) are driven by the combined effects of Fitch’s recent downgrade of American’s Issuer Default Rating (IDR) to ‘B+’ from ‘BB-‘ and by new appraisal data indicating that levels of over collateralization is being pressured for certain transactions.
KEY RATING DRIVERS
Fitch has downgraded the class A certificates for American’s 2015-1 and 2014-1 EETC transactions to ‘A-‘ from ‘A’ and downgraded the 2013-1 class A certificates to ‘BBB+ from ‘A-‘. Fitch has also placed the 2017-1 class AA certificates and the 2013-2 class A certificates on Rating Watch Negative (RWN). Ratings on the senior certificates are primarily driven by updated appraisal data that indicate lower levels of overcollateralization than was expected in prior reviews. The 2015-1, 2014-1 and 2013-1 certificates have heavy exposure to the 777-300ER where values have come under pressure along with a general drop in demand for widebody aircraft. The 2015-1 and 2014-1 transactions continue to pass Fitch’s ‘A’ level stress test, but with limited headroom, exposing them to further negative actions should asset values depreciate faster than Fitch’s base assumptions. Given the ongoing disruption in the aviation sector from the coronavirus, we will continue to update our models as we receive updated appraisal data.
The Rating Watch on the 2017-1 class AA certificates reflects the current uncertainty around aircraft values related to the impact of the coronavirus. Certificates rated ‘AA’ denote a very low level of total risk, and Fitch views near-term risk as elevated due to the unprecedented nature of this disruption. The Rating Watch Negative on the 2013-2 class A certificates reflects a provision in Fitch’s EETC criteria in which aircraft value stresses are assumed two years in the future when the underlying airline is rated in the ‘BB’ category and one year in the future for airlines rated in the ‘B’ category. Fitch’s recent downgrade of American to ‘B+’ affects the timing of stress assumptions in our models. The 2013-2 transaction fails to pass Fitch’s ‘BBB’ level stress test until mid-2021, but is expected to pass the ‘A’ level stress test thereafter as the 777-200ERs fall out of the collateral pool, and the remaining collateral pool consists of relatively attractive 737-800s. This situation creates an elevated risk that senior tranche holders could experience a shortfall in a bankruptcy scenario in the near term (which is not Fitch’s expectation), but should become materially overcollateralized and maintain current rating assuming American avoids financial distress over the next year.
Affirmation of American’s class A certificates reflect continuing levels of overcollateralization that allow the transactions to pass Fitch’s ‘A’ level stress tests. It is not yet clear what impact the coronavirus disruption will have on aircraft base values and secondary market values, though it is clear that levels of overcollateralization will weaken given the scale of the impact on the aviation industry. Fitch will evaluate the stress rates that it uses in its EETC models and determine whether further asset value haircuts remain appropriate in what is likely to be an already distressed market over the coming months.
Fitch has downgraded American’s class B certificates by a notch to reflect the recent downgrade of American’s issuer rating to ‘B+’ from ‘BB-‘. Fitch notches subordinated tranche EETC ratings from the airline IDR based on three primary variables: 1) the affirmation factor (0-3 notches for issuers in the ‘B’ category and 0-2 notches for issuers in the ‘BB’ category) 2) the presence of a liquidity facility, (0-1 notch) and 3) recovery prospects (0-1 notch). Fitch has widened its affirmation factor notching to +3 notches for all rated transactions except for AAL 2013-2 and 2013-1, which receive lower affirmation factor scores due to age of their collateral and relative pool size. Although affirmation factor notching was widened, the downgrades reflect lower scores for recovery prospects. Most transactions were revised to +0 notches from +1, due to the likelihood that aircraft values will suffer from higher levels of inventory on the market as airlines park aircraft due to the ongoing drop in demand. The US Airways 2012-2 class C certificates were affirmed at ‘BB’ reflecting a wider notching for recovery and unchanged recovery notching (-1 notch based on subordinated position).
The certificates rated ‘AA’ are in line with Fitch’s ratings on senior classes of EETCs issued by United, Spirit and Air Canada. Fitch believes that these transactions compare well with recent precedents. Stress scenario LTVs for 2017-1 and 2017-2 are in line with or better than other transactions rated at ‘AA’. The collateral pools also compare well with other transactions rated ‘AA’, featuring diverse pools of collateral including newer vintage 737-800s, and 787s among others. Fitch will be evaluating certificates of other carriers in the coming weeks to determine if rating watches are warranted for other rated ‘AA’ tranches.
Class A certificates that are rated ‘A’ compare well with issuances from United, Air Canada and British Airways that are also rated ‘A’. Rating similarities are driven by similar levels of overcollateralization and high quality pools of collateral. Class A certificates rated at ‘A-‘ are a notch lower than several other comparable issuances primarily due to weaker levels of overcollateralization.
The ‘BBB-‘ ratings on the class B certificates rated at ‘BBB-‘ are derived through a four uplift from American’s IDR. The four-notch uplift reflects a high affirmation factor, benefit of a liquidity facility and no benefit for recovery expectations. The 2013-2 class Bs receive a two-notch affirmation uplift and a one-notch downward adjustment for poor recovery prospects. The 2013-1 class Bs receive a one-notch upward affirmation factor adjustment and one notch for the benefit of a liquidity facility. The US Airways 2012-2 class C certificates are two notches above American’s corporate rating reflecting a 3-notch affirmation factor adjustment offset by a one notch downward adjustment for poor recovery prospects.
Key assumptions within the rating case for the issuer include a harsh downside scenario in which American declares bankruptcy, chooses to reject the collateral aircraft, and where the aircraft are remarketed in the midst of a severe slump in aircraft values. Fitch’s models also incorporate a full draw on liquidity facilities and include assumptions for repossession and remarketing costs.
Value stresses applied to key aircraft types in Fitch’s models include:
777-300ER – 25% A level stress
787-9 – 20% A level, 40% AA level
737-800 – 20% A level, 40% AA level
737 MAX 8 – 30% A level, 50% AA level
E-175 – 30% A level, 50% AA level
A321-200 – 20% A level
Class AA and A certificates are primarily rated based on levels of overcollateralization. Ratings may be downgraded due to asset value declines that are sharper than assumed in Fitch’s models. Class AA certificates would also be downgraded below the ‘AA’ category if American were to be downgraded to ‘B-‘ or lower.
Class B and C certificates are notched up from the underlying issuer rating. To the extent that if American’s ratings were downgraded, class B and C certificates would be downgraded in kind.
Subordinated certificates could be upgraded by one notch if recovery prospects were to solidify over time.
BEST/WORST CASE RATING SCENARIO
Ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from ‘AAA’ to ‘D’. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings https://www.fitchratings.com/site/re/10111579.
LIQUIDITY AND DEBT STRUCTURE
Class AA, A and B certificates all feature 18 month liquidity facilities that would prevent an immediate event of default for the certificates if American were to enter financial distress.
Relevant ESG issues for these transactions are related to the issuing airline. Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of 3. ESG issues are credit neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity.