October 22, 2020 5:25 am
Fitch has downgraded all of American’s class B and Class C certificates in line with the recent downgrade of American’s corporate rating to ‘B’ from ‘B+’
By Prashant Tambe
Fitch has affirmed most of American's senior EETC tranches, and downgraded one tranche. Several senior tranches remain on Rating Watch Negative, as described below. Fitch has downgraded the class A certificates for American's 2013-1 class A certificates to 'BBB' from 'BBB+'. The downgrade was primarily driven by updated appraisal data for the 777-300ERs that secure the transaction that indicate lower levels of overcollateralization than was expected in prior reviews. Fitch has affirmed American's other class AA and A certificates. The Affirmations reflect continuing levels of overcollateralization that allow the transactions to pass either our 'AA' or 'A' level stress tests. It is not yet clear what impact the coronavirus disruption will have on aircraft secondary market values, though Fitch believes that levels of overcollateralization will weaken given the scale of the impact on the aviation industry. Fitch will continue to 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. 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 Watch on the 2017-2 transaction is primarily driven by the inclusion of the 737 MAX in the collateral pool and Fitch's uncertainty around the MAX program. 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 the agency's 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. Subordinate Tranche Ratings: Fitch has downgraded all of American's class B and Class C certificates in line with the recent downgrade of American's corporate rating to 'B' from 'B+'. Fitch notches subordinated tranche EETC 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 (0-1 notch). American's Class B certificates are rated between 'BB-' and BB+. 'BB-' rated tranches reflect lower affirmation factors and/or weak recovery prospects due to lower levels of overcollateralization. Tranches rated at 'BB+' receive a +3 notch uplift for a high affirmation factor, one notch for the presence of a liquidity facility, and no notching for recovery. Fitch's recovery analysis generally assumes 'BB' level value stresses as defined in the EETC rating criteria. The criteria allow for one notch of uplift in cases where subordinate tranche recovery is expected to remain above 91%. Some of American's transactions meet this threshold, but no notching is applied due to the sensitivity of the analysis to changes in aircraft values, and the likelihood of pressures on aircraft values given the current downturn.
DERIVATION SUMMARYThe 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 'BB+' ratings on the class B certificates are derived through a four-notch 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 three-notch affirmation factor adjustment offset by a one notch downward adjustment for poor recovery prospects.
KEY ASSUMPTIONSKey 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.