MUL confirms purchase of Jackson Square Aviation
5th October 2012
For a bankrupt carrier, American Airlines has shown its worth with two tranches of enhanced equipment trust certificates (EETC) worth $663,378,000 pricing at a record low yesterday.
The $506.7 million Class A certificates, with an expected maturity of 12.3 years and an average life of 8.2 years, were rated BBB+ by Fitch Ratings and BBB- by Standard & Poor’s and carry a coupon of 4.000%. The $156.6 million B-tranche, with a final maturity of 7.8 years and average life 5.9 years, carries a B rating from Fitch and S&P at B+ and a coupon of 5.625%. Both coupon and yield priced at par, with an all-in of 4.45%.
Deutsche Bank and Morgan Stanley were lead bookrunners and lead structuring agents. Citi, Goldman Sachs and JP Morgan were active bookrunners. Natixis was co-manager, liquidity provider and the depository. American Airlines was advised by Debevoise & Plimpton, while Sherman & Sterling advised the underwriters.
Fitch has placed both tranches on ratings watch indicating that they will be upgraded once American emerges from bankruptcy protection and the merger with US Airways is completed.
American intends to finance 13 aircraft through the proposed 2013-1 EETC transaction, making it the first EETC issued while an airline is operating under bankruptcy. The notes are expected to be secured by eight currently owned Boeing 737-823 aircraft (seven 2000 vintage; one 2001 vintage) and one currently owned Boeing 777-223ER aircraft (2000 vintage), each of which aircraft is either unencumbered or is subject to a private mortgage financing, and four new Boeing 777-323ER aircraft currently scheduled for delivery to American during the period from April 2013 to July 2013.
Fitch estimates the initial LTV at 58.7% for the A-tranche and 76.9% for the B-tranche. Initial LTV's cited are calculated as of the first distribution date after all aircraft have been delivered. Fitch's base LTVs are higher than the prospectus LTVs of 54.8% and 71.7% for the A and B tranches, respectively reflecting its more conservative valuation for the aircraft portfolio. Neither Fitch's base LTV nor the prospectus base values assume any draw on the liquidity facility.
The fact that a carrier still operating under bankruptcy protection can raise debt with an investment grade rating is testament to the confidence of investors and rating agencies in the airline as well as the strength of the US capital markets. More significant is the fact that the Class A coupon matches the lowest ever EETC coupon for an airline since Continental Airlines priced its A notes at 4.000% in its 2012-2 deal. However the Continental deal was secured on brand new aircraft for an airline with $8bn in cash and a solid single-A rating with upward pressure. The fact that the American offering was for a bankrupt airline, old, in service aircraft and new aircraft priced at the same coupon, demonstrates the current strength of the market. Additionally the B tranche coupon was only 12.5bps behind the lowest-ever priced B coupon again from the same Continental deal. The Continental deal had a Class A and B LTV of 55% and 65%, the American deal has the Class A LTV at 55% and Class B at 72%. This essentially means that American paid just 12.5bps more for a 7% higher LTV. The blended coupon because of that is 4.45%, which is only slightly higher as there is more B tranche debt, and is the second best blended coupon ever.
This deal represents a number of firsts: it is the first capital markets financing for the 777-300ER in a EETC; the first EETC ever for an airline in bankruptcy and attracted an orderbook of $4bn that priced inside of all guidance.
Although Fitch ratings guidance states that the merger has not yet been priced into the offering, the market must have taken it into account.
“When the merger was announced there was momentum on the credit of the two airlines – both American and US Airways were credit positive and their bonds rallied,” says one source close to the deal. “That certainly helped this deal but at this point they are still two separate companies and ultimately there is no guarantee the merger will happen.”
That said, he adds: “During the past 15 months there has been a tremendous amount of upward momentum since the bankruptcy filing where American Airlines has restructured every part of its business from fleet to labour to purchase contracts and its balance sheet. There has been an absolute tightening of American’s credit through this process and the merger is just another positive development for American, which I would say has been priced into this deal.”
If Continental or United came to market with a similar deal today, they would likely price tighter than American but unfortunately neither airline has 787 delivering which are also financeable. Although American has raised 12 year debt at a record 4.000% coupon, this deal is still attractive for investors in this ultra-low interest rate environment. One source says: “For an airline to raise 12 year money with a 4% coupon is unheard of and yet corporate bond investors are getting senior secured paper with a near-perfect recovery history at a yield that is a 75bps pick up versus an ordinary BBB-rated corporate bond. Both sides win. So long as we have the low-rate policy of the central banks this situation should continue.”
This deal is testament to the restructuring efforts of American Airlines and its creditors, which were awarded the Airline Economics Aviation 100 award for Restructuring in January. See the special Aviation 100 awards issues of Airline Economics for all the details on this award and full coverage of the Growth Frontiers conference. This issue has just been published. Contact John Pennington to ensure you receive your hard copy by subscribing today john@aviationnews-online.com.