Rating Action: Moody's assigns Baa2 rating to United Airlines' 2020-1 Class B EETC, affirms A3 rating assigned to 2020-1 Class A
Global Credit Research - 25 Jan 2021
New York, January 25, 2021 -- Moody's Investors Service ("Moody's") assigned a Baa2 rating to United Airlines, Inc.'s $600 million of Class B Pass Through Certificates, Series 2020-1 the company announced earlier today. Moody's also affirmed the A3 rating assigned to the Class A Pass Through Certificates, Series 2020-1 that United issued in October 2020. The negative rating outlook for United Airlines, Inc. and its parent, United Airlines Holdings, Inc. is unaffected by today's ratings assignment.
The Class B certificates have a legal final maturity of July 15, 2027, the Class A, April 15, 2029. The final scheduled payment dates precede the respective legal final maturity date by 18 months. The Class B proceeds will be used for general corporate purposes. Substantially all of the airline's spare parts, 352 mainline aircraft and 99 spare engines secure the company's obligations under the transaction's equipment notes and thus the certificates.
The respective A3 and Baa2 ratings of the Certificates reflect the credit quality of United; the typical benefits of Enhanced Equipment Trust Certificates ("EETCs"), including the applicability of Section 1110, liquidity facilities sized to meet 18 months of scheduled interest payments; cross-subordination pursuant to the Intercreditor Agreement; and Moody's belief that the collateral will remain important to United's network during the transaction's life, notwithstanding the advanced age of the majority of the aircraft in the transaction.
The 352 aircraft in the collateral span 11 different models with an average age of about 19.5 years, the youngest a 10.5-year old 737-800, the oldest several 25-year-old, 757-200s. The 757-200, 757-300, 767-300ER, 767-400ER, 777-200, 777-200ER, 737-700, 737-800, 737-900ER, A319 and A320 are the aircraft models in the collateral. The aircraft in the collateral represent approximately 42% of United's mainline fleet at December 31, 2020, many of which are likely to remain parked through 2021 and for some, well into 2022, given the uncertain timing of the beginning of a sustained recovery in air travel demand. United disclosed on its Q4 2020 earnings call that it has no near-term plans to retire any aircraft in its fleet other than 13 757-200s powered by Pratt & Whitney engines. These 13 are not part of the collateral for Series 2020-1. The 352 aircraft are split into two tiers, Tier I and Tier II, differentiated by age with Tier II having the oldest aircraft. The equipment note debt attributable to each Tier II aircraft is scheduled to be repaid in full by the payment due October 15, 2024. At or after that time, these aircraft may be released from the collateral. There will be separate semi-annual LTV ratio tests for each of the three collateral groups (spare engines and spare parts, Tier I aircraft, Tier II aircraft). United will also have the right to substitute aircraft engines and or airframes and to release these types of collateral pursuant to the transaction's terms.
This transaction is the first of its kind; whereby aircraft, spare parts and aircraft engines are commingled in one EETC. There is also only one equipment note for each class of certificates, obviating the need for cross-default and cross-collateralization (together "crossing") within a class relative to a traditional transaction with as many notes in a class as the number of aircraft in a transaction. The Class A and Class B equipment notes will be cross-defaulted and cross-collateralized.
Moody's believes the inclusion of the spare parts and engines helps mitigate the financial risk associated with the advanced age of the aircraft collateral. Pursuant to FAA regulations, aircraft can only be dispatched for a flight if they meet airworthiness standards. Without access to spare parts, an airline would likely have difficulty meeting FAA regulations, impairing its ability to efficiently and properly conduct flight operations. Moody's believes this factor implies a lower probability of rejection of the transaction under a United Airlines' bankruptcy scenario versus a transaction that would be secured only by the 352 aircraft.
Moody's estimates the peak loan-to values (LTV) at about 59% and 71% for the Class A and Class B, respectively, before priority claims for repossession and remarketing costs and of liquidity providers. These occur at the inception of the Class B. The amortization profile is steeper than that of recent EETC transactions secured by new or recent deliveries of in-demand aircraft models, providing for an increase in the equity cushion with each quarterly payment through October 2024, when the equipment note amount attributable to the Tier II aircraft is paid off, assuming the rate of decline in value of the collateral does not exceed the assumed rate. Moody's projected LTVs for the Class A at October 2022, 2024 and 2026 are 47%, 32% and 36%, respectively and for the Class B, 56% and 38% for the first two dates and 45% at the Class B final scheduled payment date in January 2026. These compare to 40%, 28% and 30% for the Class A and 48%, 32% and 38% for the Class B in these same months, respectively in the prospectus. The modest increase in LTV after October 2024 reflects the assumed release of the Tier II aircraft from the transaction. Moody's discounted the equipment appraisal values by 15% when projecting LTVs for the transaction, based on its comparison of various appraisers' opinions of aircraft values. Moody's estimates the collateral value at $4.943 billion at Class B inception, $5.035 billion in October 2022, $4.215 billion in October 2024 and $2.369 billion in October 2026. These estimates are 15% below those in the prospectus. The increase in estimated value reflects changes to the issuer's projected maintenance adjustments for the aircraft and engines.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
Changes in the EETC ratings can result from any combination of changes in the underlying credit quality or ratings of United, in Moody's opinion of the importance of the collateral to the airline's network, or in Moody's estimates of equipment market values, which will affect estimates of loan-to-value.
The methodologies used in these ratings were Passenger Airline Industry published in April 2018 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1091811, and Enhanced Equipment Trust and Equipment Trust Certificates published in July 2018 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1125852. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of these methodologies.
United Airlines Holdings, Inc. is the holding company for United Airlines, Inc. United Airlines and United Express operated an average of 5,000 flights a day to 362 airports across five continents prior to the coronavirus. Revenue was $43.2 billion in 2019 and $15.3 billion in 2020.
The following rating actions were taken:
..Issuer: United Airlines, Inc.
....Senior Secured Enhanced Equipment Trust Ser. 2020-1 Class B, Assigned Baa2
..Issuer: United Airlines, Inc.
....Senior Secured Enhanced Equipment Trust Ser. 2020-1 Class A, Affirmed A3
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Jonathan Root, CFA Senior Vice President 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 Russell Solomon Associate Managing Director 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
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