Airline capital markets activity slowing in 2014: JP Morgan

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Airlines are issuing less secured aircraft debt than expectations at the beginning of 2014, as a strong bank market absorbs much of the demand for financing.

After issuing some $8.3 billion in enhanced equipment trust certificates (EETCs) in 2013 – the third highest ever – the only deal year-to-date is United Airlines’ two tranche $949.4 million issue in March.

“This year is going to be far less than the original, sorta $6 to $8 billion expectation, that we thought we’d get at the beginning of the year,” says Mark Streeter, a credit analyst at JP Morgan, on the EETC market in a webcast on 20 June.

Instead, airlines appear to be turning to the bank market for their aircraft financing needs.

British Airways-parent IAG and Turkish Airways have both postponed possible EETC deals until 2015 due to available capacity in the bank market, says Streeter.

Air Canada is the primary candidate to issue an EETC in 2014, he says based on their guidance. Regular issuers American Airlines and United could also do deals.

Alaska Airlines was also a candidate for a possible EETC issue in the second half of 2014. However, their recent investment grade rating of BBB- from Fitch Ratings provides them with access to cheap, unsecured capital markets debt.

Airlines and lessors have raised $4.9 billion on the capital markets, including both secured and unsecured deals, since the beginning of the year, according to JP Morgan. This does not include the $300 million senior unsecured notes from Allegiant Air that priced today.

“The capital markets remain wide open to airlines and lessors,” says Streeter. “The biggest problem is there hasn’t been enough issuance.”

About 70% of attendees at the ISTAT Americas conference in March expected airlines and lessors to raise between $12 billion and $20 billion on the capital markets in 2014. These expectations also beginning to look overly optimistic.

Streeter still forecasts high demand for the capital markets in the future. He expects the EETC market to surpass its record high of $10.1 billion in 2001 in either 2015, 2016 or 2017, based on the number of aircraft on order and need for financing.

“This is small, niche market,” he says on EETCs. “Good supply would be a good thing, not a bad thing, for the market.”