ANALYSIS: EETC opens new capital source for Hawaiian

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Hawaiian Airlines is the latest in a line of new enhanced equipment trust certificate (EETC) issuers this year, as more and more airlines opt to tap the debt capital markets for their aircraft financing needs.

The Honolulu-based carrier closed $444.5 million in secured notes to finance six new Airbus A330-200s on 29 May. It was split between a $328.3 million 14-year senior A tranche with a 3.9% coupon and a $116.3 million 10-year subordinate B tranche with a 4.95% coupon.

"We hit the market at a really good time and we were able to achieve some really, really low interest rates," says Scott Topping, chief financial officer of Hawaiian, in an interview with Flightglobal. "On top of that it was important for us to open a whole new source of capital for us."

Prior to the deal, the airline had used a combination of bank debt, leases and cash to finance aircraft deliveries.

Opening a new source of capital and eliminating Hawaiian's funding risk were very important to the airline, says Topping. It does not need financing for new aircraft until 2015 as a result.

"We've taken that funding risk off the table," he says. "Those are really important for the company to manage our enterprise risk in one fall swoop."

Hawaiian's 2013-1 EETC was a very strong showing for the new issuer. It achieved spreads of 196bp over 10-year US Treasury bonds on the A tranche and 301bp over treasuries on the B tranche, based on 15 May rates.

"Liquidity was on the sidelines wanting to be put to work," says Topping, noting that the timing and interest rate environment were important factors in the pricing. "Supply and demand was in our favour."

Spreads tightened for Hawaiian compared to established issuers. The $620.1 million A tranche of US Airways' 2013-1 EETC priced at 211bp over 10-year treasuries and the $199.5 million B tranche at 353.5bp over treasuries on 10 April. The all-in rates were 3.95% for the A notes and 5.375% for the B notes.

The A tranche was five-times oversubscribed and the B tranche six times, says Topping. Buyers included a "broad cross section" of investors but were primarily large insurance companies, he adds.

Hawaiian is far from alone in a first foray into the EETC market. Turkish Airlines is in the market with its first such deal for an undisclosed number of aircraft and Air Canada closed its first $714.5 million three-tranche issue for five new Boeing 777-300ERs in May. Emirates financed a number of its Airbus A380 deliveries with a $587.5 million inaugural EETC in 2012.

"Our participation in this market is an important development for us as it represents new opportunities for future aircraft financings at internationally competitive levels," said Calin Rovinescu, president and chief executive of Air Canada, in May, echoing the Topping's sentiments on a new capital source.

EETC STRATEGISING

Topping says that he began thinking about doing a EETC at Hawaiian when he joined the airline in November 2011.

He came from Southwest Airlines where he was director of the Dallas-based carrier's corporate finance, treasury, fleet planning and risk management functions - a function that is closely involved in aircraft financing activities. The airline finances the majority of its aircraft deliveries with unsecured bond issues, which is possible as a result of its investment grade credit rating.

Before Hawaiian could issue an EETC it had to get rated, says Topping. That process occurred during the past year and a half, with Fitch Ratings, Moody's and Standard & Poor's (S&P) issuing their first ratings of the company this May.

Fitch rates the airline's parent Hawaiian Holdings B, Moody's B3 and S&P B. The 2013-1 EETC A tranche is rated A-, Ba1 and BBB+ and the B tranche BB, B1 and BB- by the three agencies, respectively.

Engaging the bookrunners and structuring the notes began in earnest around February, says Topping. The debt officially launched on 14 May.

Citi, Goldman Sachs and Morgan Stanley acted as joint bookrunners, Natixis was liquidity provider and depositary, and JP Morgan and Wells Fargo were co-managers. Wilmington Trust is the trustee.

More EETCs are likely in Hawaiian's future. Topping says that it can add a deeply subordinate C tranche to the 2013-1 issue if it wants but notes that the "amount we raised fits us well at this point".

"Absolutely, we would do this again," he says. However, he adds that the airline will continue to look at all of its financing options for future deliveries and not exclusively at EETCs.

The fact that Hawaiian has until 2015 before it needs any additional aircraft financing leaves the door wide open. The market could change significantly during the interim - it certainly has in the past - changing the calculus for where airlines can find the lowest cost capital on the market.