ANALYSIS: Low EETC coupons to continue in 2013

Washington DC
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Airlines are benefitting from some of the cheapest capital markets aircraft financing ever.

United Continental-subsidiary Continental Airlines set a record low all-in interest rate of 4% with the $711.6 million series A tranche in its 2012-2 enhanced equipment trust certificate (EETC) in September 2012, while Delta Air Lines achieved a rate of 4.75% in June and US Airways of 4.625% in November. This is down from a high of 5.9% on US Airways 2012-1 A tranche that April.

Flightglobal Research

On top of the low coupons, at least two issues - US Airways 2012-2 in November and United's 2012-3 in December - were upsized due to strong investor demand.

Low rates and strong demand in the market is expected to continue.

"In general, there is still appetite for the paper," says Lily Cheung, director of aviation at Natixis. "I'm not sure how much more [rates] will come in but there is still demand for it." The lender participated as manager or co-manager in three EETC deals in 2012.

Lenders anticipate that coupons on senior EETC aircraft debt will stay in the low 4% range for the highest quality issuers with others in the market paying a small premium this year. Delta and United typically pay the lower rates while US Airways and others fall into the latter category.

Ben Millard, an independent adviser on aircraft financing and valuations, points out that rates have also come in for subordinate B and C tranches. This is due to increased investor confidence in the asset class, he says.

The spread on United's EETC B tranches tightened to 5.5% on its 2012-2 issue in September from 6.25% on its 2012-1 issue in March. Even its 2012-3 C issue in December priced at 6.125%. US Airways' B tranche coupon came in to 6.75% on its 2012-2 issue in November from 8% on its 2012-1 deal in April.

Low rates are expected to continue barring an unexpected macroeconomic event. Greg Lee, head of the trade, transport and infrastructure finance group at Goldman Sachs, says that the capital markets seem poised to continue to be robust absent a major geopolitical or economic event.

"In terms of capital market access, the EETC space will be pretty good for issuers in 2013," he says. Goldman was a bookrunner on all of the EETC deals in 2012.

Airlines plan to take advantage of the opportunity.

United, Delta and US Airways are expected to remain active in the EETC market this year, while bankrupt American Airlines has two deals pending and at least four foreign air carriers are hoping to get into the market that Emirates has tapped with its Doric Alpha A380 EETC issues since June.

United still needs financing for two Boeing 737-900ERs and two Boeing 787s - though the latter will likely depend on when the US Federal Aviation Administration returns the type to flight status - scheduled to be delivered this year. Delta needs financing for 12 737-900ERs, which are scheduled to be delivered this year according to Flightglobal's Ascend Online database, and US Airways is evaluating options for five Airbus A321s and one Airbus A330-200.

American has up to $2.25 billion in EETC debt pending. An up to $1.5 billion senior secured refinancing backed by 76 aircraft in its fleet, including Boeing 737-800s, 757-200s, a 767-300ER and 777-200ERs, was approved by the US Bankruptcy Court for the Southern District of New York on 17 January, and the carrier requested approval for a separate $750 million issue backed by 13 aircraft - four new 777-300ERs, and eight 737-800s and a 777-200ERs in its fleet - on 24 January.

"Based on the low interest rates available in the EETC financing market compared to the interest rates available in other transaction structures, and the capacity of the EETC financing market to absorb a large securities issuance, the debtors [American] concluded that proceeding with an EETC financing as soon as possible to take advantage of current market conditions was in the best interests of the debtors and their economic stakeholders," said American in a court filing in October.

The Fort Worth-based airline pays between 8.625% and 13% on the debt it intends to refinance with the up to $1.5 billion issue.

Foreign air carriers looking at EETC issues include Air Canada, British Airways, Emirates and Turkish Airlines. According to Ascend, Air Canada has two 777-300ER deliveries; British Airways three Airbus A320, three Airbus A380 and four 787; Emirates six 777-300ER and 10 A380; and Turkish eight Airbus A321, five Airbus A330-300, six 737-800 and one 737-900ER deliveries scheduled this year.

"[Low rates] are good for the small, elite subset of airlines that can access the market," says Lee. "We think that the rest of the global airline space will likely be doing more leasing."

The global aircraft order backlog was valued at $1.2 trillion at list prices in July 2012, according to a recent PwC report. The advisery shop anticipates that airlines will increasingly be looking to banks, lessors and the capital markets to finance these aircraft, especially as export credit agencies begin to pull back in the sector.

US carriers Alaska Airlines, JetBlue Airways, Southwest Airlines, Spirit Airlines and Virgin America could tap EETC markets if they wanted, say market participants. However, none of them are expected to as they either have other sources of financing or can take advantage of competitive rates for new aircraft from leasing companies.

Alaska typically finances aircraft with cash but Brandon Pedersen, chief financial officer of the Seattle-based carrier, said in September that the 35 unencumbered aircraft in its fleet at the end of last year gives it "flexibility" to raise debt in the future.

On the other hand, Southwest has access to competitively priced unsecured debt allowing to bypass secured EETC markets altogether.

JetBlue, Spirit and Virgin America are all expected to pursue lease structures for their new aircraft deliveries this year.

US airline EETC issues, 2012

Flightglobal Research