ANALYSIS: United EETC a ‘win-win’ for airline and investors

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United Airlines is happy with the performance of its $949.4 million 2014-1 secured enhanced equipment trust certificate (EETC) issue in the market, as it locks in cheap financing for most of its remaining deliveries in 2014.

“It was one of those win-win transactions,” says Gerry Laderman, treasurer of the Chicago-based carrier, referring to both the carrier and investors. “It was fairly priced and we’re happy with it.”

The $736.6 million A tranche priced at a 126bp spread over 10-year US Treasuries for an all-in rate of 4% and the $212.8 million B tranche at a 244bp spread over seven-year treasuries for a rate of 4.75% on 24 March.

The pricing tightened 30bp and 19.5bp from the A and B tranches, respectively, of its 2013-1 EETC in August 2013.

United’s 2014-1 issue were “nicely oversubscribed”, says Laderman.

The A tranche has a 12-year tenor and the B tranche an eight-year tenor.

The A tranche is rated A by Fitch Ratings and A- by Standard & Poor’s (S&P), and the B tranche BB+ by both agencies.

COLLATERAL

The notes are secured by 25 aircraft, including 13 Boeing 737-900ERs, two Boeing 787-8s, one 787-9 and nine Embraer 175s with deliveries from this March to March 2015. The aircraft can be selected from a pool of 49 aircraft delivered during the period.

The 2014-1 notes are the first capital markets deal to include a Boeing 787-9 and the second with an Embraer E-Jet as collateral.

“It’s hard to tell down the road how each of the 787s will be viewed,” says Laderman. “But I know, based on what investors have heard from other airlines, that the -9 is going to be a popular aircraft and that means investors like it.”

The value of the 787-9 is $146.8 million, based on appraisals by Aircraft Information Services, BK Associates and Morten Beyer & Agnew in the prospectus for the 2014-1 notes.

The list price for the aircraft was $249.5 million in 2013, according to Boeing’s website.

“In the long-term, these airplanes are going to show very good value and are going to be fleet workhorses,” said Fred Klein, president of Aviation Specialists Group, on the 787 at the International Society of Transport Aircraft Trading (ISTAT) Americas conference earlier in March.

The E175s provided a “nice addition to diversity of the pool”, says Laderman.

Asked why United did not take popular export credit financing from Brazilian development bank BNDES, he declines to comment but adds that the EETC market provided an “attractive alternative”.

The 76-seat aircraft will replace regional jets with up to 50 seats in United’s regional fleet. The carrier has firm orders for 30 of type, as well as options for another 40, as part of a larger strategy to improve efficiency and reduce costs across its network.

Goldman Sachs analyst Justine Fisher says the E175s are “attractive collateral” to investors, in a recent research note on United’s 2014-1 EETC.

The aircraft are appraised at between $29.3 million and $29.5 million in the prospectus.

The first capital markets deal with an E-Jet were Northwest Airlines’ $454 million 2007-1 notes that were secured by 27 E175s in November 2007.

The initial loan-to-value (LTV) ratio of the 2014-1 notes is 55.1% for the A tranche and 71% for the B tranche in the prospectus.

2014 NEEDS

United still needs financing for about five more mainline aircraft and at least six more regional aircraft deliveries in 2014, based on Flightglobal’s analysis. These include roughly four 737-900ERs, a 787-9 and at least six E175s.

The carrier plans to finance these aircraft in “other markets”, says Laderman. This likely means using bank debt based on comments he’s previously made.

“With a very active EETC market and some bank debt, it’s hard to justify leasing this year,” he said at the ISTAT conference.

Laderman declines to comment on exactly how many aircraft United still needs financing for in 2014.

United maintains plans to repay the $800 million outstanding on its 6.75% senior secured notes due in 2015, says Laderman. The carrier has yet to decide whether to refinance the notes, repay them with cash or use a combination of the two once they become repayable in September, he says.

He declines to comment on whether the airline plans to raise any additional secured or unsecured debt in 2014.

United chief financial officer John Rainey said that the carrier plans to pay down about 40% of $4 billion – about $1.6 billion – in non-aircraft or operationally “improving” debt by March 2015, in a presentation earlier in March.