ANALYSIS: Who will be the first in the EETC market in 2014?

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The capital markets are hot for aircraft financing.

A plurality of attendees at the aviation finance industry’s International Society of Transport Aircraft Trading (ISTAT) Americas conference in San Diego anticipate $15 billion to $20 billion in public deals in 2014, up from the $14 billion in 2013.

The capital markets are widely considered the most efficient source of debt financing available for airlines and lessors. Tightening spreads and a low interest rate environment - the yield on 10-year US Treasury notes stood at 2.79% on 20 March, which was down from 3% at the beginning of the year - mean issuers can achieve interest rates in the 4% to 5% range.

Tenors also tend to be longer in the capital markets than in the bank market.

Lessors will likely raise the majority of the $20 billion that ISTAT attendees expect in 2014, but airlines continued to be significant players during the year.

Regular issuers American Airlines and United Airlines will almost certainly launch new secured enhanced equipment trust certificates (EETCs) deals in 2013, while the list of possible issuers includes Alaska Airlines, Delta Air Lines, Hawaiian Airlines and Turkish Airlines.

The question is, which airline will go first?

Patrick Kaufer, managing director and global head of aviation finance at Deutsche Bank, declines to comment on who he thinks will go first but says that he anticipates all of the regular US carriers as well as four or more foreign carriers issuing EETCs in the next 12 months.

Another lender close to the capital markets says “let’s see” when asked who they think will go first. They cite American with its large orderbook and United’s regular issuance as possible first issuers in 2014.

Foreign issuers could include Ryanair, Turkish and WestJet, attendees say. Air Canada, British Airways, Emirates and Virgin Australia issued notes in 2013.

US NEEDS

“In a lease versus buy decision, it’s [solely] a financial decision,” said Derek Kerr, chief financial officer of American, at a JP Morgan Aviation financing conference earlier in March. “The market for EETC or bank financing is a little bit better now.”

The Fort Worth, Texas-based carrier needed financing for 22 of its 83 aircraft deliveries in 2014 at the beginning of the year.

American could be considering cash for some of these deliveries, despite Kerr’s comments. The carrier is serious considering using some of the cash on its balance sheet to pay for aircraft, say a couple of people who have discussed financing strategy with American this year.

The Fort Worth, Texas-based carrier had $9.25 billion in cash and cash equivalents at the end of December 2013, a nearly 50% jump compared to the combined American and US Airways cash balances a year earlier. The airlines merged on 9 December.

American and US Airways raised $3.88 billion through seven separate secured EETC issues in 2013. This number includes subordinate tranches to existing EETCs.

United is focused on the EETC or bank market for its unfinanced aircraft deliveries in 2014, says Gerry Laderman, the carrier’s senior vice-president of finance and treasurer, at ISTAT.

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

The Chicago-based carrier needed financing for 22 of its 36 deliveries in 2014, according to statements made in January. However, these numbers have changed, says Laderman, declining to say how aircraft United still needs to finance.

United raised $929.3 from its 2013-1 secured EETC in August 2013. It also raised $600 million in two unsecured issues during the year.

Other potential US EETC issuers include Delta Air Lines and Hawaiian Airlines, both of whom have tapped the market before, and Alaska Airlines, which is considering its first capital markets deal.

Atlanta-based Delta is understood to have financed 10 of its 19 Boeing 737-900ER deliveries in 2014 through a sale and leaseback deal with CIT. It has paid cash for another three aircraft, Flightglobal’s Ascend Online database shows.

This leaves the carrier with six unfinanced mainline deliveries that it could pay for with cash, lease or finance with new secured debt in 2014.

Delta’s last EETC was the $479.9 million 2012-1 deal in June 2012.

Hawaiian Airlines is considering a EETC, as well as bank debt and lease financing, for its three Airbus A330-200 deliveries in 2015, says Matt Baumgarth, director of fleet acquisition at the Honolulu-based carrier.

The airline issued a $444.6 million EETC for six aircraft in May 2013, its first such capital markets deal.

Alaska is considering raising new debt secured by some of its Boeing 737 fleet in the second half of 2014, according to treasurer Mark Eliasen. EETCs are one of the options that it is considering, he says.

Market participants at ISTAT agree that the Seattle-based carrier is a very good credit and will have its options open in the debt market.

Alaska could be well suited to a private EETC deal, says one lender. The private placements are bought entirely by institutional investors, such as insurance companies.

Such a deal would be similar to $225.7 million private EETC that JetBlue Airways closed in October 2013. The deal was upsized from $160 million after it received strong interest from institutional buyers.

“They can do a vanilla bank deal that will be priced extraordinary well, they can do a capital markets public deal [or] they can do a private placement on the capital markets,” says Kostya Zolotusky, managing director of capital markets development at Boeing Capital. “When you’re in as strong as Alaska, you have a lot of options.”

FOREIGN POSSIBILITIES

Turkish Airlines is at the top of everyone’s list of foreign carriers that could issue a EETC in 2014. The carrier has mandated Citi and Goldman Sachs for a $450 million to $500 million deal they plan to launch in the first half, sources have told Flightglobal.

Ryanair received a BBB+ rating from Standard & Poor’s (S&P) earlier in March, in what is seen as a first step towards a capital markets deal.

Jim Dempsey, treasurer of the Ireland-based low-cost carrier, said in January that it was “toying” with the idea of funding part of its order book with EETCs.

Ryanair has seven Boeing 737-800 deliveries scheduled through the end of 2014 and 31 in 2015, according to Ascend.

WestJet has discussed the possibility of a capital markets issue with lenders in New York but has yet to move on a deal despite being a “great credit” in the words of one lender.

The Canadian low-cost carrier has continued to finance its deliveries with export credit from either the US Export-Import Bank (Ex-Im) and Export Development Canada (EDC), and sale and leaseback deals.

“I think what we’re going to see continuing is this trend of more and more non-US carriers bringing deals to the market,” says Doug Greco, vice-president of sales finance at Airbus Americas. Likely issuers will be “household” names, he adds.