Fitch rates American's $663m EETC; upgrade 'likely' after Chapter 11 exit

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Fitch Ratings has rated American Airlines' proposed two-tranche $663 million enhanced equipment trust certificates (EETC) offering and placed it on rating watch positive, noting an upgrade is "likely" once the carrier exits from Chapter 11 and completes a merger with US Airways.

The $506.7 million Class A certificates, which mature in 2025, have been rated "'BBB+" and the $156.6 million Class B certificates, which mature in 2021, received a "B" rating.

The financing marks the first EETC issued while an airline is operating under Chapter 11 court supervision.

American intends to finance 13 aircraft through the proposed EETC transaction including four new Boeing 777-300ERs, eight owned Boeing 737-800s and a 777-200 currently in its fleet.

The 737-800s and the single 777-200ER are currently unencumbered and become available when the existing mortgages mature between March and July 2013, while the new 777-300ERs are available upon delivery scheduled between April and July 2013.

The total appraised value for all aircraft in the portfolio is $921 million, which is approximately 6% higher than the values used in Fitch's analysis from an independent third party appraiser not included in the transaction documents.

Fitch estimates the initial loan to value (LTV) at 58.7% for the A-tranche and 76.9% for the B-tranche. Fitch's base LTVs are higher than the prospectus LTVs of 54.8% and 71.7% for the A and B tranches, respectively reflecting its more conservative valuation for the aircraft portfolio.

Fitch notes in its assessment of the collateral backing the EETC that the widebody market appears to be "more favourable" than the narrowbody market.

It expects 777-300ER values to "fare better" than other widebody aircraft, even in a distressed scenario.

The lone, vintage 777-200ER in this portfolio is initially classified as high quality "tier 2" collateral due to its "advanced age" as it enters the transaction. Fitch believes that demand for the 777-200ER will "remain healthy" during the next decade supported by "second and third users around the globe". Furthermore, the "limited number" of 777-200ER aircraft available should support secondary market values for this aircraft, says Fitch.

The ratings agency views the 737-800 as one of the most popular narrowbody aircraft currently in operation and classifies it as top quality "tier 1" aircraft due to its market depth and desirability among 141 global operators.