Fitch Ratings rates $732m Virgin Australia EETC

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Fitch Ratings assigned its expected ratings to Virgin Australia's proposed enhanced equipment tranche certificate offering, funding 24 new and used aircraft.

The $474. million Class A notes (A-tranche) with an expected maturity of October 2023 will an expected rating of “A”.

The $120.7 million Class B notes (B-tranche) with an expected maturity of October 2020 have an expected rating to “BB+”, while the $137.9 million Class C notes (C-tranche) with an expected maturity of October 2018 have a “B+” expected rating.

The transaction marks the first time Virgin Australia taps the capital markets. The structure largely follows the US EETC template with aircraft collateral and initial LTVs comparable to recent deals, says the rating agency.

All of the aircraft to be included in the Virgin Australia's 2013-1 transaction are currently owned by subsidiaries of Virgin Australia and will be unencumbered by existing debt within several months of the time the transaction prices and immediately prior to delivery into the transaction. Through this transaction, Virgin Australia will refinance some existing debt and generate some additional funds for general corporate purposes, says Fitch.

The issuer will be Perpetual Corporate Trust, an Australian company acting solely in its capacity as trustee for the Class A, B, and C trusts.

The proceeds of the proposed transaction will be used to acquire the underlying equipment notes from Virgin Australia 2013-1 Issuer Co Pty, an Australian special purpose entity, which will be an indirect wholly-owned subsidiary of Virgin Australia. Virgin Australia's 2013-1 issuer will own a pool of 24 aircraft: 21 737-800s, two 737-700s and one 777-300ER.

The A-tranche will feature a 10-year tenor and an initial loan to value (LTV) of 55.5%. Fitch calculated the initial LTV at 60.3% using values from an independent appraiser. The B-tranche will feature a seven-year tenor and an initial offering circular LTV of 69.7%. Fitch calculated the initial B-tranche LTV at 75.6%. The C-tranche will feature a five-year tenor and an initial offering circular LTV of 85.8%. Fitch calculated the initial C-tranche LTV at 93.3%. The weighted average lives for the A-tranche, the B-tranche and the C-tranche are 4.0 years, 3.3 years and 2.8 years, respectively.

The aircraft vintages range from 2003 to 2011, making the initial age of the pool older than in most recent EETCs, observes the rating agency.

Fitch says the first two aircraft (the two 737-700s) will drop out in October 2015. Thereafter, the aircraft drop out of the collateral gradually with four in October 2017, seven (including the 777-300ER) in October 2018, four in October 2019, one each in October 2020 and October 2021, and three more in October 2022.

Within three years from the issuance, Fitch's base value LTVs will decline to approximately 44% from 60% for the A-tranche, 53% from 76% for the B-tranche and 62% from 93% for the C-tranche.

“This compares favourably to recently issued EETC transactions which tend to feature balloon payments of approximately 30% to 35%, significantly reducing the pace of LTV improvement,” says Fitch Ratings.

The structure crosses three legal jurisdictions (Australia, New Zealand, and the United States) and it contains several special purpose vehicles.

This is the first EETC-type transaction relying on the Australian insolvency regime, points out Fitch Ratings, which is different in key aspects compared to the Section 1110 and Cape Town Convention (which incorporates most elements of Section 1110 protection in countries that have ratified the treaty) legal frameworks seen in most EETCs.

Even though Australia signed the Cape Town Convention into law in late June of 2013, its implementation will not be completed prior to the issuance of the notes.

The Class A and Class B certificates will benefit from 18-month liquidity facilities provided by Natixis.

Goldman Sachs acts as structuring agent and bookrunner in the transaction.