WestJet is among a number of carriers looking at the capital markets to finance upcoming aircraft deliveries for the first time, say sources.
The Canadian low-cost carrier has held at least preliminary discussions with banks and is considered a good credit, says a New York-based banker. "They would be well received by the market," they add.
WestJet would be a first time issuer if they decided to issue enhanced equipment trust certificate (EETC) notes.
Air Canada, British Airways and Hawaiian Airlines have all tapped the EETC market as first time issuers this year, taking advantage of high investor demand for the notes.
Limited US dollar revenues, rising capital market base rates and access to US Export-Import (Ex-Im) bank guarantees could deter WestJet from entering the market.
A US dollar denominated issue would likely require the airline to mitigate its foreign exchange risk, for example with a swap agreement, which would add to the all-in cost of the notes.
Rising base rates exacerbate this cost issue. The spread on 10-year US Treasury notes has risen 45% to 2.71% on 14 August since the beginning of the year and has resulted in higher all-in interest rates on recent capital markets transactions.
United Airlines' - a long-time EETC issuer - $720.4 million 2013-1 A notes achieved a coupon of 4.3%, which is up 30bp from its last A tranche coupon in September 2012.
WestJet has ample access to Ex-Im loan guarantees. It had financed 54 of the 59 Boeing 737s that it owns in this manner with the most recent deal being a C$190.5 million ($184.7 million) 12-year loan guarantee for five 737-800s - three delivered during the first half and two to be delivered in the fourth quarter - that was approved by the export credit agency in July.
"[WestJet] has been a huge beneficiary of Ex-Im bank financing," says the banker. "Unlike some other airlines that do not have access to that, it will be curious to see, if rates continue to rise, whether they will go forward with that."
The carrier has firm orders for 42 737s outstanding, with eight deliveries scheduled in 2014 and 10 in 2015. The orders are for 737-700s and 737-800s, however, the -700s can be converted to the -800s, according to WestJet.
WestJet is also using a C$820 million 12-year loan guarantee from Export Development Canada (EDC) to cover up to 80% of the cost of its order for 20 Bombardier Dash 8 Q400s for its new regional subsidiary WestJet Encore.