New York, August 15, 2017 -- Moody's Investors Service ("Moody's") downgraded its Class A ratings assigned to the two Enhanced Equipment Trust Certificate financings backed by operating leases to Emirates Airline: Doric Nimrod Air Finance Alpha, Series 2012-1: Class A to Baa1 from A3 and DNA Alpha Limited, Series 2013-1: Class A to Baa1 from A3. Moody's also affirmed the Baa3 ratings assigned to the Class B tranches of each transaction. The rating outlook on each transaction is stable.
RATINGS RATIONALE
The downgrades reflect that the market for Airbus' ultra-large aircraft, the A380, has weakened since the transactions were first rated in 2012 and 2013, which increases market risk and potentially, the sufficiency of collateral coverage under a certificate default scenario. Nevertheless, the ratings on each class of certificates consider the credit strength of Emirates, which informs Moody's expectation that the pass through trustees will make timely payments of interest and scheduled principal for each transaction. Although the financial performance of Emirates deteriorated significantly in its 2017 fiscal year, Moody's long-term view on the credit quality of the airline remains unchanged from the time the EETC ratings were assigned. The respective final scheduled regular distribution dates of the certificates are November 30, 2022 for 2012-1 and May 30, 2023 for 2013-1.
Each transaction finances four Airbus A380s that were delivered new to Emirates in 2012 and 2013. The leases supporting the EETCs are full-payout over their respective ten-year terms. The faster annual amortization of the certificates helps to sustain an equity cushion for each transaction, which Moody's estimates at about 53% and 58% for the Class A and Class B of Series 2012-1 and about 51% and 63% for the Class A and Class B of 2013-1. Moody's used delivery date values that were approximately 20% (~$45 million per aircraft) below the lower of mean or median values of the transaction appraisers when rating these transactions. Moody's also expects improvements in the equity cushions with upcoming amortization payments.
The prospect for improved demand for the A380 is dim. Emirates placed an order for 50 A380s in November 2013, taking its total orders to 140 at that time. Only five more A380s have been ordered since, three by Japan's All Nippon Airlines and two by Emirates. Deliveries of the A380 stood at 213 through July 2017. The dearth of orders has led Airbus to consider lowering the monthly production rate to below the one aircraft per month planned to commence in 2018. There is also increasing concern that the market for second-hand A380s will be very limited. Malaysia Airlines has decided to remove its six A380s from its fleet by mid-2018. With troubles finding a buyer or sub-lessee for any of the aircraft, it has been reported that the company will charter it A380s for flights for the Hajj and Umrah. Additionally, the ten-year leases for the first five of Singapore Airlines' A380s begin to expire in October 2017. Singapore Airlines has stated that it will not extend the lease of the first aircraft and the market awaits its decisions on the next four. Having up to 11 A380s on the market for sale or lease would pressure the market values of the aircraft.
The ratings also consider (i) the applicability of the Cape Town Convention as implemented by the United Arab Emirates, (ii) the credit support provided by the liquidity facilities; (iii) the cross-default of the Notes and the operating leases, and the cross-collateralization of the Notes; and (vi) the transactions' relatively shorter tenor and faster increase in the equity cushion because of lease payments proportionately larger than Moody's estimates of annual declines in value of the aircraft.
Emirates current operating fleet of A380s stands at 94 aircraft, 51 are on operating lease including the eight aircraft in these two EETCs; the rest, finance leases or loans. Forty-eight remain on order. Moody's expects the A380 to remain a mainstay of Emirates' fleet. Emirates has the leading share of the Middle East market and is unique in that it is the only carrier of scale with an all wide-body fleet. Its Middle East location provides a strong hub from which it can connect passengers from one end of its network to the other, with only one stop-over in Dubai. The long reach of the A380, as well as its 777s, also place many destinations within reach of its hub, which should support its growth in upcoming years. The ages of the aircraft in the two EETCs will be less than or close to the average of the Emirates' A380 fleet for much of the remaining life of each transaction.
The stable outlook reflects Moody's expectation of a steady credit profile for Emirates and that the A380 will remain integral to its network strategy. A decline in Moody's view of the credit quality of Emirates could lead to a downgrade of the EETC ratings. Substantiation that there is no secondary market for A380s could also lead to downgrades of the transaction ratings.
Please see our reports: "Doric Nimrod Air Finance Alpha Limited Series 2012-1 Enhanced Equipment Trust Certificate: Airbus A380 Aircraft Financing for Emirates" and "DNA Alpha Limited Series 2013-1 Enhanced Equipment Trust Certificates: Airbus A380 Aircraft Financing for Emirates" available on moodys.com for details of each transaction.
Doric Nimrod Air Finance Alpha and DNA Alpha Limited are limited liability companies incorporated under the laws of Guernsey, whose registered offices are at Dorey Court, Admiral Park, St. Peter Port, Guernsey GY1 2HT, Channel Islands.
Emirates, is a Dubai Corporation incorporated by Decree No. 2 of 1985 (as amended) by the then Crown Prince and Deputy Ruler of Dubai, His Highness Sheikh Maktoum Bin Rashid al Maktoum, the address and principal place of business of which is at the Emirates Group Headquarters, P.O. Box 686, Dubai, United Arab Emirates. Emirates reported revenue of AED83.7 billion ($22.8 billion) for its fiscal year ended March 31, 2017.
The principal methodology used in these ratings was Enhanced Equipment Trust and Equipment Trust Certificates published in December 2015. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.
The following rating actions were taken:
Downgrades:
..Issuer: DNA Alpha Limited
....Senior Secured Enhanced Equipment Trust due May 30, 2025, Downgraded to Baa1 from A3
..Issuer: Doric Nimrod Air Finance Alpha Limited
....Senior Secured Enhanced Equipment Trust due Nov 30, 2024, Downgraded to Baa1 from A3
Outlook Actions:
..Issuer: DNA Alpha Limited
....Outlook, Remains Stable
..Issuer: Doric Nimrod Air Finance Alpha Limited
....Outlook, Remains Stable
Affirmations:
..Issuer: DNA Alpha Limited
....Senior Secured Enhanced Equipment Trust due Nov 30, 2021, Affirmed Baa3
..Issuer: Doric Nimrod Air Finance Alpha Limited
....Senior Secured Enhanced Equipment Trust due May 30, 2021, Affirmed Baa3