Fitch Ratings-Chicago-03 May 2018: Fitch Ratings affirms the following ratings on Spirit Airlines, Inc.'s (Spirit; BB+/Negative) Pass-Through Trusts Series 2017-1:
--$247,099,000 class AA certificates due February 2030 at 'AA';
--$82,366,000 class A certificates due February 2030 at 'A';
--$91,035,000 class B certificates due February 2026 at 'BBB+'.
Fitch has also affirmed its ratings on Spirit's Pass-Through Trusts Series 2015-1 as follows:
--$455,600,000 (at issuance), $393,621,650 (outstanding) class A certificates due April 2028 at 'A';
--$121,000,000 (at issuance), $83,961,500 (outstanding) class B certificates due April 2024 at 'BBB+'.
The ratings on the class AA and class A certificates (for both transactions) are derived through Fitch's top-down analysis, which incorporates a series of stress tests that simulate the rejection and repossession of the aircraft in a severe aviation downturn. The 'AA' level rating for the 2017-1 class AA certificates is supported by a high level of overcollateralization (OC) and high-quality collateral supporting Fitch's expectations that senior tranche holders should receive full principal recovery prior to default even in a severe stress scenario. Likewise, the 'A' rating on the 2017-1 and 2015-1 class A certificates is supported by OC sufficient for the tranches to pass Fitch's 'A' level stress scenarios. The ratings are also supported by the inclusion of 18-month liquidity facilities, cross-collateralization/cross-default features and the legal protection afforded by Section 1110 of the U.S. Bankruptcy Code. The structural features increase the likelihood that the certificates could avoid default even if Spirit were to file bankruptcy and subsequently reject the aircraft.
The 'BBB+' ratings on the class B certificates are derived through a bottom's up approach. The ratings are notched up from Spirit's 'BB+' corporate rating. The 'BBB+' rating for both the 2015-1 and 2017-1 transactions represent three notch uplifts consisting of two notches for a high affirmation factor (as discussed below), and one notch for the benefit of an 18-month liquidity facility.
Collateral Pool: The 2017-1 transaction is secured by a perfected first-priority security interest in 12 aircraft including seven Airbus A320-200s and five A321-200s. The 2015-1 transaction is secured by 12 A321-200s and 3 A320-200s. Fitch classifies both the A320 and the A321 as solid tier 1 aircraft. All collateral aircraft will be delivered with fuel-saving sharklets, which adds value to the planes. The 2017-1 transaction is currently a partially pre-funded transaction. Nine of the 12 collateral aircraft were delivered between December 2017 and April 2018 and the remaining three collateral aircraft are scheduled for delivery before October of 2018. The aircraft in the 2015-1 transaction were delivered between late 2015 and January of 2017.
KEY RATING DRIVERS
Stress Case: The ratings for the class AA certificates for the 2017-1 transaction and the class A certificates for both transactions are primarily based on collateral coverage in a stress scenario. The analysis uses a top-down approach assuming a rejection of the entire pool in a severe global aviation downturn. The scenarios incorporate a full draw on the liquidity facility, and an assumed repossession/remarketing cost of 5% of the total portfolio value. Fitch then applies significant haircuts to the collateral value.
In its 'AA' level stress analysis for the 2017-1 transaction, Fitch has opted to apply a 45% value stress to both the A320s and A321s. The 45% stress rate reflects Fitch's opinion of the A320 family as an example of high quality tier 1 aircraft that fall somewhere in between the highest quality collateral in the market such as the 737-800 and 787-9 (which we stress at 40%), and lower quality tier 1 assets like the ERJ-175 (which we stress at 50%). Under these assumptions, the 2017-1 class AA certificates pass Fitch's 'AA' level stress test with a substantial amount of headroom.
In its 'A' level stress analysis for both the 2017-1 and 2015-1 transactions, Fitch has opted to apply a 25% value stress to both the A320s and A321s (the mid-point of our tier 1 stress range). Under these assumptions the class A certificates for both transactions continue to pass Fitch's 'A' level stress test with substantial headroom.
High Collateral Quality
Fitch considers the A320-200 to be a solid tier 1 aircraft. Like its primary rival, the Boeing 737-800, the A320 has become a ubiquitous aircraft, providing the backbone of narrowbody operations for airlines around the globe. The existing fleet of A320s benefits from a broad geographic diversity, with some minor levels of concentration in Asia and Europe, but large numbers of the aircraft operating in all other regions of the world as well.
Secondary market values for the A320 could come under pressure in the intermediate term following the entrance of the A320NEO. Residual value risk for the current generation A320 is partially mitigated by the sheer size of the existing fleet and by the time it will take for the NEO to be manufactured in numbers significant enough to materially pressure current generation prices.
Fitch also considers the Airbus A321-200 to be a solid tier 1 aircraft. Future values for the of A321-200 variant are expected to hold up given the aircraft's broad user base and large number of aircraft in service. Trends towards upgauging from smaller aircraft are also supportive of the A321.
Like the A320, values for the A321-200 values may face some pressure over the longer term from the introduction of the A321NEO, which first entered revenue service in 2017. Fitch has accounted for the potential impact of the NEO aircraft by running scenarios through our models that incorporate faster depreciation than what we normally assume in our model. Fitch estimates that the transaction can withstand value depreciation rates that materially exceed our typical assumptions while retaining adequate collateral coverage to maintain the rating.
Airbus announced the NEO program in 2010, which includes three variants, the A319NEO, the A320NEO, and the A321NEO intended to replace the A319, A320, and A321, respectively, over time. The newest iteration of the A320 family will provide from 14% to 16% fuel efficiency compared to the current models.
Fitch considers the affirmation factor (likelihood that Spirit would choose to retain these aircraft in the event of a bankruptcy) for both pools of aircraft to be high. In our view, the likelihood that Spirit would ultimately affirm these aircraft in a scenario where the airline filed for bankruptcy is supported by the relatively high percentage of Spirit's fleet contained in these two pools.
Class B Ratings
Fitch notches subordinated tranche ratings from the airline Issuer Default Rating (IDR) based on three primary variables; 1) the affirmation factor (0-3 notches for airlines with 'B' category ratings and 0-2 notches for airlines with 'BB' category ratings), 2) the presence of a liquidity facility, (0-1 notch) and 3) recovery prospects.
In the case of the 2017-1 and 2015-1 class B certificates, the collateral pools support a three notch uplift consisting of two notches for a high affirmation factor (as discussed above) and one additional notch for the benefit of an 18 month liquidity facility.
Cross-Default & Cross-Collateralization Provisions: Each equipment note will be fully cross-collateralized and all indentures will be fully cross-defaulted from day one, which Fitch believes will limit Spirit's ability to 'cherry-pick' aircraft in a potential restructuring.
The 'AA' rating on the 2017-1 senior certificates is in line with Fitch's ratings on recent senior classes of EETCs issued by United and American. LTVs for the class AA certificates in this transaction are marginally higher than those seen in other transactions rated at 'AA', and the collateral pool suffers from a relative lack of diversity, but those factors are offset by the high proportion of Spirit's owned fleet represented by this pool of collateral and by the high quality of the underlying collateral. LTVs for the 2017-1 and 2015-1 class A certificates are comparable to other class A certificates that Fitch rates 'A'.
The 'BBB+' ratings on the 2015-1 and 2017-1 class B certificates represent a three notch uplift from Spirit's corporate rating of 'BB+'. Certain class B certificates such as those issued in recent American Airlines transactions receive four notches of uplift. The notching differential represents qualitative difference in the recovery analyses of these transactions including the level of collateral diversity in the American transactions.
Ratings for this transaction are driven by a harsh downside scenario in which Spirit declares bankruptcy, chooses to reject the collateral aircraft, and where the aircraft are remarketed in the midst of a severe slump in aircraft values. Specific assumptions regarding value stress rates, etc. are covered elsewhere in this press release.
Ratings for the class AA and class A certificates are primarily based on a top-down analysis based on the value of the collateral. Therefore, a negative rating action could be driven by an unexpected decline in collateral values. A320 family values could be impacted by the entrance of the A320NEO or an unexpected and severe global aviation downturn. Fitch does not expect to upgrade either class of certificates above their current ratings in the near term.
The ratings of the subordinated tranches are influenced by Fitch's view of Spirit's corporate credit profile. A negative rating action could be considered if Spirit's credit profile weakens in Fitch's view. We expect there to be some ratings compression on the subordinate tranches as the airline IDR moves up the rating scale. Therefore, if Spirit were upgraded to 'BBB-', the B tranche would likely remain at 'BBB+'.
Liquidity Facility: All three classes of certificates in the 2017-1 transaction benefit from dedicated 18-month liquidity facilities which will be provided by Commonwealth Bank of Australia, New York Branch (AA-/F1+/Stable). The class A and B certificates in the 2015-1 transaction benefit from 18-month liquidity facilities provided by Natixis, acting through its New York branch (A/F1/Positive).
Fitch notes that these transactions features 35-day replacement windows in the event that the liquidity facility provider or depositary should become ineligible. This is inconsistent with Fitch's counterparty criteria which generally stipulate a maximum 30-day replacement period. However, Fitch does not consider the longer replacement window to be material given that the additional time period is not significant.
FULL LIST OF RATING ACTIONS
Fitch has affirmed the following ratings:
Spirit Airlines Pass Through Trust Certificates, Series 2017-1
--Class AA certificates at 'AA';
--Class A certificates at 'A';
--Class B certificates at 'BBB+.
Spirit Airlines Pass Through Trust Certificates, Series 2015-1
--Class A certificates at 'A';
--Class B certificates at 'BBB+'.
Fitch currently rates Spirit as follows:
Spirit Airlines, Inc.
--Long-Term IDR 'BB+'.
The Rating Outlook is Negative.