Fitch Ratings - Chicago - 06 Apr 2020: Fitch has downgraded Air Canada's 2013-1 class B certificates to 'BBB' from 'BBB+'. In addition, Fitch has affirmed the 2013-1 class A certificates at 'A', Air Canada's 2015-1 class A certificates at 'A' , and class B certificates at 'BBB+'.
KEY RATING DRIVERS
Senior Tranches: The affirmation of the 2015-1 and 2013-1 class A certificates reflects sufficient levels of overcollateralization for both transactions to pass Fitch's 'A' level stress tests. The ratings on the class A certificates are driven by a top-down analysis incorporating a series of stress tests that simulate the rejection and repossession of the aircraft in a severe aviation downturn. Good collateral quality and a high level of overcollateralization (OC) support Fitch's expectations that senior tranche holders should receive full principal recovery prior to default even in a severe stress scenario. The ratings also incorporate the benefit of an 18-month liquidity facility and the Cape Town Convention in Canada that provide additional protection for creditors.
Fitch calculates the 2015-1 A tranche base loan to value (LTV) at 54.8%. Fitch's maximum stress case LTV under our 'A' stress scenario is 77% when stresses are applied two years in the future, which is in line with Fitch's prior review, and represents a material amount of headroom at the current rating. The 2015-1 transaction is supported by 787-9s in the portfolio, which Fitch considers a strong tier 1 aircraft. Appraised values for the 787-9 have remained in line with Fitch's expectations over the past year, though the most recent appraisal data does not fully take into account the current market disruption from coronavirus.
Fitch calculates the 2013-1 A tranche base loan to value (LTV) at 58.8%. Fitch's maximum stress case LTV under our 'A' stress scenario is 85% when stresses are applied two years in the future. LTVs have increased by around six percentage points from Fitch's prior review due to declining values for the 777-300ER. Despite the declining value, the transaction remains sufficiently overcollateralized to support the current rating but with less headroom. 777-300ER values are being impacted by aircraft coming off their initial leases, replacement technology and relatively high reconfiguration and maintenance costs. Fitch is monitoring 777 values closely and future value decline may lead to negative rating actions.
Subordinated Tranches: The unprecedented stress on the airline industry caused by coronavirus is pressuring airline ratings. Fitch currently rates Air Canada 'BB'/Rating Outlook Negative. To the extent that Air Canada's ratings were downgraded, the class B certificates would be downgraded in kind.
Fitch notches subordinated tranche ratings from the airline IDR based on three primary variables: 1) the likelihood of affirmation in a bankruptcy scenario (0-2 notches for airlines rated in the 'BB' category; 2) the presence of a liquidity facility (0-1 notch); and 3) recovery prospects.
The downgrade of the 2013-1 class B certificates reflects weakening recovery prospects driven by lower 777-300ER values. The 'BBB' rating is up three notches from Air Canada's BB rating, consisting of two notches for a high affirmation factor (+2) and 1 notch of uplift reflecting the presence of a liquidity facility.
The 2015-1 class B certificates receive a 4 notch uplift based on a high affirmation factor (+2), a 1 notch uplift reflecting the presence of a liquidity facility, and one notch reflecting solid recovery prospects.
The 'A' ratings on the 2015-1 and 2013-1 class A certificates compare well with other EETC transactions rated at 'A'. Stress scenario loan-to-value ratios are generally lower than other transactions rated at 'A' though both transactions suffer from a lack of collateral diversification.
The upward notching of +4 and +3 for the 2015-1 and 2013-1 class B certificates respectively is comparable to notching for EETCs issued by United Airlines (also rated 'BB'), where we also consider the likelihood of affirmation to high. The difference between the three and four notch uplift is dependent on levels of collateral coverage.
Value stresses applied to key aircraft types in Fitch's models include:
--777-300ER - 25% A level stress
--787-9 - 20% A level stress
--787-8 - 25% A level stress
Factors that could, individually or collectively, lead to negative rating action/downgrade: --Class A certificates are primarily rated based on levels of overcollateralization. Ratings may be downgraded due to asset value declines that are sharper than assumed in Fitch's models. --Class B certificates are notched up from the underlying issuer rating. To the extent that Air Canada's ratings were downgraded, class B certificates would be downgraded in kind. Factors that could, individually or collectively, lead to positive rating action/upgrade: --Positive Rating actions are not likely in the near to intermediate term given current pressures on aircraft values and airline credit ratings.
BEST/WORST CASE RATING SCENARIO
Ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings visit https://www.fitchratings.com/site/re/10111579.
LIQUIDITY AND DEBT STRUCTURE
Class A and B certificates for both transactions feature 18-month liquidity facilities provided by Natixis (A+/F1/Rating Watch Negative).
SOURCES OF INFORMATION
ESG Considerations Relevant ESG issues for these transactions are related to the issuing airline. Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of 3. ESG issues are credit neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
PUBLIC RATINGS WITH CREDIT LINKAGE TO OTHER RATINGS
EETC ratings have linkages to Air Canada's corporate issuer rating and are supported by the ratings of Natixis as the liquidity facility provider.