Fitch Ratings-New York-13 April 2018: Fitch Ratings has upgraded the ratings on British Airways Plc's (BA; Issuer Default Rating BBB-/Stable) pass-through certificates series 2013-1 as follows:
--Class A certificates to 'A+' from 'A';
--Class B certificates to 'A-'from 'BBB+'.
The upgrades of the class A and the class B certificates are driven by an increase in overcollateralization as the transaction amortized by $52.7 million since the previous review in April 2017. The amortization of the certificates has outpaced the depreciation of the supporting collateral which resulted in lower LTVs and improved recovery prospects for both tranches.
Key ratings considerations include the quality of the aircraft collateral, significant overcollateralization, stabilization of the Boeing 777-300ER aircraft values, the United Kingdom's insolvency regime coupled with the transaction's underlying structure, the liquidity facility, BA's credit quality, and various additional structural elements.
Positive credit factors include the low balloon payments for the A and B tranches, short remaining expected maturity for the B tranche, and rapid amortization of the certificates resulting in expected LTV improvements for both tranches over the rating horizon.
KEY RATING DRIVERS
The ratings for the class A certificates are primarily based on collateral coverage in a stress scenario. Fitch's analysis uses a top-down approach assuming a rejection of the entire pool in a severe global aviation downturn. The analysis incorporates a full draw on the liquidity facility and an assumed repossession/remarketing cost of 5% of the total portfolio value. Fitch then applies immediate haircuts to the collateral value.
The 'A+' rating is supported by an adequate level of overcollateralization (OC) when incorporating the latest available aircraft appraisal data 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.
In its 'A' level stress analysis, Fitch has opted to apply a 25% value stress to the 777-300ERs, A320-200s and 787-8s in the pool. The 25% value haircut represents the middle of Fitch's 'A' level stress range for Tier 1 aircraft, which reflects Fitch's view of how the aircraft compare to other high quality assets.
Fitch's 'A' level stress scenario produces a maximum LTV of 82.6% when stress rates are applied two years in the future (as stipulated in Fitch's EETC criteria for airlines with corporate ratings in the BB category or higher). The 82.6% maximum stressed LTV represents a 3.8% improvement from the comparable stressed LTV of 86.4% from the previous review, supporting the upgrade.
The upgrade of the class B certificates reflects an improvement in Fitch's recovery expectations in a downturn and is driven by principal amortization of both tranches and by steady values for all three types of aircraft in the underlying collateral pool. Fitch's view of the strategic importance of these pools of aircraft to BA's fleet has not changed and the assessment of the likelihood of the collateral pool's affirmation remains 'high'. The 'A-' rating for the B-tranche represents a three notch uplift compared with BA's stand-alone credit profile, based on a high affirmation factor, presence of a liquidity facility and superior recovery prospects. The 'A-' rating is also supported by the class B certificate holders' right in certain cases to purchase all of the class A certificates at par plus accrued and unpaid interest.
High Collateral Quality:
The transaction is secured by a perfected first priority security interest in six Airbus A320-200s, six Boeing 787-8s, and two Boeing 777-300ERs. Fitch considers all to be good-quality Tier 1 aircraft.
Fitch upgraded BA's corporate rating to 'BBB-' from 'BB+' in March 2017. The Rating Outlook is Stable. The upgrade was supported by BA's strong credit metrics and adherence to prudent financial policy including cost control. The rating also reflects the company's extensively diversified route network, strong hub position at Heathrow and strong position on the cash flow-generative routes to the U.S. Fitch rates BA on a stand-alone basis. Fitch expects BA to be one of a very few EMEA airlines generating positive FCF over 2018-2020.
Fitch rates BA on a stand-alone basis as the agency assesses the legal and operational ties between IAG and BA as moderate. This reflects IAG's principle of stand-alone management of its operating entities. In BA's financing, there are no cross-default provisions to other IAG-owned entities. There are no cross-guarantees among the entities in IAG, with independent debt management at subsidiary airlines. In addition, BA has an independent board of directors.
Unlike the majority of the EETC transactions rated by Fitch, BA 2013-1 does not have large balloon payments for both tranches and amortizes rapidly. As a result, debt amortization significantly outpaces the depreciation of the asset values. In this aspect, BA 2013-1 is similar to Virgin Australia's 2013-1 EETC transaction but different from the majority of Fitch rated EETC transactions.
The 'A+' ratings on the class A certificates is higher than the ratings of the class A certificates of the majority of EETC transactions rated by Fitch. Even though overcollateralization of the A tranche is slightly lower than those of the 'A' rated tranches of Canada Airlines EETC transactions (A tranches of AC 2013-1 and AC 2015-1), the one notch differentiation is driven by a faster amortization profile, higher credit quality of the obligor and better collateral diversification.
The 'A-' rating for the class B certificates is the highest rating assigned by Fitch when utilizing a bottom-up rating approach and is partly driven by BA's 'BBB-' corporate rating, which is higher than those of the other EETC issuers. Fitch considers the two notch uplift due to the high affirmation factor (one notch) and the presence of the liquidity facility (one notch) to be comparable to those seen in the other recent Fitch rated transactions. The recovery prospects for the class B certificates are superior to those of the majority of tranches rated by Fitch's bottom-up approach and warrants an additional uplift by one notch.
Fitch's key assumptions within its rating case for the issuer include a harsh downside scenario in which BA declares bankruptcy, chooses to reject the collateral aircraft, and where the aircraft are remarketed in the midst of a severe slump in aircraft values. Depreciation rates and value stresses incorporated into Fitch's base and stress case scenario are in line with those used for similar Tier 1 assets as described in Fitch's EETC criteria.
Ratings for the 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. Fitch does not expect to upgrade either class of certificates above 'A+' ratings in the near term.
The ratings of the subordinated the class A certificates are influenced by Fitch's view of BA's corporate credit profile and by recovery prospects. A positive rating action could be considered if BA's credit profile were to strengthen in Fitch's view. Conversely, Fitch's EETC methodology allows for wider subordinated tranche notching for airlines in the 'BB' category, therefore if BA were downgraded to 'BB+' from 'BBB-' Fitch may affirm the ratings of the class B certificates at 'A-'. Fitch may also consider a negative rating action for the class A certificates if the recovery prospects change significantly due to an unexpected decline in collateral values.
Liquidity Facility: The certificates benefit from dedicated 18-month liquidity facilities which will be provided by Landesbank Hessen-Thuringen Girozentrale (A+/F1+/Stable). The transaction features a 35-day replacement window 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 upgraded the following ratings:
British Airways Pass Through Certificates, Series 2013-1
--Class A certificates to 'A+' from 'A';
--Class B certificates to 'A-' from 'BBB+'.
Fitch currently rates British Airways as follows:
British Airways Plc
--Long-Term IDR 'BBB-'.