New York, January 31, 2018 -- Moody's Investors Service has assigned ratings to United Airlines, Inc.'s Pass Through Certificates, Series 2018-1 that the company announced earlier today : $677.175 million Class AA with a legal final due date of September 1, 2031 at Aa3 and $257.965 million Class A with a legal final due date of September 1, 2031 at A2 (together, "the Certificates"). The scheduled maturity dates precede the respective legal final due dates by 18 months. The Certificate proceeds will finance 16 Boeing aircraft, newly-manufactured between September 2017 and May 2018: two B737-800s, six B737-MAX9s, five B787-9s and three B777-300ERs. The Corporate Family Rating ("CFR") of United Continental Holdings, Inc. ("United") is Ba2 and is unaffected in this rating action. The rating outlook on the Certificates and on United is stable.
RATINGS RATIONALE
The ratings reflect the credit quality of United; the typical benefits of EETCs, including the applicability of Section 1110, cross-default and cross-collateralization of the equipment notes; 18 month liquidity facilities; cross-subordination pursuant to the Intercreditor Agreement; and Moody's belief that each of the aircraft models will remain core to United's network during the transaction's 12-year term.
The respective notching on the certificates is eight and six above United's Ba2 CFR. Moody's estimates of the respective peak loans-to value (LTV) of about 44% and 61% (before priority claims for repossession and remarketing costs and liquidity facilities) support the notching of each tranche. The estimated LTVs are a few points higher than for other recent EETC transactions issued by American Airlines Group Inc. and Air Canada, both of which are rated a notch lower at Ba3. The amortization profile of this transaction is also flatter than found in these other transactions. The peak LTVs of each class are sustained for much of the transaction's 12-year term, leading to a smaller equity cushion in the later years relative to those in the American Airlines Group Inc. and Air Canada transactions. Nevertheless, the ratings of the Class AA and Class A are the same as in these other transactions, reflecting one less notch of uplift versus the CFR but more support from a lower probability of default by the airline.
The notching for each class reflects Moody's belief of 1) the importance of the aircraft to United's network and 2) that all of the aircraft but the six MAX 9s will be younger than the average age of their respective type in the fleet during the transaction's 12-year term. These factors lower the expected probability of default of the Certificates under a United bankruptcy scenario. Expected relatively attractive coupons of the to-be-issued certificates further supports the notching as do the size of the equity cushions notwithstanding their modest shortfalls versus other recent EETC issues.
The inclusion of B777-300ERs flattens the curve for this transaction relative to the curves of EETC transactions for other airlines, which do not have 777s in their collateral. Moody's reduces values of all models by 7.5% in their first year. From Year 2, Moody's used a 6% straight-line depreciation rate for the 777s, compared to a 5% rate for the 777s in the prior United EETCs, Series 2016-1 and Series 2016-2. Moody's used straight-line depreciation rates of 4% for the MAX 9s and 5% for the 787s and the 737-800s in this transaction. The 5% for the 787s compares to 4% for the 787s in the prior United EETCs. Moody's LTVs fall to 41% and 59% at the respective maturity dates for each Class. These compare to about 35% and 50% for Air Canada's Series 2017-1, which finances MAX8s and 787s; and about 33% and 49% for American Airlines Series 17-2 EETC.
Moody's estimates the aggregate market value of the 16 aircraft at about $1.540 billion in September 2018, about $1.164 billion in September 2023 and about $635 million at the scheduled maturity in March 2030. These values compare to about $1.588 billion, $1.346 billion and $1.030 billion, respectively, of maintenance-adjusted base values disclosed in the offering memorandum. The gap grows with the passage of time given Moody's steeper annual depreciation assumptions compared to the three percent standard used in EETC offerings.
This transaction will finance three of the 17 B777-300ERs in United's fleet. This model has replaced the company's B747-400s, the last of which was retired in November 2017. The B777-300ER will have the highest seating capacity of any United aircraft and, we believe, will serve its most dense routes for a number of years after this transaction's maturity in 2030. Moody's believes having the 777s and newest technology narrow- and wide-bodies in the collateral drives down the probability of default of the Certificates.
Changes in the EETC ratings can result from any combination of changes in the underlying credit quality or ratings of United, in Moody's opinion of the importance of particular aircraft models to the airline's network, or in Moody's estimates of aircraft market values, which will affect estimates of loan-to-value.
United Continental Holdings, Inc. is the holding company for United Airlines, Inc. United and United Express operate an average of 4,500 flights a day to 338 airports across six continents. In 2017, United and United Express operated more than 1.6 million flights carrying more than 148 million customers. The company reported $37.7 billion of revenue in 2017.
The methodologies used in these ratings were Enhanced Equipment Trust and Equipment Trust Certificates published in December 2015, and Global Passenger Airlines published in May 2012. Please see the Rating Methodologies page on www.moodys.com for a copy of these methodologies.
REGULATORY DISCLOSURES
For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.
For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.
Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.
Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.
Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.