Fitch Rates American's Proposed 2015-1 Class A Ctfs 'A(EXP)' & Class B Ctfs 'BBB(EXP)'

CHICAGO--(BUSINESS WIRE)--

Fitch Ratings has assigned the following expected ratings to the American Airlines. Inc. (AAL, rated 'B+'; Outlook Stable by Fitch) proposed pass through trusts series 2015-1:

--$947,778,000 class A certificates due in May 2027 'A(EXP)';

--$266,046,000 class B certificates due in May 2022 'BBB(EXP)';

The A-tranche ratings are primarily driven by a top-down analysis incorporating a series of stress tests which simulate the rejection and repossession of the aircraft in a severe aviation downturn. The 'A' level rating is supported by a high level of overcollateralization (OC) and high quality collateral which support Fitch's expectations that A tranche holders should receive full principal recovery prior to default even in a harsh stress scenario. The ratings are also supported by the inclusion of an 18-month liquidity facility, 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 class A certificates could avoid default even if American were to file bankruptcy and subsequently reject the aircraft.

The initial A-tranche LTV, as cited in the prospectus, is 56.9%, and Fitch's maximum stress case LTV (the primary driver for the A-tranche rating) through the life of the transaction is 88%. This level of OC provides a significant amount of protection for the A-tranche holders.

The 'BBB' rating for the B-tranche represents a five-notch uplift (maximum is five per Fitch's EETC criteria) from American's Issuer Default Rating (IDR) of 'B+'. The uplift primarily reflects Fitch's view of the affirmation factor for this collateral pool (the likelihood that American would choose to affirm the aircraft in a potential default scenario). Fitch assigns a three notch uplift from the IDR based on affirmation. Secondary factors for the B tranche rating include the presence of an 18-month liquidity facility (plus one notch) and Fitch's view of recovery prospects in a stress scenario (plus one notch). Fitch rates the 2015-1 class B certificates one notch higher than American's 2014-1 class B certificates due to the new transaction's more diverse collateral pool and better recovery prospects.

Transaction Overview

American plans to raise $1,213.8 million in an EETC transaction to finance 28 new delivery and newer vintage aircraft.

The A-tranche will be sized at $947,778,000 with a 12.1-year tenor, a weighted average life of 8.7 years and an initial LTV of 56.9% (per the prospectus). Fitch calculates the initial LTV at 57.3% using the lower of mean or median (LMM) values provided in the prospectus, but applying our own depreciation assumptions. Fitch has checked the LMM values against independent data provided by a third party appraiser.

The subordinate B-tranche will be sized at $266,046,000 with an 8.1-year tenor and a weighted average life of 5.5 years. The initial prospectus LTV for the B-tranche is 72.6%. Fitch calculates the initial LTV at 73.2%.

Collateral Pool: The transaction will be secured by a perfected first-priority security interest in 28 new delivery and newer vintage aircraft including five Boeing 777-300ERs, eight Airbus A319-100s, nine Embraer ERJ 175LRs, five Boeing 737-800s, and one 787-8 . Fitch classifies the 777-300ER, the 737-800 and the 787-8 as Tier 1 collateral while the A319s and ERJ 175LRs are considered low Tier 1/high Tier 2 collateral. All five types are considered strategically important to AAL's fleet.

Liquidity Facility: The class A and class B certificates benefit from a dedicated 18-month liquidity facility which will be provided by Credit Agricole Corporate and Investment Bank acting through its New York Branch (rated 'A'/'F1' with a Stable Outlook).

This transaction features a 35-day replacement window in the event that the liquidity facility provider should become ineligible. This is inconsistent with Fitch's counterparty criteria, which generally stipulates a maximum 30-day replacement period. However, Fitch does not consider the longer replacement window to be material to the ratings given that the additional time period is not significant. Risk is also mitigated by Credit Agricole's 'A/F1' rating, which is level with the current rating of the class A certificates.

Cross-default & Cross-collateralization Provisions: Each note will be fully cross-collateralized and all indentures will be fully cross-defaulted from day one, which Fitch believes will limit American's ability to 'cherry-pick' aircraft in a potential restructuring.

Depositary: A portion of the proceeds from the transaction will be used to pre-fund deliveries expected through September 2015. Accordingly, proceeds will initially be held in escrow by Credit Agricole, the designated depositary, until the aircraft are delivered.

KEY RATING DRIVERS

Stress Case: The ratings for the class A certificates are primarily based on collateral coverage in a stress scenario. The analysis utilizes 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 777-300ERs in this pool receive a 25% haircut representing the middle of Fitch's Tier 1 stress range of 20-30%. Fitch applies a 30% stress rate to both the A319-100 and the ERJ 175LR as both aircraft are considered low tier 1 or high tier 2 aircraft. The A319-100 has a large user base but has a limited backlog. The ERJ 175LR has a limited user base but has experienced considerable commercial success in recent years. Fitch's stress scenario incorporates higher Tier 2 depreciation rates to both of these aircraft types. The 737-800 is a top quality tier 1 aircraft due to its wide user base, popularity, and large backlog. The 737-800 is considered a top-quality tier 1 aircraft and receives a 20% stress in Fitch's model. The 787-8 is also considered a high quality Tier 1 aircraft, though Fitch applies a 25% stress to the model in its stress scenario.

These assumptions produce a maximum stress LTV of 88%, suggesting full recovery for the A-tranche holders. Fitch expects LTV ratios to remain relatively flat through the first several years of the transaction as scheduled principal amortization roughly matches our depreciation assumptions. LTVs are expected to decline gradually later in the life of the deal. Although Fitch considers both the A319-100 and ERJ 175LR to be good quality aircraft, stress scenarios were run as a test, which account for both aircraft as Tier 2. Those scenarios incorporate stress rates of up to 40%. Even under those assumptions, which Fitch considers to be onerous, the maximum LTV for the senior tranche does not exceed 100% at any point in the transaction, which further supports the 'A' rating for the Class A certificates.

High Collateral Quality: The quality of the collateral pool underlying the transaction is considered solid.

777-300ER (45% of the collateral pool value): Fitch considers the 777-300ER to be a solid Tier 1 aircraft, but applies the middle of the Tier 1 stress range (25% for A-category stress), as widebodies have typically proven to be more volatile than narrowbody aircraft in prior downturns. That said, Fitch expects widebody values to hold up better in a near-term aviation downturn given the relative strength of the widebody secondary market. Furthermore, the 777-300ER is the best-selling aircraft of its size with a diverse base of global operators, solid backlog and limited competition. Notably, there are no 777-300ERs currently parked. With an average age of four years, the 777-300ER is relatively young in its life cycle, with no replacement aircraft in the near term.

The A350-1000 will compete with the 300ER and will feature a longer range and lower fuel consumption. However, the entrance of the A350 is still a couple of years away. The first delivery for the A350-1000 is not expected until 2017. At that point it will take time for the A350 to build up enough deliveries to seriously compete with the 300ER. Boeing officially launched the replacement to the 777-300ER, dubbed the 777X, at the Dubai airshow in 2013. Entry of the 777X could have an impact on the 300ERs secondary market values as the 300ER will no longer represent Boeing's premier widebody product. However, the larger 777-9X is not scheduled to enter into service until 2020. Featuring a 400+ passenger capacity, the 9x will not directly compete with the smaller 777-300ER. The 777-8x, which will represent a direct comp to the 300ER is not scheduled to enter service until at least 2022.

The ERJ 175LR (16% of collateral value) is considered a low Tier 1/high Tier 2 aircraft. Although the model has a limited user base of only 20 airlines, it has had good commercial success in recent years with large orders from United and American. The ERJ 175LRs primary competitor is the CRJ-900, manufactured by Bombardier. The two aircraft are quite similar in terms of capacity and capability, but the Embraer has proven to be the more popular choice over the past few years. Most customers appear to favor the ERJ 175LR's larger fuselage that allows for more comfortable seating and increased overhead space when compared to the CRJ-900. The CRJ-900 currently has a backlog of 57 aircraft, compared to 172 for the ERJ 175LR.

Much like the narrow body 737 and A320 families, values for the Embraer regional jets may face some pressure over the longer term from the introduction of a re-engined variant. Embraer announced the launch of its E-2 series of aircraft in 2013, which will have a high level of commonality with the existing E-jets, but will feature Pratt & Whitney's PW1700G geared turbofan engine, which along with other improvements should improve fuel consumption by 16% over the current model. While the introduction of the E-2 may impact values of current models in the longer run, Fitch notes that the first E175-E2 is not scheduled for entry into service until 2020, and at that point it will take several years of production for Embraer to produce enough of the planes to notably displace current in-service aircraft.

The ERJs in this transaction will be leased to Compass Airlines. All leases will be subject and subordinate to the note indentures.

A319-100 (17% of the collateral value): The Airbus A319 is arguably the weakest portion of this collateral pool. The A319 features a very large fleet of aircraft currently in service with over 1,300 of the model currently flying with 120 operators. However, the A319 has a relatively small backlog of new aircraft, reflecting recent airline preferences for the larger A320 and A321. Airbus' current backlog for the 319 includes 64 CEOs and only 27 NEOs. User preference for the A319s larger cousins may pressure secondary values for the aircraft going forward though these concerns are partially offset by the aircraft's popularity and wide user base.

737-800 (12.5% of collateral value): Fitch views the 737-800s as one of the most popular narrowbody aircraft currently in operation, and classifies it as top quality Tier 1 aircraft due to its market depth and popularity. The 737-800 is one of the world's most widely used aircraft and most attractive narrowbodies to finance. The 737-800 is the stretched member of the next-generation (NG) 737 family which was introduced in 1998 as a replacement for the classic 737s. The -800 made several improvements over the classic version including upgraded systems, larger wings, a higher MTOW, greater fuel capacity and range.

The 737-800 is by far the most popular variant of the 737 family, with more than 3,200 planes currently in service and nearly 150 individual operators. Boeing's current backlog for the model stands at 1,260 planes, not including the popular new MAX version. The popularity and wide user base of this aircraft are well above nearly any other model (aside from the A320) on the market, making it one of the highest grades of collateral available to back a EETC, lending significant support to its position as a top notch tier 1 plane.

787-8 (7% of collateral value): Fitch views the 787-8 as a high quality Tier 1 aircraft despite the highly publicized maintenance and production problems that the 787-8 had early in its life. The plane continues to be well accepted and highly desirable for its users. The backlog for the -8 variant stands at 241 aircraft. Fitch notes that while the model has been highly successful thus far, preferences have shifted to the larger 787-9 variant. The 787-8 only received one order in 2014 compared to 64 new orders for the 787-9.

Affirmation Factor: Fitch considers the affirmation factor for this pool of aircraft to be high. The 777-300ERs represent American's flagship international product and feature its fully lie flat seats and aisle access in both first and business class. The 300ERs also feature international wi-fi capability and a walk-up snack bar. American utilizes its highly updated first and business class sections to compete on premier routes such as London to LA, Dallas, New York, and Miami, and from Dallas to Hong Kong, and Sao Paolo.

The A319s in the collateral pool are also unlikely candidates to be rejected in a future bankruptcy scenario, as they offer compelling operating economics on routes that don't have the demand to fill a larger A320 or 737, but still benefit from high frequencies. The A319 is also an important replacement aircraft for the MD-80s that American is actively retiring. While American is replacing many of its MD-80s (140 seats) with 737-800s and A320s (160 seats), not all routes currently served by the MD-80 have the demand to fill the extra approximately 20 seats on those aircraft. The 128 seat A319 is a good option for routes with lower levels of demand.

The 737-800 represents a core component of American's domestic operation accounting for more than 40% of the company's domestic ASMs. At year end 2014 the company had 246 of the aircraft and plans to take roughly 60 more in the coming years. As is the case with the A319, the 737 plays a key role in replacing American's aging MD-80s.

The ERJ 175LR's importance to American lies in the unit cost savings that it provides over smaller, 50 seat regional jets. The trend among all of the large three domestic airlines has been to move aggressively away from smaller regional jets that limit ancillary revenue potential (no first class or 'main cabin extra'), and receive poor reviews from customers. American's regional fleet currently includes more than 200 jets with a seating capacity of 50 or smaller. American has a total of 60 ERJ 175LRs on order, and they will make up a core part of its regional fleet going forward.

The 787-8 is a unique aircraft that is also important to American (although it represents a relatively small portion of the pool). The 787-8 features the latest technological advantages, and operates at a significant unit cost discount to comparably sized wide body aircraft. The addition of the 787 to American's fleet will also allow them to connect city pairs that would not be viable with other aircraft types.

B-Tranche: The 'BBB' rating for the subordinate B-tranche is assigned by notching up from AAL's IDR of 'B+'. Fitch notches subordinated tranche ratings from the airline IDR based on three primary variables; 1) the affirmation factor (0 - 3 notches), 2) the presence of a liquidity facility, (0 - 1 notch), and 3) recovery prospects. In this case, Fitch has assigned a three-notch uplift (the maximum) based on a high affirmation factor (as discussed above), a one-notch uplift reflecting the liquidity facility, and one additional notch which incorporates the transaction's above average recovery prospects. Fitch only assigns an additional one notch of uplift for recovery prospects in situations where recovery is expected to be significantly better than for comparable existing B-tranches.

RATING SENSITIVITIES

Senior tranche ratings 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. Potential risks for the A320, 737, 777, and ERJ families aircraft include the introduction of newer technology replacement models, which could pressure secondary-market values. Senior tranche ratings could also be affected by a perceived change in the affirmation factor or deterioration in the underlying airline credit.

Subordinated tranche ratings are based off of the underlying airline IDR. As such, Fitch would likely downgrade the B tranche to 'BBB-' if American's IDR were downgraded to 'B'. Subordinated tranche ratings and the airline IDR experience some compression as the IDR moves up the rating scale. As such, if Fitch were to upgrade American's IDR to 'BB-', the subordinated tranche ratings would likely be affirmed at their current levels.

Fitch has assigned the following ratings:

American Airlines pass through trust 2015-1:

--Series 2015-1 class A certificates 'A (EXP)';

--Series 2015-1 class B certificates 'BBB (EXP)'.

Fitch currently rates American as follows:

American Airlines Group, Inc.

--IDR 'B+';

--Senior Unsecured Notes at 'B+/RR4'

American Airlines, Inc.

--IDR 'B+';

--Senior secured credit facility 'BB+/RR1'.

US Airways Group, Inc.

--IDR 'B+';

--Senior unsecured notes 'B+/RR4'.

US Airways, Inc.

--IDR 'B+';

--Senior secured credit facility 'BB+/RR1'.

The Rating Outlook is Stable.

Additional information is available on www.fitchratings.com

Applicable Criteria and Related Research:

--'Rating Aircraft Enhanced Equipment Trust Certificates' (Sept. 12, 2013);

--'Recovery Ratings and Notching Criteria for Nonfinancial Corporate Issuers' (Nov. 18, 2014);

--'Counterparty Criteria for Structured Finance and Covered Bonds' (May 14, 2014).

Applicable Criteria and Related Research:

Rating Aircraft Enhanced Equipment Trust Certificates

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=717763

Recovery Ratings and Notching Criteria for Equity REITs

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=813628

Counterparty Criteria for Structured Finance and Covered Bonds

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=744158

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=980593

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