NATIONAL AUSTRALIA BANK LIMITED Fitch Ratings has upgraded British Airways Pass Through Certificates, Series 2020-1 (BA EETC 2020-1) Class B.
It has also affirmed British Airways Pass Through Trust Series 2013-1 (BA EETC 2013-1) Class A, British Airways Pass Through Certificates 2018-1 (BA EETC 2018-1) Class AA and Class A and British Airways Pass Through Certificates, Series 2020-1 (BA EETC 2020-1) Class A. A full list of rating actions is detailed below.
The upgrade of BA EETC 2020-1 Class B to 'BBB+' from 'BBB' reflects our recent upgrade of
The affirmations reflect good over-collateralisation levels and modestly improved loan-to-values (LTVs) two years in the future for the senior tranches, despite notable declines in widebody aircraft appraisal values. The ratings benefit from low balloon payments and rapid amortisation of the certificates, resulting in expected LTV improvements over the rating horizon. They are rated in accordance with Fitch's Aircraft Enhanced Equipment Trust Certificates (EETC) Rating Criteria.
Key Rating Drivers
The ratings of the senior tranches of 2013-1 and 2020-1 certificates are based on collateral coverage at 'A' stress and those of 2018-1 at 'AA' stress. Fitch analysis uses a top-down approach that primarily focuses on structure, collateral and legal protection and Fitch assumes a rejection by BA of the entire pool of aircrafts in a severe global aviation downturn, a full drawdown on its liquidity facility, and a repossession/remarketing cost at 5% of the total portfolio value.
2013-1 Class A (Senior)
Fitch's 'A' level stress produces a maximum LTV of 82.1% when stress rates are applied one year into the future since the transaction expires in
We applied a 25% value stress to A320-200, which represents the middle of Fitch's 'A' level stress range for Tier 1 aircraft, as Fitch balances the declining value of the older generation aircraft with other high-quality assets, such as the new generation A320neo. Fitch views the 777-300ER as a Tier 2 aircraft, and hence applied a 30% stress to account for widebody jets' greater historical volatility than the more popular narrow bodies'.
2018-1 Class AA (Senior)
The 'AA-' rating on the class AA certificates reflects sufficient headroom in the current rating with a 81.9% LTV under 'AA' stress as a harsh decline in widebody aircraft appraisal value is mitigated by the amortisation of the outstanding certificates' balance. We monitor LTVs two years into the future, as stipulated in our EETC criteria for airlines with corporate ratings in the 'BB' category or higher.
2020-1 Class A (Senior)
The 'A-' rating on the class A certificates reflects a 93.2% LTV under the 'A' stress. Headroom in the current rating has diminished due to a decline in widebody aircraft appraisal value. Unlike BA's other (particularly 2018-1) EETC transactions, the 2020-1 transaction features a slow amortisation schedule, with a large lump-sum payment at maturity (around 30% of initial class A principal). We monitor LTVs two years into the future.
Coupled with weaker asset quality (than 2018-1), this leaves little headroom under the 'A' category stress. Fitch forecasts the LTV will improve to below 90% under the 'A' category stress only in 2027.
Tier and Value Stress Level Summary
A320neo: Tier 1, 20% and 40% under 'A' and 'AA' value stress, respectively
A320-200: Tier 1, 25% under 'A' value stress
A350-1000: Tier 2, 30% under 'A' value stress
B777-300ER: Tier 2, 30% under 'A' value stress
B787-8: Tier 1, 30% and 50% under 'A' and 'AA' value stress, respectively
B787-9: Tier 1, 45% under 'AA' value stress
B787-10: Tier 2, 30% under 'A' value stress
The 40% stress rate for A320neo at 'AA' reflects Fitch's opinion that the aircraft are more fuel-efficient and technologically advanced than previous generations of narrow bodies and are a more popular aircraft type.
2018-1 Class A (Junior)
The rating for 2018-1 class A certificates could benefit from a four-notch uplift from BA's IDR of 'BB+'; however, it is capped at 'BBB+', in line with Fitch's criteria for ratings achieved via the bottom-up approach for speculative-grade issuers. These notches are based on a high affirmation factor, the presence of a liquidity facility and the outstanding recovery prospects for the tranche, assuming 'BB' value stresses. Fitch's view of the strategic importance of the pool of aircraft to BA's fleet has not changed and the assessment of the likelihood of the collateral pool's affirmation remains 'high'.
The 'BBB+' rating is also supported by the junior certificate holders' right, in certain cases, to purchase all of the senior class certificates at par plus accrued and unpaid interest. A downgrade in BA's IDR by two notches will at least trigger a downgrade in the BA EETC 2018-1 class A rating, as it is notched up from BA's IDR.
Affirmation Factor: Fitch views the affirmation factor for this pool of aircraft as high, providing a two-notch uplift from BA's IDR. Our view is supported by the strategic importance of the collateral, by the status of the A320neos and B787s in the 2018-1 pool as the most important models in BA's short-haul and long-haul fleet, and by the large number of older aircraft, such as A319s and B777-200s in BA's overall fleet, which are more likely to be rejected in a restructuring compared with aircraft in this pool.
Liquidity Facility and Recovery: A one-notch uplift derives from dedicated 18-month liquidity facilities provided by
2020-1 Class B (Junior)
The rating for 2020-1 class B certificates could benefit from a four-notch uplift from BA's IDR of 'BB+' but is capped at 'BBB+', in line with Fitch's criteria for ratings achieved via the bottom-up approach for speculative-grade issuers. The uplift comprises two notches for Fitch's view of the high affirmation factor for this collateral pool (the likelihood that BA would choose to affirm the aircraft in a default), one notch for the 18-month liquidity facility and one notch for recovery prospects. The 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.
Affirmation Factor: Fitch's view of the high affirmation factor for this pool of aircraft is supported by the strategic importance of the collateral, with A320NEOs, A350-1000s and B787-10s being the latest aircraft technology available in the market today, and the large number of older aircrafts in BA's fleet such as A320CEOs and B777-200s, which are more likely to be rejected in a restructuring than aircraft in this pool.
Liquidity Facility and Recovery: Both classes of certificates benefit from a dedicated 18-month liquidity facility, which would prevent an immediate default of the certificates should BA face financial distress. The liquidity facility provider is
Corporate Rating Outlook Stable: The Stable Outlook reflects improving travel demand in BA's key markets, easing risks over its capacity to pass on high fuel prices and inflation, but also downside risk related to the macro environment. Our forecasts factor in our expectations that BA's capacity will be fully restored above pre-pandemic levels by end-2024.
Derivation Summary
BA EETC 2013-1
Unlike the majority of the EETC transactions rated by Fitch, including BA 2020-1, BA 2013-1 certificates do not have large balloon payments and amortise rapidly. As a result, debt amortisation outpaces the depreciation of the asset values. The 'A+' rating on the class A certificates is higher than the ratings of the class A certificates of the majority of EETC transactions rated by Fitch. The higher rating is driven by a faster amortisation profile, higher credit quality of the obligor and better collateral diversification.
BA EETC 2018-1
The 'AA-' rating on the 2018-1 senior class AA certificates is comparable with class AA certificates issued by Air Canada EETC 2017-1 and higher than that of other class AA certificates issued by American Airlines EETC 2017-2 and
The 'BBB+' rating for the 2018-1 class A certificates is capped at the current level using a bottom-up rating approach with BA's 'BB+' IDR. The two-notch uplift reflects the high affirmation factor, the presence of the liquidity facility (one notch) and outstanding recovery prospects (one notch) that are comparable with those in other recent Fitch-rated transactions.
BA EETC 2020-1
Relative to other EETCs, BA 2020-1 certificates feature a higher LTV, which will decrease more slowly due to its slow amortisation schedule, mitigated by new and diversified assets in the collateral pool.
The 'A-' rating on the class A certificates reflects limited headroom, mitigated by the collateral quality. The stressed LTV of 93.2% at 'A' is higher than those of Air Canada Pass Through Series 2020-2 at mid-80% and Alaska Air Group Pass Through Certificate Series 2020-1 at a low 90%, both of whose class A tranches are also rated 'A-'. However, this is mitigated by over 90% of BA EETC 2020-1's aircraft pool value being represented by new and the latest technology.
The 'BBB+' rating on the class B certificates is capped at the current level using a bottom-up rating approach with BA's 'BB+' IDR. The two-notch uplift reflects the high affirmation factor, the presence of the liquidity facility (one notch) and outstanding recovery prospects (one notch) that are comparable with those in the other recent Fitch-rated transactions.
Key Assumptions
Fitch's key assumptions within its rating case for EETCs senior tranches include a harsh downside scenario in which the airline declares bankruptcy, chooses to reject the collateral aircraft, and where the aircraft are remarketed amid a severe slump in aircraft values. Specific assumptions regarding value stress rates are covered under tier and value stress level summary.
Fitch's analysis incorporates a 6% annual depreciation rate for Tier I aircraft and a 7% annual depreciation rate for Tier II aircraft. Fitch has increased its depreciation-rate assumptions modestly, reflecting its updated analysis of historical aircraft value trends.
RATING SENSITIVITIES
BA EETC 2013-1 Class A
Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade:
An upgrade may be possible if collateral coverage continues to increase as the transaction amortises
Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade:
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 or downgrade could be driven by an unexpected and significant decline in collateral values
BA EETC 2018-1 Class AA
Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade:
Fitch may upgrade the ratings to 'AA' if collateral coverage continues to increase as the transaction amortises
Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade:
Ratings for the class AA certificates are primarily based on a top-down analysis using the value of the collateral. Therefore, a negative rating action or downgrade could be driven by an unexpected and significant decline in collateral values
BA EETC 2018-1 Class A
Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade:
The rating of the subordinated class A tranche is influenced by Fitch's view of BA's rating and thus an upgrade may only follow an upgrade of BA's IDR
Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade:
The rating of the subordinated class A tranche takes a bottom-up approach and is influenced by Fitch's view of BA's rating. A downgrade may follow a two-or-more notch downgrade of BA's IDR, or fewer notching for the affirmation factor, liquidity facility or recovery prospects
BA EETC 2020-1 Class A
Factors That Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade:
An upgrade may be possible if collateral coverage continues to increase as the transaction amortises
Factors That Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade:
The class A certificates' rating is primarily based on a top-down analysis using the value of the collateral. Therefore, negative rating action could be driven by an unexpected decline in collateral values
BA EETC 2020-1 Class B
Factors That Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade:
The rating of the subordinated B tranche is influenced by Fitch's view of BA's rating, so an upgrade may only follow an upgrade of BA's IDR
Factors That Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade:
The rating of the subordinated class B tranche takes a bottom-up approach and is influenced by Fitch's view of BA's rating. A downgrade may follow a two-or-more notch downgrade of BA's IDR, or fewer notching for the affirmation factor, liquidity facility or recovery prospects
Best/Worst Case Rating Scenario
International scale credit 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 '
Liquidity and Debt Structure
Liquidity Facility: All tranches benefit from dedicated 18-month liquidity facilities. The liquidity facility provider for 2013-1 is
Issuer Profile
BA is one of the largest European airlines based on pre-pandemic passenger-revenue-kilometers and the largest
Criteria Variation
The BA 2018-1 transaction varies from one of the qualitative characteristics for the 'AA' rating category consideration as specified in Fitch's EETC criteria. Fitch expects collateral pools of less than 10 aircraft to contain at least five wide body aircraft.
The collateral pool of the BA 2018-1 transaction initially comprised 11 aircraft, qualifying it for the 'AA' rating consideration; however, certain aircraft are scheduled to be released from the pool prior to the final expected maturity. In
Even though the transaction will not meet Fitch's minimum number of aircraft consideration for the 'AA' rating category for the last 18 months of the transaction, Fitch has assigned a 'AA-' rating to the AA certificates because we believe the significant expected overcollateralization and the high quality of the aircraft in the pool mitigate the qualitative constraint tied to the pool's size.
ESG CONSIDERATIONS
Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means 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.
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