Fitch Ratings has affirmed the ratings for Spirit Airlines' 2015-1 and 2017-1 enhanced equipment trust certificates (EETCs).
The affirmation of the class AA and A ratings was driven by sufficient overcollateralization and amortization profiles. The affirmation of the subordinated tranches was supported by high affirmation factors and the availability of liquidity facilities.
Key Rating Drivers
Class AA and A Ratings:
The 2017-1 class AA certificates hold sufficient headroom to pass our 'AA' stress scenario, which results in a loan-to-value (LTV) ratio of 93.3%, up from 91.9% in the prior review. Under the 'A' level stress scenario, LTF for Spirit's 2015-1 class A certificates improved slightly to 86.3%, down from 87.3%, whereas the 2017-1 class A certificates increased to 89.5%, up from 88.1%. The 2015-1 transaction amortizes more aggressively, which mitigates the effects of underperforming collateral values. Fitch expects both transaction's LTVs to improve over their lifespans due to the pace of their amortization profiles.
The 2015-1 and 2017-1 transactions are both exposed to 2016-2018 vintage A320 and A321 aircraft, which declined above Fitch's updated tier 1 depreciation assumption of 6% year-over-year (yoy). The A320 aircraft declined 6.6%-6.8%, slightly above the A321-200 aircraft which declined 6.3%-6.5% yoy. Under the 'AA' and 'A' stress scenarios, Fitch assumes a 45% and 25% stress rate for the collateral in the pools, respectively.
Spirit's 2015-1 transaction is collateralized by 15 aircraft, encompassing 12 2016-2017 vintage A321s and three 2016 vintage A320s. The 2017-1 transaction consists of 12 aircraft, including seven 2017-2018 vintage A320s and five 2018 vintage A321s.
The value stresses listed above produce the following maximum LTVs for transactions rated through our top-down approach:
SAVE 2017-1 Class AA: Base Case - 45.6% AA level stress: 93.3%
SAVE 2017-1 Class A: Base Case - 60.8% A level stress: 89.5%
SAVE 2015-1 Class A: Base Case - 58.7% A level stress: 86.3%
Subordinated tranche ratings:
Fitch has affirmed Spirit's class B certificates at 'BBB'. Fitch notches subordinated tranche EETC ratings from the airline's Issuer Default Rating (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 (0-1 notch). The four-notch uplift from Spirit's 'BB-' IDR reflects a high affirmation factor (+2 notches), the benefit of a liquidity facility (+1 notch), and solid recovery prospects in a stress scenario (+1).
Fitch considers the affirmation factor for the 2017-1 and 2015-1 pools to be high. In our view, the likelihood that Spirit would ultimately affirm these aircraft in a scenario where the airline filed for bankruptcy, is supported by the relatively high percentage of the fleet contained in these pools. The Spirit 2015-1 pool contains 15 aircraft, which makes up around 9% of the company's current fleet. The 2017-1 pool contains 12 aircraft, or around 7% of Spirit's fleet. The two pools also contain 17 A321s, which represents more than half of Spirit's (30) owned A321s as of August 2022. The A321's larger size allows Spirit to add capacity on denser routes without necessarily adding additional frequencies. The larger gauge of the A321 also leads to a lower cost per available seat mile compared to its smaller cousins, which is key to Spirit's low-cost strategy.
The 'AA-' rating on the 2017-1 senior certificates is in line with Fitch's 'AA-' ratings on EETCs issued by British Airways and Air Canada. The collateral pools suffer from a relative lack of diversity, but that is offset by the high proportion of Spirit's owned fleet represented by this pool of collateral and by the age of the underlying collateral. LTVs for the class A certificates for both the 2017-1 and 2015-1 transactions are comparable to as to other class A certificates that Fitch rates 'A'.
Key assumptions within the rating case for the issuer include a harsh downside scenario in which Spirit declares bankruptcy, chooses to reject the collateral aircraft, and where the aircraft are remarketed in the midst of a severe slump in aircraft values. Fitch views a hypothetical Spirit Airlines bankruptcy as unlikely, which is reflected in Spirit's 'BB-' IDR. Fitch's models also incorporate a full draw on liquidity facilities and include assumptions for repossession and remarketing costs.
Fitch's analysis incorporates a 6% annual depreciation rate for Tier I aircraft, up from 5% in the prior review, reflecting updated analysis of historical aircraft value trends.
Fitch's recovery analyses for subordinated tranches utilize our 'BB' level stress tests and include a full draw on liquidity facilities and assumptions for repossessions and remarketing costs.
The class AA and A certificate 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. Senior tranche ratings could also be affected by a perceived change in the affirmation factor or deterioration in the underlying airline credit. The transaction ratings may be impacted in the future by pressures on A320 CEO family values or changes in value stress rates utilized in Fitch's models as the A320 NEO family becomes a more dominant presence in the global aircraft market. Fitch does not expect positive rating actions for these transactions in the near term, given the Negative Outlook on Spirit's IDR.
The class B certificates are linked to Spirit's corporate rating. However, Fitch's criteria allow for wider affirmation factor notching when the underlying airline is rated in the 'B' category. Therefore, if Spirit were downgraded to 'B+' the class B certificates could be affirmed at their current levels. Fitch currently views the Affirmation Factor for each Spirit EETC as high. This could weaken over time as the collateral aircraft age and become a smaller portion of Spirit's total fleet. Negative actions could be driven by lower recovery prospects driven by weaker aircraft values.
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 '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
The AA, A, and B certificates benefit from dedicated 18-month liquidity facilities that will be provided by Commonwealth Bank of Australia, New York Branch (A+/F1/Sta).
The class A and B certificates feature an 18-month liquidity facility provided by Natixis (A+/F1/Negative).
Fitch does not provide separate ESG scores for Spirit's EETC transactions as ESG scores are derived from its parent. ESG relevance scores and commentary for the parent entity, Spirit, can be found here https://www.fitchratings.com/entity/spirit-airlines-inc-93771290