SPIRIT AIRLINES, INC.
Fitch Ratings has downgraded
The downgrade is driven by Fitch's recent downgrade of Spirit's Issuer Default Rating (IDR) to 'CCC' from 'B-'. Fitch has also affirmed the 2017-1 class AA certificates at 'A+', the class A certificates at 'A' and the 2015-1 class A certificates at 'A'.
The class A certificates are derived through Fitch's top-down approach, while the class B certificates are notched off of the underlying airline rating. The class A certificates are supported by healthy overcollateralization. Loan-to-values (LTVs) for both the 2017-1 and 2015-1 transactions remain relatively steady since Fitch's last review, and base values for the A321s and A320s in these portfolios have performed in line with Fitch's standard depreciation assumptions over the last year.
Should Spirit enter bankruptcy, Fitch would further downgrade the class B certificates. However, modest LTVs and good recovery prospects may support ratings in the low 'B' or high 'CCC' range. The class AA and A certificate ratings remain supported by solid collateral coverage.
Key Rating Drivers
2017-1 Class AA and Class A Certificates: The class AA certificate ratings are primarily driven by Fitch's top-down approach, which implies a 'AA-' rating. However, Spirit's IDR of 'CCC' caps the class AA certificates at 'A+', given senior tranches are precluded from reaching the 'AA' category under Fitch's EETC criteria if the underlying airline is rated 'B-' or lower.
The ratings for the class A certificates for both the 2017-1 and 2015-1 transactions are derived through Fitch's top-down approach. Loan-to-values (LTVs) for both transactions have increased slightly since Fitch's last review, but they maintain a moderate level of cushion at the current rating category. Both also benefit from strong levels of overcollateralization with LTVs at 84.9% for the 2015-1 certificates and 91.6% for the 2017-1 certificates in Fitch's 'A' level stress scenario.
The weaker headroom on the 2017-1s is offset by strong market values for both A320 and A321CEO aircraft, which are trading above current base values.
Class B Certificate Ratings: Fitch typically notches subordinated tranche EETC ratings from the airline's 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 'CCC' IDR reflects a moderate-to-high affirmation factor (+2 notches), the benefit of a liquidity facility (+1 notch), and solid recovery prospects in a stress scenario (+1). In addition, the LTVs on the 2017-1 class B certificates pass Fitch's 'BB' level stress test with limited headroom, further supporting the 'B+' rating.
Affirmation Factor: Fitch chose not to assign the maximum +3 notch affirmation factor uplift for the 2017-1s. While we view the likelihood of affirmation in a distress scenario as high, the uplift is limited by the shrinking proportion of Spirit's total fleet represented by the transaction as the company continues to grow. The collateral aircraft are also becoming marginally less attractive as Spirit takes delivery of more A320 and A321 NEOs, which are more fuel efficient. However, on
Although Spirit's fleet is growing, the two EETCs still make up a sizeable proportion of its assets. The 2017-1 pool contains 12 aircraft, or around 7% of Spirit's fleet. The A321's larger size allows the company 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.
Derivation Summary
The class AA certificates and class A certificates rated in both of Spirit's EETC transactions are in line with other EETC class AA and A certificate ratings in Fitch's coverage. The level of overcollateralization and LTVs are consistent with similar-rated certificates.
The class B certificates are rated slightly lower than other subordinated EETC certificates with similar credit profiles, given Spirit's constrained IDR ('CCC').
Key Assumptions
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's models also incorporate a full draw on liquidity facilities and include assumptions for repossession and remarketing costs. At the 'A' level, Fitch stresses all aircraft (A320 and A321CEOs) in both the 2015-1 and 2017-1 transactions at 25%. This is the midpoint of Fitch's tier 1 aircraft stress rat es (20-30%).
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive rating action/upgrade:
Class AA and A Certificates: The class AA and A certificate ratings are primarily based on a top-down analysis based on the value of the collateral. Upgrades may be driven by stable or increasing values for the A321 and A320 along with continued principal amortization leading to improved collateral coverage. An upgrade to the class AA certificates is unlikely, given Spirit's IDR is at 'CCC'.
Class
The class B certificates are linked to Spirit's corporate rating. Therefore, if Spirit were upgraded to 'CCC+' the class B certificates would be upgraded as well.
Factors that could, individually or collectively, lead to negative rating action/downgrade:
Class AA and A Certificates:
Negative rating actions 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.
Class
The class B certificates are linked to Spirit's corporate rating. Therefore, if Spirit were downgraded to 'CCC-' the class B certificates would be downgraded as well. Fitch currently views the Affirmation Factor for each Spirit EETC as moderate. 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.
Liquidity and Debt Structure
Liquidity Facilities:
2017-1: The AA and A certificates benefit from dedicated 18-month liquidity facilities which will be provided by
2015-1: The class A certificates feature an 18-month liquidity facility provided by
Issuer Profile
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