AerospaceSociety group reviewed an aircraft financing method, Enhanced Equipment Trust Certificate (EETC). We believe that EETC could become the future of aircraft financing as more airlines start consider capital markets as the source of financing.
Enhanced equipment trust certificate is a highly structured aircraft financing product. It is secured by a collateral pool of aircraft or related collateral (engines and spare parts). The enhancements in the EETC are mainly achieved in three ways: first, the issuer of the EETCs is bankruptcy remote and insulated from a bankruptcy of the lessee to the satisfaction of the rating agencies. Second, the EETC are trenched to take advantage of the expected residual value of aircraft. Third, a Liquidity Facility is provided to ensure the continued payment of interest on EETC during the remarketing period following a default by the lessee. These enhancements allow EETC to have credit ratings significantly higher than the corporate rating of the lessee, particularly at lower advance levels. As a result, sub-investment grade borrowers can issue investment grade debt and an investment grade borrower can reduce its borrowing costs with the lower pricing for higher grades of debt. It is currently the most cost-effective form of aircraft financing for U.S. airlines.
EETC Rating Process
The rating process begins with a proposal discussion initiated by the deal arranger or originator. It is recommended that initial discussion take place at least four to six months before a transaction is due to close. Initial contact is usually in the form of a conference call or meeting during which the key features of the transactions are presented. The purpose of this discussion is to identify any significant credit, structural, or legal issues which may be unusual or complicated and which may require additional time to consider or which could prevent the assignment of the final rating.
The formal rating process begin with the agreement on a timetable and the assignment of an analyst who will be the daily contact of a rating agency. An engagement letter will be issued which should be returned as soon as possible.
The banker then provide a detailed transaction book which provides asset information on the portfolio. Analysts will review this information and supplement it with due diligence visits to the relevant parties.
The rating process is highly interactive. The rating analyst will be in continuous contact with the originator, deal banker and their legal advisors. When the transaction structure has been finalized, the analyst will present the transaction to a rating committee. Any issues arising from the committee will be passed on to the banker and other parties to be resolved.
Once the rating has been assigned, ongoing management reviews and surveillance will be required to maintain the rating.
International airlines can benefit from Cape Town Convention. The implications are that airlines have access to Capital Markets, the deepest overall market capacity. EETC is a cheaper, more efficient funding approach (NPV benefits over the next best alternative). Transaction rating is enhanced over general unsecured rating of airline. EETC offers airline balance sheet flexibility as well as operational flexibility. There is no financial covenants; high LTV ratio based on appraised value; longest maturities/slow debt amortization; ability to pre-fund or add debt in the future; liquid pricing benchmark for future transactions.
For rating constrained investors, EETC open new yield-oriented asset class that allows sufficient yields to fund liability streams. Investors can achieve higher yields than from unsecured Bonds of similar credit quality. EETC has very low loss history, especially on Senior Tranches.
About Aerospace Society
AerospaceSociety provides insights, professional development and networking events to aerospace industry professionals. To learn more about AerospaceSociety, visit: www.aerospacesociety.com