British Airways on Tuesday raised funds through its first-ever enhanced equipment trust certificates (EETCs) offering to finance the purchase of 14 new Airbus and Boeing aircraft.
EETCs, a critical source of funding for US carriers, are attractive because the planes -- the carrier's main long-term asset -- are put into a special-purpose trust to protect investors in case of an airline default or insolvency.
Such structures from non-US carriers are more rare. Air Canada tapped the market in late April with a USD$606.3 million EETC that it used to acquire five new Boeing aircraft, and Emirates did a USD$587.5 million deal in July 2012 to finance four Airbus A380s.
The deal is not expected to be hampered by the recent dislocation in the bond markets because of its bankruptcy-remote structure.
"There is a shortage of decent-yielding securities, and EETCs can't stay on the shelves," said Ronald Scheinberg of law firm VedderPrice.
"EETCs present an important road to capital for air carriers, and this market will likely stay robust despite the recent upheaval in general bond markets. EETCs have lots of legs left."
The structure of BA's deal largely follows the typical US EETC template, which includes a special purpose vehicle, debt tranching, and a liquidity facility.
However, the company will use the so-called Japanese Operating Lease Structure (JOLCO), a leveraged-lease financing with a call option. The structures will together provide the proceeds to purchase the aircraft collateral.
The aircraft will be leased to BA, which is the underlying corporate credit in the transaction.
The USD$928.6 million two-part deal comprises a USD$721.61 million Class A tranche with an 11-year maturity rated Baa1/A/A and a USD$207 million Class B 7-year tranche rated Ba1/BBB/BBB-.
The proceeds will be used to pre-fund the purchase of 14 new aircraft scheduled to be delivered between June 2013 and June 2014.
Fitch Ratings said all three aircraft types included in the transaction are strategically important to BA and key to the airline's fleet renewal program, making it highly unlikely that the pool would be rejected in a restructuring scenario.
Since EETCs are a form of secured debt financing, for the purposes of bankruptcy the aircraft belongs to investors, not the airline, until maturity.
Similar to securitization, ownership remains with a separate trust rather than the carrier, which has various tax benefits.
Because of the protection afforded by the trust, EETCs such as BA's are able to garner investment-grade ratings from credit rating agencies.
One hurdle for the expansion of international EETCs is that the carrier's country has to ratify the Cape Town Convention (CTC), an international treaty signed in 2001 that protects investors by setting standards for registrations of contracts of sale and security interests, including aircraft equipment.
The country of origin for an EETC must ratify the CTC in order to provide the same investor protections as the US Bankruptcy Code.
For example, the Canadian government signed the CTC last year to allow airlines such as Air Canada to tap this market, which is more efficient and allows for a lower cost of capital than other forms of aircraft financing.
However, neither the CTC nor the US Code apply to the BA transaction, because the aircraft leases underpinning the deal are governed by English law.
The general insolvency regime in the UK is quite strong and creditor-friendly, but rating agencies say that it is still slightly weaker than either the CTC or the US Code.
EETCs have maintained a very dedicated, deep pool of investors because it is one of the few sectors that provide an opportunity to deploy large amounts of capital efficiently in 'hard assets' -- the planes.
The certificates provide relatively predictable returns and are based on an asset that is highly mobile, which provides comfort to investors who may need to reclaim or repossess the asset in case of airline insolvency or default.