S&P Global Ratings today assigned its preliminary 'AA (sf)' and 'A (sf)' issue-level ratings to United Airlines Inc.'s series 2024-1 class AA and class A pass-through enhanced equipment trust certificates (EETCs), respectively.
The final rating will depend on our receipt and satisfactory review of all final transaction documentation. Accordingly, the preliminary ratings should not be construed as evidence of final ratings. If we do not receive final documentation within a reasonable timeframe, or final documentation departs from materials reviewed, we reserve the right to withdraw or revise our ratings. Potential changes include, but are not limited to, use of notes proceeds; maturity, size, and conditions of the notes; financial and other covenants; security; and ranking.
Our ratings on United and its debt, including our ratings on its existing EETCs, are unchanged. We will assign final ratings upon completion of our legal and documentary review. We base our preliminary rating on the credit quality of 'BB-' rated parent United Airlines Holdings Inc.; high affirmation credit; collateral coverage afforded by mostly newer, high-quality aircraft; and the legal and structural protections available to the certificates. The secured notes relating to each aircraft are cross-collateralized and cross-defaulted, a provision we believe increases the likelihood that United would cure any defaults and agree to perform its future obligations (including payment obligations) under the indentures in a bankruptcy. If United does file for bankruptcy, we believe there is a very high likelihood that it would successfully reorganize.
The class AA and class A certificates benefit from a liquidity facility provided by Natixis S.A., acting through its New York branch, which--if necessary--would be required to cover up to 18 months of (three consecutive semiannual) interest payments. This would allow the certificate holders to continue receiving interest payments as they negotiate with United and, if necessary, repossess and remarket the aircraft. We believe that our 'A+' issuer credit rating on Natixis (New York Branch) is sufficiently strong such that, based on our counterparty criteria, it does not constrain our preliminary ratings on the certificates. The documentation requires a replacement facility that has a long-term rating of 'A-' or above for the class AA tranche and 'BBB' or above for the class A tranche in the event the rating on Natixis weakens beyond this level or a replacement provider is required. Should that not be possible, Natixis would fund a cash collateral account sufficient to fulfill its commitment.
The largest proportion of the current estimated value of the collateral pool that we apply in our analysis includes the Boeing 787-10 aircraft (just over 30%), followed by the Boeing 737 MAX-9 (about 24%) and 737-900ER (close to 20%). The newer aircraft are core to United's fleet renewal strategy and international fleet (namely the Boeing 787-10 and 777-300ER). We expect the older narrowbody aircraft, all of which are expected to be retrofitted by end-2025, will also remain a key component of United's domestic fleet.
Under our calculations, the loan-to-value (LTV) ratio peaks at just over 45% for the class AA certificates and 65% for the class A certificates. Our LTV calculation is above the peak in the prospectus supplement when using appraised base values estimated to total close to $2.3 billion at the beginning of the transaction and our estimated depreciation rates for each aircraft. We focus on the base value (an appraisal term intended to convey long-term value) of the collateral, which is currently comparable to market values given currently strong supply and demand fundamentals for aircraft. Our analysis also considers that a full draw on the liquidity facility, plus the interest on those draws, represents a senior claim on the certificates. We estimate the potential drawing to exceed 6% of the collateral value. As per our criteria, the calculated peak LTV includes the excess over 6%. Our peak LTVs for the class AA and A are reached in 2031 when the aforementioned aircraft exit the collateral pool.
Our preliminary ratings on the class AA and class A certificates are 10 notches and seven notches higher than our 'BB-' long-term rating on United, respectively. Our ratings on EETCs can be well above our long-term issuer credit rating on an airline because a default on the certificates occurs only if the airline enters insolvency proceedings; either liquidates or reorganizes but rejects the secured aircraft debt or leases that collateralize the rated certificates; and the proceeds from the repossession and sale of the aircraft collateral are insufficient to repay the principal and interest due on the certificates. The chance of these three events happening in succession is almost always less than that of the airline becoming insolvent. The holders of the EETCs, particularly the most senior class, can also be repaid if the airline agrees to a restructuring plan that lowers the payments on junior certificates but still pays enough to cover the senior class of EETCs.
Our rating on the certificates notably includes affirmation credit and collateral credit. We assigned four notches of rating uplift from the issuer rating for affirmation credit (the highest score possible) for the class AA, and three for the class A (due to lower priority of claims). Our affirmation credit assessment reflects the likelihood that United would reorganize following a bankruptcy and agree to keep paying on the certificates. This would occur if the company affirms (agrees to perform on) the secured debt on each aircraft in the collateral pool, which we believe would be a high likelihood, given the role these planes play in United's long-term fleet plan. We assigned an additional six notches of uplift for the class AA and three notches of uplift for the class A certificates for collateral credit. Class AA peak LTV is at the lower (stronger) end of the range of the 45%-50% threshold for the assigned '6' collateral credit. Class A peak LTV is about 65%, which at the bottom (stronger) end of the range of the 65-70% threshold for the assigned '3' collateral credit. We provide an additional one-notch of uplift (by applying a comparable ratings analysis modifier) to the class A rating, reflecting the close proximity to a higher collateral credit score, the potential strengthening in our collateral assessment following the exiting of older aircraft from the collateral pool, and current strength in aircraft supply and demand fundamentals that we believe could persist for at least the next few years.
The legal documents for the transaction include language specifying that repossession and sale of the collateral aircraft must comply with Article 9 of the U.S. Uniform Commercial Code (UCC) and U.S. Bankruptcy Code. The reference to the UCC is intended to deter the type of scenario from the bankruptcy of Latam Airlines Group S.A., when the controlling party majority of senior EETC creditors sold repossessed aircraft to a related party at what appeared to be below market value, harming the interests of other senior EETC creditors and more junior EETC creditors. Although we did not assign a higher rating specifically because of this language, we believe it is a positive feature for class AA, class A, and (if issued) class B certificates.
Lowering our rating on United would likely lead us to lower our preliminary rating on the class AA and class A certificates. Conversely, raising our rating on United would likely lead us to raise our preliminary rating. We would also review our ratings if our view of the appraised value of the aircraft and the resulting LTV values materially deteriorated.
