Neither the greatest crisis to face the aviation industry in its history, nor LATAM’s rejection of 23 aircraft that formed
the collateral for an enhanced equipment trust certificate (EETC) appear to have stymied the attractiveness of the EETC
structure among investors.

In the five months since the Covid-19 pandemic first struck, a number of airlines have been able to tap this structure to raise debt.

In June, Alaska Airlines came to market with what would ultimately be a $1.17 billion EETC backed by 61 aircraft.

Also in June, Air Canada completed a private offering of one tranche of class-C EETCs with a combined aggregate amount of about $315 million secured against 27 aircraft.

In August, Jetblue Airways came to market with an $808 million two-class offering secured by a collateral pool of 24 aircraft.

Hawaiian Airlines and Federal Express (FedEx) have also raised financing via EETCs since the onset of the crisis.

FedEx raised $970 million through a single tranche EETC to finance 13 Boeing 767-300Fs and six 777-200Fs.

Hawaiian Airlines’ $262 million two tranches of certificates are secured by six A321-200neos as well as two 2013-vintage A330-200 aircraft.

This does not cover any private placements that may have been arranged during recent months.

The success of these EETCs comes in contrast to the asset-backed securities (ABS) market, which has not witnessed an issuance since the start of the crisis.

Panellists at the Airfinance Journal North America 2020 virtual event in July described continued demand for EETCs despite LATAM rejecting a number of aircraft in one vehicle as part of its Chapter 11 restructuring earlier this year.

“In the broader EETC market, the LATAM rejection was an event that investors, analysts, bankers and lawyers were watching,” says Citi’s director, global structured finance, Matthew Simonetti.

“For the broader market, we continue to see some of the top investors, including some that were included in the LATAM transaction, participate into the new EETC offerings, and they continue to send us enquiries expressing their interest in new transactions,” he adds.

Simonetti says further problems arose, which were relevant to EETCs in general, about how investors would pay for the storage and insurance costs associated with the aircraft.

“Some investors were surprised that the liquidity facility was not going to be able to chip in for some of those costs. They were really sold in there for interest,” he says.

Peter Sladic, managing director of capital markets and outreach, Boeing Capital Corporation, tells Airfinance Journal that investors may view an EETC structure more favourably at present than an ABS.

“Investors have different risk appetites, with some having a much lower tolerance. ABS structures can be less favoured by today’s investor crowd versus an EETC because with the ABS you don’t have recourse to the issuer, while investors have recourse to the issuer and security from the collateral with an EETC,” he says.

Jonathan Root, senior vice president, corporate finance group at Moody’s Investors Service, says EETCs are likely to remain “predominately” for US airlines, but adds that if “non-US airlines came to market they would probably be successful in that placement”.

Root adds that “nothing extraordinary jumps out” at him in terms of the pricing or terms of recent EETCs being materially impacted by Covid-19.

“I think the collateral is important, be it redeliveries versus used and how used,” he says, adding: “It’s still a relatively small market, but the instrument performs very well over its history in terms of its default profile, with relatively few defaults.

“I think many investors recognise that in the near term demand for aircraft is going to be subdued, but the fleet decisions and strategies involve buying an aircraft is a 20-year investment for most airlines, so I am not surprised that the market is still open.”

Root expects the EETC structure to remain popular because investors see beyond the immediate crisis and it is attractive compared with other forms of financing.

“Five years ago, the sale and leaseback market was very attractive in terms of relative cost because of all the new money going into the aircraft leasing industry.”

He adds: “Now in today’s environment, I think that Jetblue is demonstrating as an example and the airlines that pledged
aircraft for their 364-day facilities, which they arranged back in March when the crisis hit, that the EETC market is an attractive option for refinancing those obligations.”