Fitch Rates EA Partners I B.V.'s Notes 'B-'
EA Partners I B.V. is to on-lend the proceeds from the notes' issue to respective obligors (defined as debt obligations). These notes are secured over assets that represent senior unsecured claims to the respective obligors. The rating reflects our view of the credit profiles of the obligors and is constrained at 'B-' by obligors of the weakest credit quality. EA Partners I B.V. is a private company with limited liability established solely for the purpose of this transaction, and whose sole shareholder is a foundation.
KEY RATING DRIVERS
The proceeds from the notes' issue represent separate debt obligations of seven obligors, including Etihad Airways PJSC (USD132m or 18.85% of total), Air Berlin PLC (USD132m), Jet Airways (India) Limited (USD113m equivalent), Alitalia Societa Aerea Italiana S.p.A. (USD132m), Air SERBIA, a.d. Belgrade (USD56.5m), Air Seychelles Limited (USD21.5m) and Etihad Airport Services LLC (USD113m). On-lending of proceeds from this transaction's secured notes creates back-to-back senior unsecured claims upon the relevant obligors, which rank behind each obligor's other prior-ranking, including secured debt.
Weakest Obligor Credit
The rating of the notes reflects our view of the creditworthiness, and the senior unsecured ranking, of the obligors including our assessment of their links with their respective parents.
Given the transaction's recourse to each obligor on a several basis, the rating is constrained at the 'B-' level by obligors of the weakest credit quality. This is due to the sole cash flow for the service and repayment of the notes being the individual cash flow streams from the obligors under their respective loans. Failure of any obligor to make interest or principal payments under its respective debt obligation, which remains uncured following the re-marketing of the respective debt obligation and/or through the liquidity pool, may lead to an event of default under the notes and their acceleration. This transaction's noteholders are thus exposed to the underlying creditworthiness of each individual obligor.
Obligors' Credit Quality Varies
In addition to Etihad Airways, the other obligors are either Etihad Airways' subsidiaries (eg Etihad Airport Services) or its equity airline partners (eg Air Berlin, Air Serbia, Air Seychelles, Alitalia, Jet Airways). These and its other equity airline partners are key to Etihad's growth strategy, which aims at establishing a global network with competitive operational scale and diversity.
The credit quality of the obligors varies substantially - from that of Etihad Airways (A/Stable) whose rating incorporates strategic, operational and, to a lesser extent, legal ties with its sole shareholder Abu Dhabi (AA/Stable), to that of obligors with the weakest credit quality - which has constrained the notes' rating. While the obligors with the weakest profiles also benefit from the shareholder support of their minority parent, Etihad Airways, their standalone profiles remain weak largely due to weak credit metrics.
The transaction contains a liquidity pool, its only cross-collateralised feature (excluding its ratchet account component, which is not cross-collateralised), which is available to service the interest or principal on the notes, if an obligor fails to pay an interest or principal on its respective debt obligation when due.
Fitch estimates that the amount of the liquidity pool, including additional deposits, is sufficient to cover around nine months of interest payments under the notes. It also represents 12 months of interest payments for all obligors, except for the stronger Etihad Airways and Etihad Airport Services. If over 25% of the initial deposits, which account for most of the liquidity pool, is drawn to cure a default of an obligor to pay interest on its debt obligation, this may trigger the re-marketing of the respective debt obligation. Contractually, the liquidity pool does not have to be replenished if it is used to service the notes.
The notes do not have a cross-default provision, which means that a default by one obligor under its debt obligation does not constitute an event of default under other debt obligations incurred under this transaction by other obligors. However, events of default under each debt obligation include a customary cross-default provision which states that a failure by the respective 'obligor or any of its material subsidiaries to pay any of its own financial indebtedness when due' will lead to an event of default under the debt obligations of this obligor but not of any other obligor other than in the case of Etihad Airways and Etihad Airport Services as described below.
Theoretically, upon an uncured event of default by one of the weakest entities, after use of the liquidity pool and no take-up under the re-marketing mechanism, the notes are in default and can be accelerated. Noteholders would look to non-defaulted entities to meet their obligations under this transaction but any shortfall resulting from the defaulted entity would not be an obligation of these other transaction parties.
Etihad Airport Services is considered a material subsidiary of Etihad Airways under this transaction's documentation. Therefore, an uncured failure by Etihad Airport Services to make payments under this transaction's debt obligation will constitute an event of default under Etihad Airways' debt obligation under this transaction. Etihad Airways or any other non-defaulting obligor may also provide support to other obligors by purchasing their debt obligations through the 're-marketing event', if it takes place upon default of another obligor on its payments under the debt obligation. However, this can be exercised at Etihad Airways' or any other non-defaulting obligor's discretion and is not an obligation under this transaction.
This lack of legal obligation to support other entities underpins this transaction's rating approach based on the credit profile of the weakest obligors rather than on the stronger entities supporting the weakest.
The issuer is a private company with limited liability incorporated under the laws of the Netherlands and has no authorised share capital. Stichting EA Partners I, a foundation incorporated under the laws of the Netherlands, is the sole shareholder of the issuer. The issuer was established for the purpose of the issue of the notes and lending of the notes' proceeds to the seven obligors. Stichting has contributed additional equity to the issuer of EUR2m, which was in turn provided by Air Berlin.
Proceeds for Refinancing and Capex
The purpose of the transaction is to provide a financing platform to the airline, cargo and ground services businesses that are part of Etihad's partner network. Air Berlin and Air Seychelles plan to use the proceeds of their debt obligations mostly for refinancing purposes whereas Etihad Airways, Etihad Airport Services, Air Serbia, Jet Airways and Alitalia intend to use the proceeds mainly to finance capex and/or working capital and for other general corporate purposes.
The debt obligation of Jet Airways is denominated in Indian rupee while the debt obligations of other obligors and the notes are denominated in USD. FX risk is expected to be mitigated through a hedge transaction that the issuer is to enter into with ADS Securities LLC, an Abu Dhabi-based brokerage company.
Average Recovery Prospect
We assess the recovery (given default) prospect of the notes as average (31%-50%, 'RR4') based on the average of our assessment of the recovery prospects of the obligors and their respective country caps. Recovery prospects can be supported by successful re-marketing of performing debt obligations at higher than par.
Fitch's key assumptions within our rating case for the issuer include:
- The proceeds from the notes' issue are on-lent to seven obligors.
- This transaction's notes are secured over assets that represent senior unsecured claims to respective obligors.
- The notes do not have a cross-default provision.
Positive: Future developments that could lead to positive rating action include:
-The improvement of the credit quality of the obligors with the weakest credit profiles
-Improvement of the recovery prospects for the senior unsecured creditors of the obligors of the weakest credit quality, unless there are limitations due to country-specific treatment of Recovery Ratings.
Negative: Future developments that could lead to negative rating action include:
-The deterioration of the credit quality of the obligors with the weakest credit profiles
-Worsening of the recovery prospects to below-average for the senior unsecured creditors of the obligors of the weakest credit quality.