Trading of enhanced equipment trust certificates (EETCs) may be somewhat volatile, but despite the recent rejection by LATAM, demand for the debt instrument remains, Citi’s director, global structured finance, Matthew Simonetti, has told delegates at the Airfinance Journal North America 2020 virtual conference.
“In the broader EETC market the LATAM rejection was an event that investors, analysts, bankers, lawyers were watching,” he says.
“We spent a lot of time educating investors about the legal regime outside the US and investors were very focused about how that transaction will play out. Interestingly it was not necessary to play out the legal process in the local regime, as it was simply rejected.”
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 for some of those costs. They were really sold in there for interest,” he says.
Simonetti admits that appetite remains in the EETC market but investors are “thinking a bit more”.
“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.”
On the trading side, Simonetti says investors are differentiating between those airlines credits that they think will weather the storm.
“Investors are also differentiating within the same airline credit with some airlines that have large multiple EETCs out there, or those who have widebodies or older aircraft with potentially less equity in the deal. Those transactions are trading at a greater discount and wider yield than those with a narrowbody concentration.”
While rating agencies “still look at the strategic value of aircraft and airlines”, says KBRA senior managing director, head of aviation and transportation Marjan Riggi, “investors are going to be more careful and understand it is not always about the strategic value as there are other dynamics especially in non-US jurisdictions with airlines that are not frequent issuers”.
S&P Global Ratings managing director, corporate ratings Philip Baggaley observes that LATAM has a high concentration of leased aircraft.
“It may be they felt they could get to a large deal more quickly with lessors than they could with capital market participants to help get organised themselves. It may be just some tactics for the reorganisation process.”
Deutsche Bank’s director head of capital markets, Rafael Khun, agrees: “It was a specific circumstance where there could have been a strategic rationale for rejection.”
Khun says that when the LATAM rejection became public the A tranche opened up at 50 cents on the dollar.
“Immediately investors piled in and started trading the instrument because I don’t think there is a view that the senior tranche will be particularly impaired," he comments.
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