Continuing upward pressure on oil prices coupled with disheartening news from Delta Airlines in its 10-k dinged aircraft ABS bonds in the secondary market last week, a source reported.

In its annual report, the legacy carrier said that it did not expect to have enough cash to cover leases, debt payments and other obligations, and would likely have to tap into available cash, including the $250 million it borrowed from American Express Co. last year. Delta warned that if conditions did not improve, it would be forced to seek Chapter 11 bankruptcy protection.

Meanwhile, oil prices continue to scale new heights, with U.S. light crude climbing as high as a record $57.50 in electronic trading late last week.

Traders have been reporting robust secondary activity in the aircraft ABS sector since late last year (see ASR 1/24/05). Trading, however, appears to be patchy in the first quarter of 2005. "Secondary activity slowed after the first of the year, but it picked up again in the past couple of weeks," said one source on a trading desk. "Oil prices have had a big impact on trading levels."

As a barometer, PALS 2001-1A 3.25% A1class, due May 10, 2031, were bid in the low 50s on a dollar price basis, according to a bid list circulated last week.

Monolines safe from EETC exposure

Despite the mounting financial crisis in the airline sector, monoline exposure to senior EETC risk is limited, according to a report from Moody's Investors Service. "The probability for a significant number of defaults is limited and most airlines with wrapped EETCs have, on average, a solid dependency on the aircraft financed," Moody's analysts said in the report.

MBIA and Ambac account for the vast majority of EETC exposure, with $3.5 billion and $1.8 billion in EETC net par outstanding, respectively, representing 0.6% and 0.4% of their aggregate NPO as of year end 2004, the report found.

As insurers of the senior tranches, the monoline guarantors will likely be the controlling party in negotiations with the debtor during a workout, a key factor in the guarantor's loss mitigation. In both the US Airways and ATA bankruptcies, the insurers were able to retain sole discretion over critical workout decisions, the report noted.

While Moody's does not foresee any rating stress on the guarantors stemming from EETC obligations, analysts cautioned that the probability of further workouts is high, and that outcomes are unpredictable. This could lead to "widely differing recoveries based on market conditions that will be beyond the guarantor's control," analysts said.

Copyright 2005 Thomson Media Inc. All Rights Reserved.

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