A trio of asset-backed deals for Latin American airlines - one closed and two on the way - once again demonstrate the power of securitization, even for airlines with a checkered past. Of the three airlines in question, two have previously issued asset-backed deals and while they have defaulted on other kinds of debt they have never looked likely to default on their securitizations - something that has obviously given investors enough comfort to come back for more.

"There are a two main reasons why these airlines have been able to perform so well on their securitizations through stressful times," explained Samuel Fox, assistant vice president at Duff & Phelps. "One reason is related to the fact that creditors can't successfully attack the structures and get at the assets in this type deals, the other reason is related to the way airlines operate.

"Airlines tend to have unsecured debt, debt secured by their airplanes and securitizations. Logic suggests that they are going to honor their airplane debt above all. But what we have seen is that airlines usually have large fleets, so they have defaulted on some of their airplane-backed debt and returned some of their aircraft. By doing that, they were able to continue servicing their routes, selling tickets and honor their payment obligations."

Aerolineas Argentinas' $100 Million Deal

The completed deal was a $100 million securitization of ticket receivables for Aerolineas Argentinas, via Citibank, which was funded through the company's Fideicomiso Financiero Condor program. The notes have a seven-year final maturity and a five-year average life. Pricing was 855bps over Libor.

The deal is similar in structure to the company's $150 million securitization program, Aerocard, which was launched by Citibank in 1997. While Aerocard targeted the local market and was backed by tickets purchased with credit cards in Argentina, Condor was aimed at international investors and backed by ticket receivables from credit cards and cash sales in the U.S., as well as ticket receivables paid for in cash in Europe, Australia and Canada.

"It is impossible to get financing in the local market right now," said Fabian Farace, Aerolineas Argentina's finance director. "That's why we decided to tap the international investors."

Though Condor is an international transaction it only required a local credit rating, as it was shopped to investors as a private placement. However, while Aerocard received a local single-A rating from Fitch IBCA and a local single-A-minus credit rating from Standard & Poor's, Condor only won a triple-B-plus rating from Fitch and an A-minus rating from DCR.

"We gave Condor a lower credit rating than Aerocard because the ticket sales for Condor will come from Europe, the U.S., Japan and Australia, which are very competitive markets for Aerolineas Argentinas," explained Javier Merighi, analyst with Fitch IBCA in Buenos Aires. "With Aerocard, however, they were relying on ticket sales in the domestic market, where they have a much bigger market share."

Under the new management of American Airlines, Aerolineas Argentinas expects to solve its financial troubles and be able to issue straight debt in the future.

The proceeds of the latest transaction will go towards cancelling the company's short-term debt with local banks and towards funding additions to the Aerolineas fleet. In addition, the success of Condor might pave the way for a third issuance from Aerocard by the end of the year.

Merrill Brings Two

Meanwhile, after successfully closing a $50 million ticket receivable-backed deal for Lan Chile in the first quarter of 1999, Merrill Lynch is getting ready to launch two other similar securitizations for Mexican airlines AeroMexico and Mexicana.

AeroMexico will issue $60 million of notes, while Mexicana is issuing $80 million. Both deals will be backed by ticket receivables purchased with credit cards in the U.S. and will offer notes with a seven-year final maturity and 4.5-year average life to U.S. private investors. The transactions received a preliminary double-A credit rating from DCR and are expected to hit the market next month.

This is AeroMexico's second time around in the securitization market, after completing a $50 million deal backed by ticket receivables in 1994. Following the Mexican peso meltdown, both AeroMexico and Mexicana went through financial turmoil and had to restructure their debt. In 1995, the airlines were placed under holding company CINTRA S.A. de C.V., a move said to have helped their stability.

"The only debt that was unimpaired by AeroMexico's debt restructuring was its $50 million securitization of ticket receivables," said DCR's Fox. "The transaction held up very well through the troubled situation."

The deals are both wrapped by double-A rated Centre Re, the same company that wrapped Lan Chile's transaction and a relative newcomer to the Latin securitization market.

"The companies are in an industry that is quite volatile, so that alone makes it a risky business," said Fox. "Having said that, they also have some significant strengths: large market shares on the international and domestic routes that they service, and agreements with major international operators United Airlines and Delta Airlines."

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