United Continental Prices $1B EETCs with Record Low Coupon

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Growth in air travel is slowing, but investors are still snapping up bonds backed by leases on passenger jets.

This week United Continental Holdings priced $1.05 billion of enhanced equipment trust certificates, its first deal of the year; it achieved a record low coupon, according to Deutsche Bank.

Proceeds from the nine-year bonds will be used to purchase 18 new aircraft, which will then be leased back to the airline.

The deal consists of two tranches; there are $730 million of class AA notes with a first-lien on the aircraft that pay a coupon of 3.1%, according to Deutsche.  The tranche was priced to yield 140 basis points over Treasuries. It represents of 38% the base value of the collateral and 42% of the market value of the collateral, which Deutsche said is consistent with equivalent tranches of recent deals.

A $320 million tranche of class A second-lien notes priced at par with a coupon of 3.45%, or a yield of 175 basis points over Treasuries. The notes have a base value loan-to-value ratio of 55%, and market value LTV of 61%. Both tranches have initial weighted-average lives of nine years.

Morgan Stanley, Credit Suisse and Goldman Sachs are the lead bookrunners.

In a research report published Wednesday, Deutsche described the transaction’s collateral a “very good.”  Three quarters of the jets, by market value, are in-production widebodies (777-300ER and 787-9) and one quarter are in-production narrowbodies (737-800 and 737-900ER).

“Three of the four aircraft types in the collateral pool are among our favorites and are at the very top of our Aircraft Marketability Grade spectrum – the 737-800 (“A” grade), 787-9 (“A-“ grade) and the 777-300ER (“A-”), the report states. “The 737-900ER is an aircraft beloved by United and that is economically efficient for its operators, but has a more limited ownership base than the others,” it added.

The deal hit the market after the International Air Transportation Association reported that total passenger air travel demand grew by 4.6% in April 2016 compared with April 2015. Travel demand has been growing for the past year, helped by a sharp decline in fuel prices that has resulted in lower fares. However April’s rate marked a deceleration from previous months. In fact it was the slowest rate of growth since January of 2015. However the IATA believes that the attacks in Brussels in March reduced demand by roughly 0.5 points.

Both IATA and Deutsche think there’s a limit to how much longer weak fuel prices and low demand can continue to boot air travel demand, particularly while the economic backdrop is “tepid.”

Investors in bonds backed by aircraft leases also have to worry about possible overproduction, particularly for widebody types. 

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