Rating Methodology for EETC
(Enhanced Equipment Trust Certificate)
1. Enhanced Equipment Trust Certificate (EETC) - Overview(1) Basic Scheme
EETC is one of the aviation finance techniques. It is developed and being used in the UnitedStates for airline companies’ aircraft procurement. Its use is started lately in other countries. EETC ischaracterized for its strength in creditor protection and hence prevailed in the US.
EETC has a structure of bundling multiple ETC (Equipment Trust Certificates). It raises thelikelihood of credit collection by way of tranching, liquidity facility, cross-default and crosscollateralization covenants, etc.
ETC is an equipment trust established on an aircraft for lease, taking the aircraft ascollateral. The trust investors expect debt payment to be made upon the lease payment made by thelessee (airliner).
Basic schematics and the post-issuance cash waterfalls are shown by Chart 1.
(Chart 1)

The following are an example of some schematic variations.
The Chart 1 shows a case that holds two tranches of A and B. There actually are cases in whichmore than 3 tranches are set.
Tranche A has a senior position to Tranche B. A balloon of debt at the time of maturity is usuallyobservable.
By way of holding multiple ETCs, EETC more often than not entails aircrafts of multiple counts
and types.
EETC usually entails an airline company or else’s, investment of around 30% as equity underother tranches for financial investors.
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(2) Characteristics of EETC
EETC has the following characteristics.
① Kinship with the corporate financei.
An EETC serves for one debtor, i.e. an airline company, only.
ii.
EETC investors have recourse to the airline company.
(The aircraft securitization (ABS), in contrast, assumes to serve for multiple airliners andassumes replacements/disposals of collateralized aircrafts prior to the maturity.)② Kinship with the structured financei.
In view of possible Chapter 11 of US Bankruptcy Code filings by the airline company, EETC isequipped with a mechanism to be able to fulfill its debt payment obligation nonetheless.
(EETC pays interest always as scheduled. Principal payment, on the other hand, has leeway
that it legally is payable up to the maturity.)(For senior tranches EETC is given a credit line, amounting to as much as 18 months ofpayable interest, to be tapped in case of airliner filing Chapter 11.)
(EETC enjoys strong legal protection, being, for example, eligible for US Bankruptcy Code,Section 1110.)(More often than not EETC has cross-default and cross-collateralization covenants.)
ii.
EETC has a senior-subordinated structure by tranching.
(3) Section 1110
A summary of Section 1110, which takes a significant role for EETC, is as follows.
US Bankruptcy Code Chapter 11 usually entails constraint over the collection/ exercise ofdebt/ collaterals until the procedure ends. Section 1110 forms an exception thereof and the aircraft
collateral makes an applicable case thereto. If the airline company files a petition for Chapter 11, theEETC redemption is carried out as follows: The airline company upon Chapter 11 filing receives a 60-day Automatic Stay Period on its lease
payment.
 At the time when 60 days elapse, the airline chooses either (a) to reaffirm the lease or (b) toterminate the lease and let the aircrafts repossessed as per prescribed return conditions.
 In the case (a), EETC resumes its payment of interest and principal upon receipt of lease payment.
 In the case (b), the creditors to EETC choose either to replace the airline company as lessee or to
exercise collateral, having the airplanes disposed for an early redemption of EETC.
 If and when the claim recovery fails, by either way of airline replacement, aircraft sale or othermeans of collateral disposals, the creditors to EETC turns to seek collection as an unsecuredcreditor in the rehabilitation procedure.
 If and when all attempts of the claim recovery fail, the loss materializes on the EETC investors intheir receivable interest and principal. See Chart 2.

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(Chart 2)
Ai rl iner operates intact, leasepa yment continuing

Yes
EETC Redeemed
wi thout l oss on
pri ncipal/interest

Normal DaysNo

Ai rl iner Chapter 11, but l easepa yment continues

Yes
EETC Redeemed
wi thout l oss on
pri ncipal/interest

Post Chapter 11
Phase INo
Di s pose collaterals to anothera i rliner, pri ncipal/interest being
col l ected without l oss

Post Chapter 11
Phase IINo

Yes
EETC Redeemed
wi thout l oss on
pri ncipal/interest

Col l ection as unsecured claim
a dded to make up thepri ncipal/interest payment

Yes
EETC Redeemed
wi thout l oss on
pri ncipal/interest

No

Post Chapter 11
PhaseIIILos s on EETC
pri ncipal/interest

In other words, loss would incurr on the principal and insterest receivable from EETC in suchcases as follows:① Airline company files a petition for Chapter 11, chooses to discontinue the lease agreement andthus return collaterilized aircrafts, of which disposal by the invstors, however, only generates
insufficient cash, short of paying off thier would-have-been-receivable princial and interest, andtherefore they attempt to recover the balance by claiming it as a claimant of unsecured debt,
which again fails to pay off.
② Airline company files petition not for Chapter 11 but Chapter 7 with intention of being liquidated,or else, and the responding creditors fail to recover the whole loss on principal and interest after
they attempt collection by disposposal of the collateralized aircrafts and even after claiming thebalance as unsecured debt.
Note that the slimilar legal protection is available in other countiries that ratify theCapetown Treaty.
(4) Examples
Under the condition where Section 1110 is at work, there are only few examples in which
EETC creditors failed to collect whole principal and interest if the airline filed a petition for Chapter 11.
In 2002 when United Airline went bankrupt, it took to court against Section 1110. It lost the case,however, and complied with scheduled procedure. More recently, when American Airline failed, it wasquick to follow the procedure as Section 1110 stipulated. Thanks to such a record, American Airline
was able to organize a new EETC for a new funding in 2013, despite its parent company AMR
Corporation was under the rehabilitation procedure up until the end of the same year.
2. Analytical Points
JCR considers EETC to be a financial vehicle that is, on the basis of corporate finance,
equipped with raised likelihood of the debt payment taking advantage of its legal framework. Hencethe credit rating of EETC requires to see both the credit standing of the airline company and thestructure of the financial vehicle. To be specific, JCR, in view of the whole picture as depicted by Chart2, makes assessment of a given case according to the following criteria, each and every one from (1) to(6) in parallel.
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JCR will refer to legal opinion as for the legal framework and hear from experts andassessment companies for the post-airline-default procedures and the valuation of given aircrafts.
(1) Creditworthiness of Airline Company
Airline company is examined in its credit standing to see how it could sustainably keep
paying the given lease. Airline’s credit rating is important also for a factor to enable refinance ifnecessary and when the EETC has a balloon at the time of its maturity.
(2) Structural Strength of the EETC
JCR sees how the given EETC is installed with structural mechanisms that are expected assuch, which include liquidity facility, legal protection such as Section 1110, cross-default/ collateralization covenants. JCR presumes the ratable EETC should have them all to present herewith
this rating methodology, considering a case of certain EETC in the past which had no crosscollateralization provision and defaulted.
(3) Likelihood of Lease Being Reaffirmed After the Airline Filed Chapter 11
Section 1110 is not applicable to the cases in which the airline company files a petition forChapter 7 procedure, with intention to be liquidated, or else other than Chapter 11. In order toevaluate the likelihood of given lease agreement being reaffirmed pursuant to Section 1110 procedure,
it is required to see (a) the probability of defaulted airline choosing rehabilitation rather thanliquidation, and (b) the merit of reaffirming the lease and the collateralized aircrafts.
JCR judges on (a) the probability of given airline of choosing rehabilitation rather thanliquidation depends on the name, business size and characteristics of the airline company. If the airline
has a certain size of business presence and flight networks and well established as an indispensable
infrastructure of life, JCR would consider it to be highly likely that rehabilitation is chosen.
It depends on the positioning of given aircrafts seen from the airline company if they have (b)the merit in their continued utilization rather than being repossessed as collateral. If the collateralized
aircrafts are of new model and of high fuel efficiency, it is deemed highly likely that the lease isreaffirmed. Also taken into consideration is that airline companies tend to want holding the samemodel of aircrafts in certain large numbers because it helps secure adequate number of pilots, aircraft
parts for replacement and the ease of maintenance. As a rule, the more likely the lease should bemaintained, the greater the extent to which the collateralized aircrafts are important as the core ofgiven airliner’s fleet organization, in such a way that the airline company holds a great number of thesame aircraft as the collateralized ones.
(4) Asset Liquidity of Aircraft
Asset liquidity of given aircrafts, i.e. demand/supply balance, is assessed to see how readily
and properly the collateralized aircrafts are disposable by sale in the market or for lease to anotherairline company. Those models that fly many in the world, with small number out-of-service, withmany name of airlines, with long waiting lists for delivery are supposed to be easy to sell in the market
or lease to another airline company.
(5) Collateral Value
The following factors are considered in the evaluation of collateral value at a point of selling
aircrafts, as they tend to have a significant impact on the price. Information for the evaluation iscollected from the offering memorandum of given EETC, evaluation reports of an assessment company,
and other reports.
 Model name4/6
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Supply and demand
Fuel price; its level and trend

Obtain/determine the following prices at first and then consider the above factors to come up
with an estimated collateral value.
 Appraisal value (Price at the time of new delivery) – ((New delivery price) x 5% x (Number of used years))(Assuming 20 years taken before the aircraft value becomes zero.)(6) LTVLTV is important when the EETC is considered for refinance or, as the worst scenario, forearly redemption by the proceeds from the disposal of collateralized aircrafts. Assess the balance
between the amount of outstanding debt and the collateral value at the time of credit rating, andcalculate LTV. The rating of EETC may be changed later when LTV changes along with redemption ofthe principal, etc.
Chart 3 shows a table of rough guidelines for the decision of a credit rating for given EETC bynotching up from the airline’s corporate rating. The table takes into consideration such factors as: thedegree of discrepancy between recorded aircraft price in the normal-day transactions and the valuation
thereof; the cost of EETC principal/interest collection by aircraft disposals (legal and brokerage fees,etc.); the estimated magnitude of other debts that are senior to EETC principal/interests (interest paid
from the liquidity facility, etc.)
JCR considers it possible for certain EETC to deserve a greater notch-ups, such as for
instance those with high composition of the aircraft types of exceptionally limited price dropping risk
at the point of sales, thanks to their asset liquidity is high and/or aircraft age is young, wellmaintained, etc.
(Chart 3)
LTV Level
60% - 50%
50% - 30%30% and Lower

Notch-up Differentials
EETC on aircrafts with ahigh-share of exceptionallyEETC on aircrafts mostly ofsmall price dropping risk atcommon-types
a point of saleAround 1 – 3
Around 4 - 6
Around 4-6
Around 7 - 9
Around 7-9
Around 7 - 9(Reference) Relations between Analytical Points and Chart 2
Analytical Points
Phases Anticipatable in Chart 21) Airline creditworthiness
Normal time2) Structural strength of EETC
Post Chapter 11 filing Phase I3) Probability of the lease reaffirmed after Post Chapter 11 filing Phase I
Chapter 11 thanks to 1110
4) Asset liquidity of aircrafts
Post Chapter 11 filing Phase II & III5) Collateral value
Post Chapter 11 filing Phase II & III6) LTV
Post Chapter 11 filing Phase II & III
3. Reflection of Analytical Points in the Rating
Starting from the airline’s creditworthiness JCR determines the rating of given EETC by way
of notch-up, of which differential depends on the assessment of its structural strength, specification of5/6
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the collateralized aircrafts, LTV, etc. and judgment in totality.
Chart 3 provides reference points for the determination of notch-up differential. For the cases
in which the asset share of certain aircrafts with extraordinary small price dropping risk at a point ofsale, where collateralized aircrafts make a focal point for the analysis, JCR would consider notch-up
reachable to a level within A range or its proximity if the collateral is deemed excellent. Depending on
the asset quality of collateral, the notch-up ends lower. JCR recognizes the strength of EETC asstructure. It also is aware that a degree of conservative stance is required, since the aircraft as
collateral thereof holds technical obsolescence risk, the expected service life for the passenger aircarriers is as limited as around 25 years, and the last aircraft user is limited to some airline company,etc.
When the airline creditworthiness changes, it is possible EETC follows suit, of which rating ishence changed. On the other hand, EETC would not necessarily be rated D, if the airline filed apetition for Chapter 11 and thus its corporate rating dropped to D. EETC could possibly stay,depending on the cases, in the BBB rage.

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Information herein has been obtained by JCR from the issuers and other sources believed to be accurate and reliable. However, because of the possibility of human or mechanical error as well asother factors, JCR makes no representation or warranty, express or implied, as to accuracy, results, adequacy, timeliness, co mpleteness or merchantability, or fitness for any particular purpose,with respect to any such information, and is not responsible for any errors or omissions, or for results obtained from the us e of such information. Under no circumstances will JCR be liable forany special, indirect, incidental or consequential damages of any kind caused by the use of any such information, including but not limited to, lost opportunity or lost money, whether in contract,tort, strict liability or otherwise, and whether such damages are foreseeable or unforeseeable. JCR’s ratings and credit assessments are statements of JCR’s current and comprehensive opinion
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