OREANDA-NEWS. Fitch Ratings has assigned the following expected ratings to Norwegian Air Shuttle ASA's (NAS) proposed aircraft Enhanced Pass Through Trust Certificates, Series 2016-1 (NAS 2016-1):

--$274.3 million class A Certificates due in May 2028 'A(EXP)';
--$74.8 million class B Certificates due in May 2024 'BB-(EXP)'.

The final legal maturities for the class A and the class B Certificates are scheduled to be 18 months after the due dates.

KEY RATING DRIVERS
The A-tranche ratings are primarily driven by a top-down analysis incorporating a series of stress tests which simulate the rejection and repossession of the aircraft in a severe aviation downturn. The 'A' level rating is supported by a high level of overcollateralization (OC) and high quality collateral which support Fitch's expectations that A-tranche holders should receive full principal recovery prior to default even in a harsh stress scenario. The ratings are also supported by the inclusion of an 18-month liquidity facility, and cross-collateralization/cross-default features. The structural features increase the likelihood that the class A Certificates could avoid default (i.e. achieve full recovery prior to the expiration of the liquidity facility) even if NAS were to file bankruptcy and subsequently reject the aircraft.

The ratings also reflect the transaction's reliance on the Irish insolvency regime, which Fitch views as protective of creditors' rights but which has no specific provision protective of aircraft creditor rights and differs from key aspects of the U.S. Bankruptcy Code in that regard. Ireland signed the Cape Town Convention (CTC) into law in April 2014, but has not yet adopted Cape Town's Alternative A insolvency regime providing for a "waiting period" of 60 days. Although Ireland appears to be moving toward adopting Alternative A in the not too distant future, the ratings Fitch assigns today assume current Irish insolvency laws apply.

The initial A-tranche loan to value (LTV), as cited in the offering memorandum, is 55.1%, and Fitch's maximum stress case LTV (the primary driver for the A-tranche rating) through the life of the transaction is 84.6%. This level of OC provides a significant amount of protection for the A-tranche holders.

Transaction Overview:
NAS plans to raise $349.1 million in an EETC transaction to finance 10 aircraft. This will be NAS's first public EETC transaction, and the structure largely follows the U.S. and non U.S. EETC template (SPV, debt tranching, liquidity facility, cross-provisions, etc.) with aircraft collateral and initial LTVs, and amortization schedules comparable to other recent EETCs. The structure crosses three legal jurisdictions (Ireland, Norway and the United States) and it contains several Norwegian group entities, including one SPV (see below).

Torefjorden DAC (Torefjorden - an Irish SPV) will issue senior and junior loans (equipment notes made individually on an aircraft-by-aircraft basis) to partially fund a purchase of 10 737-800s. Torefjorden is a wholly owned subsidiary of Arctic Aviation Assets Limited (AAAL - NAS's wholly-owned Irish leasing subsidiary). Torefjorden will fund the remainder of the aircraft balance by either an equity injection or intercompany loans from AAAL. The aircraft will be leased (triple net operating leases) to Norwegian Air International Limited (NAIL - an Irish-registered, airline operating company and a wholly-owned subsidiary of NAS). The equipment notes will support pass through certificates issued by NAS Pass Through Trust 2016-1A and NAS Pass Through Trust 2016-1B.

The leases to NAIL will be standard triple net leases, with the airline being responsible for all taxes, costs, expenses, insurance, and maintenance for the aircraft. The lease end dates are scheduled to coincide with the maturity dates for the respective loans. Lease payments from NAIL will be payable semiannually, and will be in an amount sufficient to cover all amounts needed to repay the loans.

NAS will provide an unconditional and irrevocable guarantee of all NAIL's obligations under each lease agreement which covers all obligations owed by the lessee to the lessor. In addition, NAS will provide guarantees to the security trustee for all Torefjorden's obligations under the loan agreements which cover all obligations owed by the lessor to the related finance parties under the governing documents.

The A-tranche will be sized at $274.3 million with a 12 year tenor, a weighted average life of nine years and an initial LTV of 55.1% (per the offering memorandum). Fitch calculates the initial LTV at 57.8% using base values provided by several independent appraisers.

The subordinate B-tranche will be sized at $74.8 million with an eight year tenor and a weighted average life of six years. The initial prospectus LTV for the B-tranche is 69.9%. Fitch calculates the initial LTV at 73.3%.

Similar to the majority of the recent transactions, NAS 2016-1 features IIPP waterfall, whereby the interest of the subordinated B tranche is paid prior to the A tranche principal.

Collateral Pool:
The transaction will be secured by a perfected first-priority security interest in 10 new delivery Boeing 737-800s. Fitch considers the 737-800 to be a solid Tier 1 aircraft due to its wide user base and large number of aircraft in service. The popularity of this aircraft mitigates the risk of remarketing/re-selling the planes in the event of a bankruptcy/rejection by NAS. Three of the collateral aircraft were delivered in March and April of 2016, and the remaining seven aircraft are scheduled for delivery between May and September of 2016. The 737-800s in this pool will feature a maximum take-off weight (MTOW) of 174k lbs, which is the maximum for the aircraft type.

The future market values of the 737-800 face some risk from the introduction of the 737-MAX program. Boeing announced the MAX program in 2011, which will include three variants, the 737-7, the 737-8, and the 737-9 intended to replace the 737-700, 737-800, and 737-900ER, respectively, over time. The introduction of the new models will likely place pressure on older variants, but it is not expected to have a significant immediate impact on modern 737s such as the ones in the NAS 2016-1 transaction.

Fitch believes that the fleet size and large operator base of the 737-800 aircraft will mitigate the impact of MAX on NG valuations, possibly into the next decade. The first delivery of the 737 MAX 8 is not expected until the third quarter of 2017 (3Q17) and it will take some time to produce a significant number of the new aircraft before it starts pressuring market values of the 737-800s. Delivery slots are scarce, and production rates increased to 42/month in the first half of 2014, and will rise to 47/month in 2017. Fitch expects the 737-800 will remain one of the most favored type of collateral in aircraft finance transactions for the next decade.

Liquidity Facility:
The class A and class B Certificates benefit from dedicated 18-month liquidity facilities which will be provided by Natixis (rated 'A'/'F1' with a Stable Outlook).

Depository:
The proceeds from the offered notes will initially be held in escrow by Natixis, the designated depository, until the three initially delivered aircraft are refinanced and the remaining aircraft are delivered.

A-Tranche Ratings:
The ratings of 'A (EXP)' for the class A Certificates are primarily based on collateral coverage in a stress scenario. The analysis utilizes a top-down approach assuming a rejection of the entire pool in a severe global aviation downturn. The analysis incorporates a full draw on the liquidity facility, and an assumed repossession/remarketing cost of 5% of the total portfolio value. Fitch then applies immediate haircuts to the collateral value.

Fitch applies a value haircut of 20% to the 737-800 aircraft, representing the low-point of its Tier 1 stress range of 20-30%. We consider a 20% value haircut to be appropriate for the model given its popularity among operators, large fleet of existing aircraft spread across many users, and by strong backlog, all of which support the aircraft's values going forward.

These assumptions produce a maximum stress LTV of 84.6% through the life of the deal. This would imply full recovery prior to default for the senior tranche holders in what Fitch considers to be a harsh stress scenario.

B-Tranche Ratings:
The rating of 'BB- (EXP)' for the B tranche is reached by notching up from NAS's stand-alone credit profile. Fitch notches subordinated tranche ratings from the airline Issuer Default Rating (IDR) based on three primary variables; 1) the affirmation factor (0-2 notches for issuers in the 'BB' category and 0-3 notches for issuers in the 'B' category), 2) the presence of a liquidity facility, (0-1 notch), and 3) recovery prospects. In this case the uplift is based on a moderate affirmation factor, availability of the liquidity facility and strong recovery prospects. The rating is also supported by the class B Certificate holders' right in certain cases to purchase all of the class A Certificates at par plus accrued and unpaid interest.

Affirmation Factor:
Fitch considers the affirmation factor for NAS 2016-1 to be moderate primarily driven by the company's fleet strategy which contemplates a significant expansion over the next decade. As stated earlier, Fitch considers the 737-800 to be a solid Tier 1 aircraft, but the expected increase in the NAS's fleet size with newer and more fuel efficient aircraft will result in a relatively rapid and continual decline in the strategic advantage of the collateral backing the transaction.

In a typical EETC transaction rated by Fitch, the underlying collateral has clear affirmation advantages over other aircraft in the obligor airline's fleet. In Fitch's view, the collateral of NAS 2016-1 does not have such an advantage over the remainder of the fleet. NAS first started taking deliveries of its 737-800s in 2008, meaning that the entire fleet is quite young. The 737-800s in this transaction will not represent the most attractive/fuel efficient aircraft in NAS' fleet for long because the company will take its first A320neos' and 737-8 MAXs' deliveries in 2016 and 2017, respectively. In addition, this pool of 10 737-800s does not have a significant age advantage over the other 737-800s in the company's fleet.

Irish Insolvency Law:
Fitch's EETC rating methodology reflects considerations of the speed, certainty and costs associated with repossession, deregistration and export of aircraft in different jurisdictions. It also reflects consideration of the influence of creditors' ability to quickly repossess aircraft on airlines' incentive to affirm aircraft in bankruptcy (while paying all interest and principal on time and in full). Section 1110 of the U.S. Bankruptcy Code (which offers unique legal protection to aircraft creditors in U.S.) and the Cape Town Convention (which offers similar protections in countries implementing Cape Town Alternative A) are two examples of legal frameworks cited in Fitch's EETC rating methodology.

Neither Section 1110 nor the Alternative A of CTC applies for NAS 2016-1. However, the creditor-friendly nature and reliability of the Irish legal regime, precedent under Irish law, and several structural elements of the transaction that provide significant credit protection, allow Fitch to apply its EETC criteria to this transaction.

If NAS were to become subject to insolvency proceedings (assumed to be examinership rather than liquidation), Fitch believes that so long as NAS desires to continue to fly the aircraft it is probable that the certificates will remain current. In other words, although NAS insolvency laws do not include a specific provision geared to protecting the interests of aircraft finance creditors akin to Section 1110 of the U.S. Bankruptcy Code, Fitch's opinion is that the Irish regime, combined with the key structural and other features noted above, practically speaking leads to a similar outcome: examinership will not necessarily result in a default on the class A and the class B Certificates.

KEY ASSUMPTIONS
Fitch's key assumptions within the rating case for the NAS 2016-1 class A Certificates include:
--A top down scenario in which the collateral aircraft are rejected in a global aviation downturn;
--Collateral value stresses of 20% for the 737-800;
--Annual collateral depreciation rates of 5%;
--Full 18 month liquidity facility draw along with an assumed remarketing/repossession cost of 5% of the collateral value.

Key additional assumptions for the class B
Certificates include:
--A moderate affirmation factor that effectively reduces the probability of default for the Certificates.
--Strong recovery prospects for the class B notes (RR1 - 90% to 100%)

RATING SENSITIVITIES
Senior tranche ratings are primarily driven by a top-down analysis based on the value of the collateral. Therefore, a negative rating action could be driven by an unexpected decline in collateral values. For the 737-800s in the deal, values could be impacted by the entrance of the 737-8 MAX, or by an unexpected bankruptcy by one of its major operators. Fitch does not expect to upgrade the senior tranche ratings above the 'A' level.

The ratings of the subordinated tranches are influenced by Fitch's view of NAS's corporate credit profile. Fitch will consider either a negative or a positive rating action if NAS's credit profile changes in Fitch's view. Additionally, the ratings of the subordinated tranches may be changed should Fitch revise its view of the affirmation factor which may impact the currently incorporated uplift or if the recovery prospects change significantly due to an unexpected decline in collateral values.

Fitch may also consider downgrading all or some tranches of the transaction if the aircraft backing NAS 2016-1 are subleased, de-registered in Ireland and registered in another legal jurisdiction which Fitch views as being inferior to the Irish jurisdiction.

FULL LIST OF RATING ACTIONS

Fitch has assigned the following expected ratings;

Norwegian Air Shuttle ASA Enhanced Pass Through Trust Certificates, Series 2016-1
--Class A Certificates 'A(EXP)';
--Class B Certificates 'BB-(EXP)'.