High-yield professionals on the buy- and sell-sides say airline enhanced equipment trust certificates (EETCs) offer some of the best value in the corporate credit market, but they say those values are extremely difficult to identify.
Willliam Peck at ING Investment Management says factors such as the difficulty of valuing the aircraft that back the bonds make analysis extremely challenging. "There is some value out there, but at the same time it's almost deal specific and tranche-specific where the values are," he says. He also argues that some recent bankruptcy court decisions may have hurt the structural integrity of EETCs.
Sasha Kamper, buy-side analyst at Principal Global Investors, points to several instances of what she believes are price discrepancies. For example, she says she recently saw American Airlines' unsecured bonds bid at 25, just points lower than the secured paper. Bids on both issues were presumed to have dropped another 10 points on reports of a potential bankruptcy filing, but prices could not be obtained at press time last Thursday. This differential is far too small, she argues, because history has shown that unsecured investors recover almost nothing in airline bankruptcies. "There are huge areas of value that could be exploited if people want to put some time in," she says. Kamper also argues that the "A" tranche of the US Airways' 6.85% notes of '19, which were recently seen offered at 78.5, should recover to par.
The global market for public and privately placed EETC debt worldwide in $30 billion--a relatively small segment of the debt market, says Tom Kmiotek, an analyst at ABN AMRO Asset Management. "Understanding that market is a fairly arcane type of knowledge. You have to understand corporate credits, the structure, and the individual aircraft." He notes that Standard & Poor's rates United Airlines EETCs an investment-grade rating of BBB-, even though the company is bankrupt. But, Kmiotek says the oversupply of aircraft is a serious concern that is driving down prices of many EETCs.