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STRUCTURED FINANCE 

Special Report 

Moody’s Approach to Rating Obligations Backed by 

International Airline Ticket Receivables: The Sky’s the Limit 

AUTHOR: 

Susan C. Knapp 

Vice President 

Senior Credit Officer 

(212) 553-1405 

CONTACTS: 

Maureen R. Coen 

Managing Director 

(212) 553-3831 

Martine Nowicki 

Vice President 

Senior Credit Officer 

(212) 553-0831 

Client Services 

(212) 553-7941 

CONTENTS 

• Opinion 

• Unique Nature of Air Travel Receivables 

• Typical Transaction Structure 

• Analysis of Risk Factors 

• Structural and Legal Elements 

• Conclusion: Piercing The Sovereign Ceiling is Possible 

• Related Research 

OPINION 

International airline ticket receivables are created every time the purchase of an 

airline ticket for international travel is paid for with a credit card at a travel agency, at 

an airline ticket office, over the telephone, or through the internet. 1 Structured financings 

have been effected in which credit card receivables arising from the future sale 

of tickets (that is, ticket sales which are expected to be made in the future but which 

do not exist today) in one or more jurisdictions on routes flown by a carrier (for 

example, Aeromexico, Avianca, and VARIG) are sold to a special purpose company 

(SPC). These receivables can then be used to support a cross-border structured 

finance transaction. 2 

Properly structured cross-border transactions backed by the sale of future international 

airline ticket receivables may exceed the local currency unsecured debt rating 3 

of the carrier and the country ceiling for foreign currency bonds of the jurisdiction 

where the carrier is domiciled. 4 

1 These receivables could be based on travel between the country of domicile of the airline and any international destination and be derived from ticket 

sales charged in any jurisdiction. For illustrative purposes throughout this article, it is assumed that the receivables are being created in the United 

States for travel between the United States and the host country of the airline. 

2 A cross-border structured financing refers to a transaction in which an originator, such as an airline, located in one jurisdiction, transfers assets to an 

entity in another jurisdiction, usually either a trust or an SPC. The purchaser of the assets then funds this asset purchase with the issuance of debt. 

The debt, which is usually secured by the issuer’s interest in the assets, is repaid from the cash flow generated by the assets. 

3 The local currency unsecured debt rating of a carrier reflects its ability to meet its local currency debt service obligations on a timely basis. 

4 Foreign currency country ceilings assess convertibility or transfer risk, measuring the likelihood that governments would impose restrictions on the 

repayment of foreign-currency-denominated obligations. 

April 9, 1999

Piercing the local currency rating of the carrier can be an issue if the target foreign currency 

rating on the airline ticket receivables securitization exceeds the local currency rating of the 

carrier. To receive a transaction rating higher than the carrier’s local currency unsecured debt 

rating, the laws of the carrier’s domicile must permit the sale of these future ticket receivables to 

be isolated from the carrier’s property in the event of the carrier’s bankruptcy. Another important 

factor to be evaluated in determining whether or not a structured financing can exceed the local 

currency unsecured debt rating of the carrier is the historical relationship between the carrier 

and the account debtors, because the account debtors generally retain the right to cancel their 

contracts with the carrier if it files for bankruptcy. 

It is also possible for a properly structured transaction to exceed the country ceiling for foreign 

currency bonds of the carrier’s domicile if the receivables are generated electronically outside 

the host country of the carrier by entities whose obligation is to remit all funds to a fiduciary 

agent acting on behalf of the bondholders. 

UNIQUE NATURE OF AIR TRAVEL RECEIVABLES 

A ticket receivable is created every time a ticket purchased at a travel agency or directly through 

the airline at an airline ticket office, over the telephone, or through the internet is paid for using a 

credit card. 5 Receivables are created in an amount equal to the price of the ticket. 6 

When ticket purchases are effected at a travel agency, the agency submits periodic (usually 

weekly) reports to a central clearing agency. In the United States, Airline Reporting Corporation 

(ARC) is the clearing agency. ARC was established by its member airlines to provide reporting 

and settlement services and related services in connection with the sale of transportation 

services by authorized travel agencies in the United States on behalf of participating carriers. 7 

The reports specify the amount of U.S. dollars owed to the carrier pursuant to purchases by the 

airline’s customers paid through the various credit card companies. 

ARC electronically invoices the account debtors, which are the entities that process and settle 

the receivables, for the U.S. dollar amounts owed to the originator. The airline electronically 

invoices the account debtors for tickets sold directly through its airline offices, at airport ticket 

counters, and for telephone sales of tickets. 

For example, American Express and Diners Club are both credit card companies (i.e., card 

issuers), and they are also account debtors. Purchases made on Visa and MasterCard are 

processed by, and payment is effected through, a merchant processor hired by the carrier. 

When a ticket for travel on an airline is purchased in the United States through the use of a 

credit card, a receivable owing by the account debtor is created. ARC determines the settlement 

amount owing to the carrier and then the receivables are settled by payment directly to the 

carrier by the credit card company in the case of American Express and Diners Club, or through 

a merchant processor in the case of Visa and MasterCard. 

TYPICAL TRANSACTION STRUCTURE 

A typical transaction structure for a securitization of future international airline ticket receivables 

is outlined below. For illustration purposes, the example provided assumes that the airline ticket 

purchases are made in the United States. 

5 The receivables may also include amounts due to other airlines for services provided. For example, if a ticket is issued with flight segments on two 

different airlines, the ticket is normally issued in the name of the airline providing the largest share of the transportation. Therefore, the carrier which 

issues the ticket owes the other carrier money for the service which it provided. While the trust can benefit from this arrangement, these inter-airline 

payments are the responsibility of the originating airline and are settled through IATA (International Air Transportation Association). Depending upon 

the direction of the payment flows, this arrangement may have an impact on the analysis of the transaction’s cash flows. It is important to note that 

any payments owed by the originating airline are not the responsibility of the trust. 

6 The securitization of tickets purchased with cash involve a different settlement process and pose different risks than those tickets purchased with 

credit cards. 

7 In Europe, for example, there is a Billing and Settlement Plan (BSP) in each of the principal markets. For travel agents located in smaller markets, 

tickets are processed through the BSP in a neighboring country. 

2 • 

Moody’s Approach to Rating Obligations Backed by International Airline Ticket Receivables

1. The originating airline carrier sells its 

future ticket receivables owing from one 

or more account debtors to an offshore 

(e.g., outside of the carrier’s jurisdiction) 

special purpose company (SPC). 

2. The SPC issues securities to purchase 

the receivables. At closing, the carrier 

funds a reserve account from the 

proceeds of the sale to provide credit 

support for the transaction and to mitigate 

the risk that any temporary dip in the 

level of receivables generation would 

cause an event of default. The originator 

may also unconditionally guarantee the 

repayment of the notes. 

3. The SPC pledges its right to the receivables 

to a fiduciary agent for the benefit 

of the bondholders. 

4. Travel agents submit periodic (usually 

weekly) reports to Airline Reporting 

Corporation (ARC). The reports specify 

the amount of U.S. dollars owed to the 

carrier pursuant to purchases by the 

airline’s customers through charges on 

the credit card companies. 

5. On a daily basis, ARC electronically 

invoices the account debtors for the U.S. 

dollar amounts owed to the originator. 

The carrier electronically invoices the 

account debtors for tickets sold directly 

through its airline offices and at airport 

ticket counters. 

6. The account debtors contractually agree 

to pay amounts owed to the originator 

directly to the segregated account held 

offshore by a fiduciary agent for the 

benefit of the bondholders. These 

payments are generally made net of 

membership dues, chargebacks, and 

Travel 

Agent 

Fiduciary 

Figure 1 

Transaction Flows 

other deductions taken in the normal course of business. The carrier does not receive any 

payments directly from the account debtors until the outstanding balance on the securities 

has been fully paid down. All the money flows owed by the account debtors to the carrier 

through the ARC settlement process are paid into this segregated account. 

7. During each payment period, a fiduciary agent will accumulate funds in the segregated 

account until such time as that period’s debt service has been accumulated. 

8. As long there is no continuing event of default, a fiduciary agent will remit the receivables 

collections in excess of the required amount to the originator until the commencement of the 

next payment period. If there is a continuing event of default, generally no funds will be 

released to the originator until such breach has been cured. 

9. Bondholders receive interest and principal payments on the periodic basis specified in the 

transaction documents. 

(3) 

Merchant 

Processor 

Pledge of 

Assets 

(4) 

(6) 

(5) 

Proceeds 

(US$) 

Bondholders 

(2) (2) 

(1) 

Issuer 

Carrier 

ARC 

AMEX 

Carrier 

(5) (5) 

Bonds 

(8) 

(9) 

(6) 

Excess Cash 

(7) 

Fiduciary 

Diners 

Club 

(6) 

Fiduciary 

(8) 

Excess 

Cash 

United States 

Cayman Islands 

Host Country 

Moody’s Approach to Rating Obligations Backed by International Airline Ticket Receivables • 3

ANALYSIS OF RISK FACTORS 

In analyzing a transaction backed by international airline ticket receivables, Moody’s considers 

various factors, including: the sovereign’s ability to divert the payments owed to the carrier by 

the account debtors 8 ; the financial strength of the carrier and the risk that it will file for bankruptcy; 

the carrier’s ability to continue to operate; the projected levels of debt service coverage 

provided by the ticket receivables; the strength of the other transaction participants; any sovereign 

risk elements inherent in the transaction; and the legal and structural characteristics of the 

transaction. 

Sovereign Risk is Limited 

In a balance of payments crisis when a government is having difficulty paying its foreign debt 

service, the government could adopt desperate measures in an attempt either to maximize its 

receipt of foreign exchange generated by the entities domiciled within its jurisdiction or to prioritize 

the distribution of foreign exchange according to its assessment of the country’s needs. 

These measures could include the implementation of foreign exchange controls to limit and 

control the outflow of foreign exchange; the imposition of a debt moratorium; the implementation 

of a debt rescheduling or writedown; and the requirement that generators of foreign 

exchange remit all proceeds directly to the Central Bank. The probability of any of these events 

occurring is reflected in a country’s foreign currency country ceiling for long-term debt. 9 

In a sovereign bond default scenario, a sovereign might attempt to interfere with an airline ticket 

receivable securitization by requiring that the parties to the transaction remit all funds arising 

from the carrier’s offshore ticket sales back to the Central Bank. To the extent that the transaction 

structure could not withstand these attempts to interfere, the rating assigned could not 

pierce the country ceiling. 

However, Moody’s believes that the ability of a sovereign to interfere with a securitization 

based on the sale of future international airline ticket receivables is extremely limited. 

Although a government has control over a carrier which is located in its jurisdiction, receivables 

related to tickets purchased using a credit card are generated and settled through electronic 

means outside of the jurisdiction of the carrier. Therefore, the government has no direct control 

over the cash flow. This is true because: 

• All payments are recorded and effected through the offshore account mechanisms of the 

account debtors – no cash flows back to the carrier’s home country unless approved by a 

fiduciary agent acting on behalf of the bondholders. This settlement mechanism severely 

limits the ability of the carrier’s host government to require the repatriation of all ticket 

proceeds directly back to the host country; 

• The account debtors, which have contractually agreed to make all payments to an offshore 

account held for the benefit of the bondholders, are outside the jurisdiction and control of the 

government of the carrier. This fact limits the ability of that government to control their 

actions; and 

• The obligations of the account debtors to remit all U.S. dollar payments to a segregated 

account held by a fiduciary agent for the benefit of the bondholders are irrevocable and are 

assumed under U.S. law. If the account debtors were to redirect the U.S. dollar payments 

away from the designated account, this act would cause a breach of contract and could 

subject them to potential legal action by the bondholders. 

8 The account debtors are the entities which process and settle the receivables. For example, American Express and Diners Club are both credit card 

companies (i.e., card issuers) and account debtors. Purchases made on Visa and MasterCard are processed by and payment is effected through a 

merchant processor hired by the carrier. 

9 Foreign currency defaults by both sovereign and private sector borrowers in some of the emerging markets have been relatively common since the 

late 1970s. In most of these instances, governments have imposed various payment restrictions on foreign currency debt obligations of issuers in 

that country. 

4 • 


Although unlikely, the government might also try to order the reorganization of the carrier into a 

new corporate entity solely for the purpose of disrupting the securitization so that the transaction 

documents become unenforceable. To the extent that the bonds carry the guarantee of the 

carrier, this risk of reorganization may be limited in achieving its intended purpose; the reorganization 

may not be recognized by foreign courts if its sole purpose was to interfere with the cash 

flows of the transaction. 

Generation Risk: Can the Transaction Stay Aloft? 

The assets being sold in a future receivables transaction do not exist on the date of the sale. 

Therefore, if the carrier goes out of business or if it becomes bankrupt and is not permitted to 

sell future receivables, no further receivables will be generated and investors will suffer a loss. 

Depending on the laws of the jurisdiction where the carrier is located, even if the carrier stays in 

business its bankruptcy may void the transfer of any receivables generated after the filing of the 

bankruptcy proceeding. If the carrier’s bankruptcy works to void the transfer of future receivables, 

the rating assigned to the securitization will be constrained by the carrier’s local currency rating. 

In addition, the impact of a deterioration in the carrier’s credit quality may have a less obvious 

impact. Credit quality deterioration may cause the carrier to reduce the service it provides on 

certain routes potentially diminishing the amount of receivable generation. Additionally, if the 

carrier is unable to service its aircraft lease obligations, the lessor may decide to repossess the 

aircraft. A lessor’s decision to repossess aircraft may be affected by factors such as its historical 

relationship with the carrier and its ability to re-lease the aircraft to another entity at that point in 

time. For these reasons, it is important to assess the credit quality of the airline and how its 

credit quality may impact its ability to generate, or transfer, sufficient receivables to repay all 

obligations in accordance with the transaction documents. 

Effect of Carrier’s Bankruptcy or Liquidation on the Securitization 

In analyzing an airline ticket future receivables transaction, Moody’s reviews the carrier’s financial 

condition to assess its credit quality. An understanding of the carrier’s financial condition will 

help Moody’s evaluate the likelihood that the airline will file for bankruptcy protection, liquidate its 

business, or default on important financial obligations. The occurrence of any of these circumstances 

is likely to have a material impact on the likelihood that investors will be repaid under 

the securitization. 

Effect of Bankruptcy Laws 

The relevant measure of the carrier’s credit quality for purposes of analyzing a future airline 

ticket securitization may not be directly related to the carrier’s ability to pay its local or foreign 

currency denominated obligations. Depending upon the bankruptcy law of the jurisdiction where 

the carrier is located, the receivables generated after the carrier’s bankruptcy may be able to be 

transferred. Brazil, Mexico, and Peru are a few of the jurisdictions where a carrier’s bankruptcy 

will not prevent receivables generated after the bankruptcy filing to be transferred to a third party 

to honor a pre-bankruptcy sale obligation. In these jurisdictions, which tend to be civil law jurisdictions, 

if the carrier defaults on its debts, it may still continue to fly and therefore continue to 

generate and transfer receivables after bankruptcy. 

In jurisdictions where the laws permit transfer of receivables, Moody’s evaluates the probability 

that the airline might cease operations over the life of the transaction, because if the airline does 

not fly, no receivables will be generated. As part of this analysis, Moody’s takes into consideration 

the carrier’s importance to its host country either as the flag carrier of the country or as a 

significant generator of foreign exchange or local jobs. 

In other jurisdictions, where bankruptcy prevents the transfer of future generated receivables the 

local currency rating of the carrier, which gives an indication of the carrier’s creditworthiness, will 

likely act as a rating ceiling for the transaction, in the absence of other significant protections. 


Satisfaction of Third Party Obligations 

The financial strength of the carrier will probably affect its relationships with the account debtors 

and the amount of service provided. For example, account debtors generally retain the right to 

cancel their contracts with the carrier if the carrier files for bankruptcy, because they have financial 

exposure to the carriers. This cancellation could cause a sudden drop in the level of receivables 

being generated. If there is a history of a long and profitable relationship with the carrier, 

the account debtors may be inclined to seek a work-out with the carrier through a closely monitored 

period as long as the carrier continues to fly. But it is possible that the account debtors 

might start to withhold additional cash otherwise payable to the carrier in order to create a 

reserve fund to limit their exposure to the carrier against higher than anticipated refunds and 

chargebacks. The probability of this situation occurring is factored into Moody’s analysis. 

Cash Flow Coverage and Volatility 

In assigning a rating to a ticket receivable transaction, Moody’s performs a quantitative and 

qualitative analysis to project the cash flow coverage over the life of the transaction. 

From a quantitative perspective, the analysis takes into account historical levels of receivables 

generated by the carrier to evaluate any trends, seasonality, and volatility which may have 

affected the generation of the receivables in the past and which may continue to impact receivables 

generation in the future. 

From a qualitative perspective, Moody’s considers those micro- and macro-economic factors 

which can influence travel patterns. The flow of receivables for a particular carrier generally 

depends on the volume of tourist and business travel on the selected routes, and competition 

from other carriers. There are also other relevant factors. For instance, an understanding of the 

operating history of the carrier is important to assess the carrier’s ability to generate sufficient 

receivables to make required payments on the securities over the term of the transaction. This 

analysis includes an evaluation of the carrier’s domestic operating environment and the international 

markets in which it operates, as well as the historical and projected market shares. 

What is the Competitive Environment? 

To assess the impact of competition, Moody’s considers which airlines currently compete with 

the originating carrier in its domestic and international markets. If the markets are highly 

competitive, the likelihood that the carrier will be able to compete successfully with the other 

participants and maintain or increase its market share will be evaluated. The probability that 

there will be new entrants in the market over the life of the transaction is taken into account 

when projecting the level of receivables available to support payments on the securities. In the 

United States, for example, there have been major shifts in market share which have allowed 

airlines such as Southwest to come in; in some cases these shifts have caused carriers to exit. 

Because of bilateral agreements overseas, it can be harder to shift market share between 

various airlines. 

Cyclical Risk vs. Event Risk 

The international airline industry is cyclical and remains subject not only to economic conditions 

in its domestic market and general economic conditions worldwide because of the discretionary 

nature of air travel, but also to event risk (such as natural disasters and civil disturbance). 

Cyclical implies increases or decreases in air travel which occur over time. Triggers in the transaction 

which specify a minimum acceptable level of receivables can help to protect investors 

from a slow decline in the generation of receivables by accelerating repayment of the bonds if 

the amount of receivables generation falls below a certain level, such as three times debt 

service coverage. 

It is harder to mitigate event risk which could cause a sudden drop in air travel (and the generation 

of receivables) between two countries. For example, fear of terrorism was a major factor in 

the reduction in airline industry profitability during the Gulf War. However, some of the effects of 

6 • 


event risk can be ameliorated if, for example, travel between the two countries includes various 

destinations so that an event in one destination might not affect travel to another. In the case of 

Mexico, a natural disaster in one location (such as a hurricane in Acapulco) might merely result 

in the redirection of travelers to another Mexican destination, such as Cancún. 

Moody’s also looks for any trends that may affect travel between the various markets which are 

the subject of the securitization. For example, if the carrier’s receivables generated from ticket 

sales in the United States are the subject of the securitization, Moody’s will analyze the historical 

and projected traffic between the United States and the carrier’s home country; whether ticket 

sales are driven by tourism, business, or some combination of the two; the effect, if any, of 

natural disasters and civil disturbances on travel between the two countries; and the macroand 

micro-economic trends which could impact air travel generally and between the two countries 

specifically. 

Adjustments to Receivables by Account Debtors 

The account debtors have the right to make adjustments to the receivable amounts owed to the 

originating carrier. These adjustments may result from discount fees payable to the account 

debtors, refunds for tickets not used and returned to the airline; setoffs, or chargebacks which 

are deductions taken as a result of computation errors, unauthorized charges and charges 

disputed by the cardholder. Since these adjustments reduce the cashflow to the originating 

carrier, the historical level of adjustments is analyzed by Moody’s in determining the sufficiency 

of the expected receivables levels and related cash flows. 

Potential Impact of Code-Sharing Alliances Cash Flow Volatility 

Another factor which can affect the volatility of cash flow is the existence of code-sharing 

alliances between the carrier and one or more international carriers. 10 Code-sharing alliances 

may cause the revenues to be redistributed. The redistribution of revenues may have a positive 

or negative impact on the transaction. For example, if more code-sharing flights are booked 

under a partner’s name, it may have a detrimental effect on the level of receivables generated 

despite the overall benefit to the carrier. This is because the inter-airline receivables would be 

settled via IATA and would remain outside the scope of the ARC settlement process and therefore, 

outside the scope of the transaction. 11 If the code-sharing arrangement is well established, 

it should be easier to discern what impact, if any, the arrangement has had on the level of 

historical level of receivables generation. 

Seasonality of the Cash Flow 

It is also important to determine whether or not the cash flows are seasonal to assess whether 

the transaction’s structure mitigates the risk of a payment disruption. For example, if the securitization 

requires that the payments to bondholders are made on a monthly basis, but the carrier’s 

ability to generate receivables is highly seasonal, a payment disruption could be caused by a 

temporary decline in receivables flows. 

Structural adjustments to compensate for seasonality might include the inclusion of a reserve 

account, or structuring principal amortization in accordance with expected receivable levels. 

Moody’s analyzes historical and projected volatility of the cash flows in order to minimize the 

probability of a payment disruption. Volatility risk of the cash flows can be mitigated through 

overcollateralization and required minimum coverage levels. 

10 All of the major world airlines participate in numerous alliances. These range from simple sharing of capacity on a limited number of routes to full 

code sharing agreements with antitrust immunity. Some involve equity participation, but most do not. 

Originally alliances were of limited scope, usually with smaller airlines, and were intended to fill voids in selected markets. More recently, some of the 

largest airlines around the world have become involved and the programs are much more comprehensive. The goal is to capture high fare travelers 

and keep them on the system as long as possible. 

11 Factors which can influence travelers’ preference for one airline over another in a code-sharing alliance include membership in select frequent flyer 

programs, corporate travel contracts with specific airlines, and travel agents’ incentives to ticket passengers on one airline versus another. 


Basket of Credit Cards Accepted May Influence Cash Flows 

The basket of credit cards which the carrier accepts as a form of payment can also influence 

the aggregate level of receivables generated. As mentioned above, receivables are created 

when a cardholder uses a credit card to purchase an airline ticket. The greater the basket of 

credit card companies included in the transaction, the lower the likelihood that consumer preference 

for one card over another will have a negative impact on receivables flows. 

This flexibility is evaluated by analyzing the percentage of the carrier’s receivables which are 

accounted for by sales through those credit cards to be included in the securitization. In addition, 

Moody’s analyzes the historical sales patterns for the different credit card companies to 

ensure that the receivables being sold to the SPC represent a substantial portion of the carrier’s 

eligible receivables. 

Strength of Transaction Participants 

The principal transaction participants include: 

• The airline carrier, as the originator of the receivables 

• The account debtors, as the obligors of all amounts owing under the receivables 

• The credit card companies, which provide a method of payment for the airline services (to 

the extent different from the account debtors) 

• The fiduciary agents involved, such as an indenture trustee 

• Any guarantors 

• Any third party providers of credit enhancement 

The importance of the carrier as the generator of the receivables to the transaction has already 

been discussed. Moody’s analysis of the other participants in the deal focuses on their credit 

strength and their ability to perform their obligations under the transaction documents. Highly 

rated counterparties can reduce the probability of an interruption in payments to bondholders 

once the carrier has complied with its obligation to generate the receivables and provide the 

requisite services because of the relatively low risk of payment default associated with highly 

rated counterparties. 

In the case of the credit card companies, their ability to remain competitive with consumers in 

the face of alternative methods of payment receives particular attention. If, either through technological 

obsolescence or consumer preference, consumers stop purchasing airline tickets with 

the credit cards whose receivables have been sold to the securitization, there would be an 

adverse impact on the generation of receivables. 

Transactions have been structured which rely on the generation of receivables sales using Visa 

(A1/P1), MasterCard (NR), Diners Club (NR), and American Express (Aa3/P1)/Optima credit 

cards. The settlement mechanism for funds due from Visa and MasterCard is through the 

merchant processor selected by the carrier. 12 As a result, the carrier is exposed to the credit 

risk of the merchant processor. The transaction documents should provide for the substitution 

of merchant processors if the merchant processor does not perform its functions satisfactorily 

or decides to exit the merchant processing line of business. 

However, the substitute processor must agree to abide by the terms of the transaction documents. 

In analyzing the risk of the role played by unrated entities, Moody’s considers the entity’s 

credit quality, operating history, market share, and what percentage of the projected receivables 

they account for. 

12 The role of a merchant processor is to process and settle all ticket purchases which are made using Visa or MasterCard. 

8 • 


Moody’s reviews the carrier’s historical relationship with each credit card company and the 

historical level of adjustments to receivables (chargebacks, refunds, discount fees, and setoffs), 

in addition to assessing their financial strength. Both of these factors can affect the cash flows 

available to repay bondholders. In the first instance, the adjustments can make the cash flows 

more volatile. In the second instance, if the credit card company should file for bankruptcy, there 

may be outstanding amounts due the carrier which may remain unpaid. 

Finally, Moody’s analyzes the credit quality of other participants, such as guarantors and other 

providers of credit support and fiduciary agents, to ensure that the probability that they will 

perform their duties is consistent with the rating on the transaction. 

STRUCTURAL AND LEGAL ELEMENTS 

Important structural elements which are assessed include: ownership of the SPC; allocation of 

funds between the different parties to the transaction; the SPC’s ability to issue additional debt in 

the future and under what conditions; the existence of performance triggers; covenants at the 

level of both the carrier and the SPC; events of default; the existence and terms of any corporate 

guarantees; and the existence and terms of other credit enhancement from a third party provider. 

For example, the existence of performance triggers can alert investors to nascent problems and, 

depending on the terms of the transaction, can allow an early amortization of the transaction. 

Important protections to investors in this type of securitization include the carrier’s obligation to: 

maintain specified minimum levels of collections on receivables; maintain a specified minimum 

number of weekly flights to and from those markets relevant to the transaction; comply with all 

transaction documents; maintain satisfactory relations with the account debtors; and compliance 

by the carrier with any specific financial and operational covenants. Other features which 

can enhance investor protection include the existence of early amortization events which can 

provide for an accelerated repayment of the securities if certain events occur. 

Moody’s assesses the enforceability of each party’s rights and obligations under the governing 

law of each transaction document, including submission to the jurisdiction of foreign courts, 

where appropriate; a waiver of sovereign immunity, if applicable; validity of the bondholders’ 

security interest in the collateral. 

CONCLUSION: PIERCING THE CEILING IS POSSIBLE 

In Moody’s opinion, the ability of most sovereigns to interfere with the cash flow of a transaction 

backed by airline ticket receivables is extremely limited. These transactions are structured so 

that the receivables are generated electronically outside of the sovereign jurisdiction and by entities 

(the account debtors) also outside of the sovereign jurisdiction and whose obligation to 

remit all funds to an offshore fiduciary agent acting on behalf of the bondholders is assumed 

under a foreign law. As a result, these cross-border structured finance transactions which 

depend on the settlement of international airline ticket receivables for payment of principal and 

interest frequently can often “pierce the country ceiling” and achieve a rating higher than the 

foreign currency country ceiling of the domicile of the carrier. 

These transactions may also achieve a rating higher than the unsecured local currency rating of 

the carrier if certain conditions exist, such as the ability to isolate the future receivables from the 

estate of the carrier in the event of its bankruptcy or the presence of specific regulations which 

limit a carrier’s ability to file for bankruptcy in its host country, and a qualitative assessment of the 

carrier’s historical relationship with the account debtors which indicates that the bankruptcy of 

the carrier would not result in an automatic termination of its contracts with the account debtors. 


RELATED RESEARCH 

• “VARIG”, S.A. (Viacao Aerea Rio-Grandense) – RG Receivables Company, Ltd. – Moody’s 

Structured FInance, New Issue Report, April 3, 1998. 

• “Moody’s Approach to Structured Finance Transactions: Piercing the Foreign Currency 

Country Ceiling,” Moody’s Structured FInance, August 1997. 

• “Structured Finance Transactions Backed by Future Receivables,” Moody’s Structured 

Finance, February 27, 1998 

• “Structured Finance and Energy Project Ratings Demonstrate Stability Despite Sovereign 

Rating Actions,” Moody’s Structured Finance, October 1998. 

10 • 



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SUCH PURPOSE, IN WHOLE OR IN PART, IN ANY FORM OR MANNER OR BY ANY MEANS WHATSOEVER, BY ANY PERSON WITHOUT MOODY’S PRIOR WRITTEN CONSENT. All information 

contained herein is obtained by MOODY’S from sources believed by it to be accurate and reliable. Because of the possibility of human or mechanical error as well as other factors, however, such information 

is provided “as is” without warranty of any kind and MOODY’S, in particular, makes no representation or warranty, express or implied, as to the accuracy, timeliness, completeness, merchantability or 

fitness for any particular purpose of any such information. Under no circumstances shall MOODY’S have any liability to any person or entity for (a) any loss or damage in whole or in part caused by, resulting 

from, or relating to, any error (negligent or otherwise) or other circumstance or contingency within or outside the control of MOODY’S or any of its directors, officers, employees or agents in connection with 

the procurement, collection, compilation, analysis, interpretation, communication, publication or delivery of any such information, or (b) any direct, indirect, special, consequential, compensatory or incidental 

damages whatsoever (including without limitation, lost profits), even if MOODY’S is advised in advance of the possibility of such damages, resulting from the use of or inability to use, any such information. 

The credit ratings, if any, constituting part of the information contained herein are, and must be construed solely as, statements of opinion and not statements of fact or recommendations to purchase, sell 

or hold any securities. NO WARRANTY, EXPRESS OR IMPLIED, AS TO THE ACCURACY, TIMELINESS, COMPLETENESS, MERCHANTABILITY OR FITNESS FOR ANY PARTICULAR PURPOSE OF ANY 

SUCH RATING OR OTHER OPINION OR INFORMATION IS GIVEN OR MADE BY MOODY’S IN ANY FORM OR MANNER WHATSOEVER. Each rating or other opinion must be weighed solely as one 

factor in any investment decision made by or on behalf of any user of the information contained herein, and each such user must accordingly make its own study and evaluation of each security and of each 

issuer and guarantor of, and each provider of credit support for, each security that it may consider purchasing, holding or selling. Pursuant to Section 17(b) of the Securities Act of 1933, MOODY’S 

hereby discloses that most issuers of debt securities (including corporate and municipal bonds, debentures, notes and commercial paper) and preferred stock rated by MOODY’S have, prior to 

assignment of any rating, agreed to pay to MOODY’S for appraisal and rating services rendered by it fees ranging from $1,000 to $1,500,000. 

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Moody's Approach to Rating Obligations Backed ... - Securitization.Net

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