Fitch Ratings has affirmed the financing co-issued by SkyMiles IP Ltd. (SMIP) and Delta Air Lines (Delta) at 'BBB'.
The Rating Outlook has been revised to Positive from Stable. The Positive Outlook mirrors the corporate outlook revision and reflects continued de-leveraging efforts along with profitability and cash flow generation expectations moving forward.
SMIP is a special-purpose vehicle (SPV) incorporated under the laws of the Cayman Islands for the purpose of this transaction. SMIP is an indirect, wholly owned subsidiary of Delta Air Lines.
RATING ACTIONS
Entity / Debt
Rating
Prior
SkyMiles IP Ltd./Delta Air Lines Loyalty Program Securitization
Senior Secured Class A Notes 830867AA5
LT
BBB
Affirmed
BBB
Senior Secured Class B Notes 830867AB3
LT
BBB
Affirmed
BBB
Senior Secured Term Loan 24736CBS2
LT
BBB
Affirmed
BBB
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VIEW ADDITIONAL RATING DETAILS
Transaction Summary
The transaction is backed by payments to be made to SMIP under a license agreement signed with Delta for the use of the SkyMiles Intellectual Property (IP) assets and backed by co-brand agreements with third parties for the purchase of SkyMiles. SMIP, as owner and licensor of the IP, licenses the IP to SkyMiles IP Finance Ltd. (SMIF), which then sublicenses the IP to Delta. Through the license agreements, SMIP grants a worldwide license to Delta and its subsidiaries to use the IP to operate the loyalty program, SkyMiles. The licensees then pay a monthly license fee equivalent to all cash collections generated by the sale of miles to Delta as governed through an intercompany agreement.
Additionally, the third-party agreements are assigned to SMIP, and payments for the purchase of SkyMiles from third parties are remitted directly to a SMIP collection account held at JP Morgan Chase Bank, N.A. in the name of SMIP. These agreements include the co-brand agreement and membership reward agreement with American Express, the largest third-party partner.
The senior secured financing is guaranteed, on a joint and several basis, by certain subsidiaries of Delta. Additionally, the issuers grant additional security to the lenders/bondholders, including a first priority perfected security interest in the cashflows from the SkyMiles program, a pledge of all rights under contracts/agreements related to the SkyMiles program, a pledge of the transaction accounts (including the collection, payment and reserve accounts) and a pledge over the equity interests in certain subsidiaries of Delta.
Fitch's rating reflects timely payment of interest and timely payment of scheduled principal when due by the legal final maturity date.
KEY RATING DRIVERS
Credit Quality of Delta Air Lines (as IP licensee): Cash flows backing the transaction will primarily come from payment obligations from Delta under the licensing agreement related to intellectual properties owned by the IP SPV. Therefore, the Issuer Default Rating (IDR) of Delta Air Lines acts as the starting point for the analysis. Delta Airlines is rated 'BB+' with a Positive Rating Outlook, which reflects continued de-leveraging efforts along with profitability and cash flow generation expectations moving forward.
Performance Risk and GCA Score: Timely payment on the bonds depends on the ongoing performance of the licensee. Delta's going concern assessment (GCA) of 2 determines the cap for the transaction rating. The GCA provides an indication of the likelihood that Delta continues to operate in the event of default and Chapter 11 bankruptcy.
Strategic Nature of Assets (likelihood of affirmation of license agreement): The affirmation factor which measures the likelihood that Delta would view this obligation as strategic and would affirm the license or continue to make the licensing fee in the event of a Chapter 11 bankruptcy is considered High by Fitch. The strategic importance of the IP assets to Delta's operations coupled with the structural incentives in place supports this assessment. The assessment of High allows the transaction to obtain the maximum three-notch uplift from Delta's IDR, but is tempered to two notches as discussed below. This is commensurate with the GC 2 score.
The $9.0 billion maximum program size currently represents over 20% of Delta's total liabilities, which limits the maximum notching differentiation between the transaction rating and Delta's IDR. Given Delta's IDR is in the 'BB' category, the uplift is tempered to two notches due to the leverage constraint.
The debt service coverage ratio (DSCR) for the quarter ending December 2023 was 5.38x, significantly higher than the early amortization trigger threshold of 2.00x.
Asset Isolation and Legal Structure: Fitch assesses the legal protections and structural protection incorporated in the transaction. In addition to having the IP assets legally conveyed, bondholders have a first perfected security interest in the contractual obligations due from American Express and Delta. The legal structure incentivizes Delta to continue to make payments on the license as creditors will benefit from other structural features including other guarantees, potential liquidated damages, and a three-month interest reserve.
RATING SENSITIVITIES
Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade
The rating is sensitive to changes in Delta's credit quality. Delta acts as licensee under the IP license agreement. According to the analytical framework set out in the criteria, the transaction rating may withstand a one-notch downgrade of Delta's current 'BB+' IDR. However, a significant deterioration in Delta's credit quality would lead to a rating downgrade of the debt facilities. In addition, a change in Fitch's assessment of the affirmation factor and the GCA score could result in negative rating actions.
Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade
Fitch does not anticipate developments that would likely trigger an upgrade. If Delta's IDR is upgraded, Fitch will consider whether the same uplift could be maintained, or if it should be further tempered in accordance with criteria.
USE OF THIRD PARTY DUE DILIGENCE PURSUANT TO SEC RULE 17G -10
Form ABS Due Diligence-15E was not provided to, or reviewed by, Fitch in relation to this rating action.
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
ESG Considerations
The highest level of ESG credit relevance is a score of '3', unless otherwise disclosed in this section. A score of '3' means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. Fitch's ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. For more information on Fitch's ESG Relevance Scores, visit https://www.fitchratings.com/topics/esg/products#esg-relevance-scores.
Additional information is available on www.fitchratings.com
DELTA AIR LINES, INC. 
