Aviation Capital Group Corp., an owner and international lessor of commercial passenger jets, is marketing a collection of leases on some of it older fleet of aircraft assigned to largely emerging-market carriers.
Merlin Aviation Holdings DAC is a $250.8 million, three-note series backed by leases of 18 aging aircraft in the collateral pool. The funds being raised are slated for the purchase or refinance of the narrow-body, single-aisle aircraft leased out to 17 airlines in 16 countries.
Kroll Bond Rating Agency has assigned a preliminary ‘A’ structured finance rating to the senior ‘A’ notes, which comprise $209 million of the $250.8 million in 16-year bonds included in the asset-backed offering. The appraised value of the planes (not including maintenance adjustments) is approximately $334.4 million, according to KBRA.
This is the first ACG deal rated by KBRA.
The fleet in Merlin Aviation Holdings DAC 2016-1 has a weighted average life of 14.3 years, considered mid-life to end-of-life aircraft.
The senior notes’ single-A rating is in line with other recent securitizations of older-vintage aircraft leases from Apollo Aviation, Castlelake Aircraft and Harbour Aircraft. All of those deals this year were capped at ‘A’ under KBRA’s aircraft lease ABS methodology due to potential steep asset-value declines and expected 7-10 year cyclical downturns in the aviation industry that have historically impacted the leasing business.
The ‘A’ notes in Merlin 2016-1 will amortize based on a 13-year payoff schedule, which is slightly slower than senior notes from Apollo (initially at 11 years), Castlelake (12 years) and Harbour (11 years in the first two years for its Series 2016 offering).
However, ACG is pooling leases that have considerably shorter remaining life spans: just 2.1 years on average, compared the other aircraft deals average between 3.3 and 4.7 years remaining on lease terms.
The remainder of the Merlin 2016-1 structure includes $25.1 million in Class B notes rated ‘BBB’ and the $16.7 million in C notes carrying a ‘BB.’
KBRA credits the deal for its diversity with 17 different airlines, and a top client concentration of just 11.7% (Jet2.com), 8.6% (Interjet) and 7.4% (TAM). The three largest countries represented in the pool (England, South Korea, and Mexico) comprise just 29.6% of the lease deals.
However, the deal does have a significant exposure (63.4%) to emerging markets including Brazil, Egypt, Lithuania, Colombia, Chile, Indonesia, Ecuador and Russia, notes KBRA. Only one U.S. airline (Southwest) is included in the deal.
All of the aircraft are Boeing and Airbus jets. The Boeing plans are in the B737-700/800 family, while the Airbus fleet consists of A320-200 models, all of which are among the largest long-haul planes utilized by airlines worldwide
ACG, which has been leasing aircraft globally since 1989, owns a fleet of 266 passenger jets with a book value of $8.1 billion on lease to 100 clients in 45 countries. While the aircraft in Merlin 2016-1 are older vintage, ACG’s average age for its aircraft is just six years.
The average remaining terms on the leases in the Merlin portfolio is 2.1 years, shorter than most recent esoteric aircraft leasing asset-backed deals rated by KBRA.
That short term is mitigated by an increased amortization requirement that would kick in should more than 50% of the pool of leases fail to receive of letter of intent to re-lease or gain a sale/part-out agreement within 12 months of expiring.
The deal also features a 25% cash-sweep mechanism for the Class A notes beginning six years after the bonds’ issuance, which boosts to 50% in year seven and 100% in year eight.
AGC, which like all aircraft lessors is required to maintain the planes itself, will maintain a $19 million maintenance reserve account for the fleet.
Credit Suisse is the structuring agent and sole bookrunner on the deal. The closing date is to be determined.
