Willis Lease Finance Corp. is prepping its first aircraft engine lease-backed securitization, via structurer and lead manager First Union Securities. The $250 million-range deal is in the preliminary stages, according to industry sources, but is slated for this year.
Although there have been other attempts at it, the only successful all-engine lease deal came from Rolls-Royce Air & Engine. The $367 million traditional private placement was brought to market by Greenwich Capital Markets (then Greenwich NatWest) last May.
Unicapital Corp., which filed for bankruptcy last December, attempted to bring an engine lease portfolio to market, although that deal went down on the runway, an industry source noted.
Last month, Willis closed a $115 million warehouse facility with Fortis Bank, while First Union expanded a facility for WLFC Funding Corp. another $190 million.
The Sausalito, CA-based company primarily leases spare aircraft engines, which are stored in the hangers by the airlines as backups, if not being used as replacements. These engines can cost between $4 million and $7 million, according Nicholas Weill, an analyst at Moody's Investors Service.
Interestingly, with appropriate maintenance, these spare engines can hold value longer than the actual aircraft. However, the depreciation tends to be much more sensitive to maintenance scheduling, which is a risk the rating agencies are currently assessing. Also, the depreciation is potentially different on an engine in use as a replacement, versus one being stored as a backup.
Servicer risk is another major issue in an aircraft engine deal, as the servicer, such as Willis, may not be a rated entity, and the securitization would require a backup servicer to be in place. However, since there is just a handful of companies specializing in the aircraft engine lease finance, finding a replacement servicer could pose a challenge.
Of the few, other companies that lease aircraft engines include GE Engine Leasing (of GE Capital Aviation Services), Kellstrom Industries, and BTM Capital.
Trend toward broadening
The entrance of engine lease deals is part of a larger trend appearing in both the aircraft lease-backed securitizations and enhanced equipment trust certificates. The standard securitization deal type, such as those from GECAS, Morgan Stanley Aircraft Finance (MSAF) or Pegasus Aviation, have been large portfolios backed by diverse pools of commercial passenger jets that are considered fairly liquid.
"In both EETC and in pools you are seeing a broader range of aircraft assets backing the deals," said Donald Powell, an analyst at Fitch. "These assets include engines, freight aircraft, regional jets and business jets."
It is understood that UBS Warburg is preparing its second all-freighter aircraft lease securitization, which could hit market this year. The old PaineWebber (now part of Warburg) debuted an all freighter-backed deal in late 1999, with a $130 million transaction called Aerofreighter Finance Trust, which is said to have widened out quite a bit. Warburg's pending deal will be backed by a larger and more diverse pool, a source said.
As one industry banker noted, there's likely to be a noticeable asset-class tiering. "It comes down to execution," the banker said. "There's a recognition by the investor base as to the quality of the transaction's assets, and that's being priced accordingly."
The recent GECAS LIFT deal priced at 43 basis points over the one-month Libor on the five-year A-3 class, which was rated Aaa/AA/AA (M/S/F). The two-year double-A's priced at 39 over one-month Libor.
Significantly, the GECAS deal was the first of its kind to garner a Aaa' rating.
Down credit, the 10-year A2/AA/AA fixed-rated class priced at 197 over Treasurys, and the 11-year, triple-B fixed-rate class priced at 297 over Treasurys.
As for the 1999 Aerofreighter deal, the 2.5-year A1/AA (M/F) A-class priced in the 200 over Treasurys range, while the 4.7-year Baa2/BBB class priced in the 375 over Treasurys range.
Regional jets? Turbo props?
Beyond freighter deals, other innovations include deals backed by regional jets, which are smaller jet aircraft, seating around 70 passengers, which have appeared in securitizations, but have not yet been the primary asset. The EETC market has already seen deals secured entirely by pools of regional jets.
Continental Airlines, American Airlines, and Northwest Airlines have all been active purchasers of regional jets, which are said to be more economical for local flights than the mid-size commercial aircraft, such as a Boeing 737. Canada-based Bombardier Aerospace and Brazil-based Embraer are two major manufacturers of regional jets.
And below the regional jets, there's "turbo props," which are propeller planes. These are viable for securitization, and have appeared in pools, though have not yet been the primary asset financed.
