Zephyrus, an aircraft lessor launched just this year by former CIT Group executives, is tapping the securitization market to financing the purchase of a portfolio of mid-life and end-of-life vessels.
The company, which is owned by Virgo Investment Group (98%) and Seabury (2%), is marketing $336.6 million of fixed-rate loans with a final maturity of 2038 and a preliminary single A rating from both Kroll Bond Rating Agency and S&P Global Ratings.
Deutsche Bank Securities is the sole structuring agent and lead arranger.
Proceeds, together with equity contributed by Virgo, will be used to acquire 21 aircraft on lease to 19 lessees located in 14 countries. As of June 30, 2018, the initial weighted average age of the portfolio was approximately 12.9 years with a weighted average remaining lease term of approximately 3.1 years, according to Kroll. S&P puts the weighted average life at 13.3 years and the weighted average remaining life at 2.9 years.
The portfolio consists of 18 narrowbody aircraft (69% by value) and three widebody aircraft (31% by value). It has an initial value of approximately $527.3 million, based on the average of the half-life base values provided by three appraisers as of June 30, 2018, per Kroll. Adjusted for needed maintenance, however, the value is just $510.1 million.
The loans amortize on a 10-year straight-line schedule, which is faster compared to other recent aircraft lease securitizations rated by Kroll. Here also, S&P takes a different vew. It says that the loans follow a straight-line 12-years-to-zero amortization. Both rating agencies say that, during years six and seven of the transaction, if no rapid amortization event has occurred and is continuing, the scheduled amortization of the loans will be supplemented with 50% "cash sweep" of the remaining available collections, after payments 1-11 of the payment priority.
The total leverage in the transaction is also “modestly” lower than other recent aircraft asset-backeds, at 63.8%, according to Kroll. S&P puts the LTV higher, at 74.07%; this is based on "the lower of the mean and median of the three half-life base values and the three half-life current market values on the loans," the presale report states.
Zephyrus’ lack of a track record is also a credit consideration; however Kroll believes the management is sufficiently experienced to fulfill its strategy in the management of mid-life and end-of-life aviation assets. Chairman Tony Diaz is the former president of CIT Aerospace, and president and CEO Damon D'Agostino, is CIT’s former chief commercial officer. Other CIT veterans have joined the firm as well.
To mitigate the small team, Zephyrus has entered into a support contract with SGI Aviation, a Seabury affiliate, which will provide ongoing technical support, market knowledge and enhanced relationships, according to Kroll. SGI has 45 full-time employees and 80 ad hoc consultants. It specializes in providing support for assets on lease and in technical consulting for commercial aircraft and engines.
Another potential concern is the fact that purchase of the aircraft may not go through by the time the sale of the loans closes. Nineteen are being purchased from a single third-party seller and are subject to a binding purchase agreement; the other two are expected to be purchased from the same third-party seller and are subject to a letter of intent. So there’s a risk that the purchases may not all be completed, changing the composition of the portfolio.
Also, unusually for an aircraft least securitization, one of the planes, a 16-year A319-100, is coming off-lease in December. Kroll understands that Zephyrus plans to sell this aircraft shortly after its delivery into the transaction.
Zephyrus has offices in Fort Lauderdale, Fla., San Francisco, New York and Dublin.
