General Electric Capital Aviation announced plans last week to securitize $1.4 billion of aircraft lease obligations in the Rule 144A market. Exhibiting the markets' growing acceptance of this untested asset class, the offering contains the first-ever tranche of such a transaction rated triple-A by Moody's Investors Service.
The relatively small volume of issuance - seven issues totaling $5.5 billion priced in 2000 - and the untested performance of the collateral have kept investors and rating agencies alike at bay, as many buysiders are not yet fully comfortable with aircraft lease-backed paper.
Structures for aircraft leases, as well as the notes securitizing them, remain complex, often amortizing over a 30-year period and frequently being refinanced as leases expire and change hands.
This offering, however, particularly in the $405 million A-3 class, displays strength in all of the areas needed to obtain Moody's triple-A rating: cashflows, structure and servicing.
"The A-3 class of this offering amortizes interest right away, the first principal payment is in one month from closing," said senior credit officer Nicolas Weill, who rated the offering for Moody's. Weill also cited the short legal final maturity (July 2016 versus July 2031 for every other class of this issue) and G.E. Capital Aviation's strong history as a servicer as two strengths.
Aircraft lease specialists were surprised when they heard of Moody's highest rating, which had previously been a Aa2 for similar deals - two notches below Aaa. "These deals have a lot of moving parts," said one aircraft lease market guru.
"There are really only five years of identifiable cashflows for any aircraft lease, then they are frequently refinanced. Also, if any lease should default, the bondholder has only security interest in the issuance SPV and therefore no direct claim to any aircraft," the source added.
Others cited the relative immaturity of aircraft leases as a collateral type; since its inception in 1992 through general acceptance in 1994-1995, there has yet to be a prolonged economic downturn in order to judge defaults. "There is really only about five years of significant data to look at," a market source away from the deal said.
The transaction is backed by a portfolio of 39 Boeing Co. (72% of pool), McDonnell Douglass (17%) and Airbus Industrie (11%) aircraft, all owned and leased by GE Capital Aviation, one of the offering's strongest points. Credit Suisse First Boston is lead manager for the deal with Lehman Brothers and Salomon Smith Barney as co-managers. Pricing is expected mid-June, with settlement scheduled for June 26.