BOCA RATON, FLA. - Despite the negative headlines surrounding the commercial airline industry, the pooled aircraft lease ABS sector is heating up, as evidenced by the pricing of recent transactions as well as one transaction scheduled for later this year. In anticipation of the pending supply, fresh money is coming into the sector from hedge funds and private equity, even though rising fuel costs and labor difficulties threaten to send more commercial airline carriers into bankruptcy.
Recent pooled lease transactions from Bombardier, Debis AirFinance, RASPRO and the planned offering from Aviation Capital Group have offered fresh price discovery that is bringing in the distressed outstanding pre-Sept. 11, 2001 deals across the board. The fact that, amid numerous downgrades, these transactions continue performing has yield-hungry investors giving aircraft ABS a closer look - and further tightening is expected.
United Capital Markets aircraft ABS trader Randy White predicted that 2001 vintage triple-B rated senior notes issued by Pegasus Aviation, currently trading near $0.50 will be near $0.60 within a year. Subordinated bonds, meanwhile, offer even further value in the current spread environment.
The fact of the matter is that while U.S. carriers, as did Delta Air Lines and Northwest Airlines, may end up in bankruptcy, they can operate indefinitely under Chapter 11 protection. Additionally, worldwide air travel is up, particularly overseas and in Asia, where many aircraft leasing companies are well positioned with newer, narrow-body aircrafts.
Richard Baudouin, managing director at Aviation Capital, reports that flight travel in China is up 20% this year and that aircraft lease rates have steadily increased and "haven't topped out," he added.
But for many investors, the backing of a monoline surety provider is a prerequisite for investing in pooled-lease ABS and placing large non-triple-A rated classes of such deals is extremely challenging. Monolines, however, are unlikely to drastically increase their appetite for this sector, due primarily to re-insurer skittishness, but also because of the sector in general. "How much monoline appetite [for pooled aircraft lease ABS} out there? A lot less than there was yesterday," said FGIC's Ken Degen.
Moody's Investors Service Assistant Vice President Parla Ozgediz noted that while it hasn't changed its methodology for rating aircraft ABS, Moody's has tweaked the assumptions underlying its analysis. For example, Moody's has revised downward by six years its useful life assumption to 25 years for commercial aircraft.
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