Aircraft ABS could be negatively impacted by the Air Transportation Stabilization Board decision not to guarantee loans made to Vanguard Airlines, according to research from Morgan Stanley.

The ATSB - a panel of regulators set up after Sept. 11 - announced on May 29 that it had rejected the third application from Vanguard, this one for $15 million in loan guarantees. The airline initially filed for $55 million in loan guarantees last December.

The ATSB also rejected a $7.5 million loan guarantee application for small Alaska carrier Frontier.

For aircraft ABS, the picture is uncertain. Frontier leases are said to appear in a limited number of deals, although this could not be confirmed. Also, it's unclear as to the impact it will have on the company, and the extent of the company's need for the guarantee.

As for Vanguard, Morgan Stanley believes a bankruptcy and liquidation is a real possibility. While only a few deals have limited exposure to Vanguard, a market exit could put downward price pressure on Boeing MD-80 aircraft - out of favor when compared to aircraft such as the 737 NG family and the A320 family, and a difficult product line to place with lessees, researchers at Morgan Stanley said. In fact, Vanguard is the only airline that was actively expanding its portfolio of MD-80s, while others were siphoning them out of their fleets.

In essence, "If Vanguard goes bankrupt, there's going to be even less of a market for MD-80s," a source commented. "A lot of the lessors had no homes for the MD-80s, so they placed them with Vanguard in hopes that they would get the loan guarantee. Now that they haven't, it's only going to put more pressure on the MD-80 market."

Vanguard leases appear in about three ABS trusts, including AerCo, Pegasus, and Airlines Group. Morgan Stanley also points out that aircraft ABS with large concentrations of MD-80s would also be potentially negatively impacted if Vanguard were to saturate the market with these planes, decreasing the ability to re-lease them at current prices. Airplane Group deals have the largest concentration of MD-80s, at 13%.

According to Moody's Investors Service, Vanguard was already delinquent in some of the leases supporting ABS transactions.

"The developments put more pressure on the securitizations with Vanguard concentrations, although I don't think this is something that would impact the senior tranches," a source at the rating agency said.

All told, the rejections from the Stabilization Board are seen as a tough-luck development for an industry already on rocky ground, as it sets the precedent that the ATSB will indeed reject certain applications, a notion previously untested.

Morgan Stanley believes that "the unanimous rejection of the Vanguard application signals the likely rejection of other applications from smaller, less viable carriers."

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