Since being acquired by CarVal Investors three years ago, Aergo Capital's focus has shifted from trading aircraft to leasing them. Now it's making its first trip to the securitization market with $605.5 million of bonds backed by leases on 26 aircraft to primarily emerging-market airlines.
The transaction, Metal 2017-1 Ltd./USA, refinances 60.5% of Aergo's portfolio of owned and committed aircraft. It is unusual for its large exposure to turboprops, which are noisy and uncomfortable, but can be more fuel efficient on shorter flights, and to emerging markets.
Four tranches of notes will be issued: $430.03 million in Class A notes with a preliminary A rating from Kroll Bond Rating Agency, $86 million in Class B notes rated BBB, $55 million in C-1 notes rated BB, and $34.4 million in C-2 notes rated B.
(Kroll caps its ratings on aicraft lease ABS at A.)
Proceeds from the notes will be used to acquire 26 aircraft on lease to 12 airlines in 10 countries (Aergo will not own all the aircraft – some are being acquired for airlines in sale-leaseback arrangements). Eleven of the airlines are in emerging markets, representing 97.6% of the portfolio's appraised valuation of $672.7 million. The lone developed-market asset is an airliner leased to U.S.-based Sun Country.
The weighted average age of the portfolio is 5.3 years, with remaining lease terms of 7.8 years. Boeing and Airbus narrowbody aircraft make up 57.3% of the pool; 23.5% are widebody jets; the remaining 19.3% – encompassing 12 aircraft – are turboprops manufactured by ATR.
This is only the third aircraft lease securitization with a large concentration of turboprops. This type of aircraft accounted for one third of the collateral for Castlelake Aviation’s 2014-1 transaction, and a 100% turboprop transaction was sponsored earlier this year by Elix Aviation (Prop 2017-1).
The transaction is also notable because it allows allows 100% exposure to emerging markets. This exposes investors to the risks of legal, economic and political uncertainty, all of which could make it difficult for lessees to meet their contractual obligations, Kroll noted. The largest lessee in the pool, South African Airways, needs government support to complete a sale-leaseback arrangement with Aergo to acquire a new Airbus A330-300 commercial widebody – a plane for which Airbus plans to wind down production by 2018, with 82 on order, according to KBRA’s presale report published Thursday.
Over 28% of the portfolio assets are aircraft committed to the Lion Air Group, parent of Thai Lion, Lion Air and Malindo Air), a relatively higher concentration to a single group than other rated aircraft securitizations. But the company, with its primary focus in emerging markets, has lengthy experience in Asia/Pacific and African regions. It has successfully repossessed 40 narrowbody aircraft from 11 jurisdictions and has provided repossession/re-leasing services for other lessors including GPA, Orix, Standard Chartered Aviation Finance and Power Aviation.
The assets in the pool are broken down into three groups: the Group 1 planes – 22 in all – are operating leases lacking a purchase option for the lessee. There are two aircraft in each of Group 2 and Group 3 assets than have purchase options for the airline leasing the plane.
The notes amortize on varying straight-line schedules. The A and B notes backed by the 22 planes making up 91.8% of the pool’s value will be paid down on a seven-year schedule.
The deal has a $3 million maintenance account, and also cash sweep rapid amortization features seven years after the deal closes, or should the note performance deteriorate in the interim (such as if the debt service coverage ratio is below 1.25x, or less than 80% of the aircraft in the collateral is utilized).
Goldman Sachs is the sole structuring agent, global coordinator and sole bookrunner.