Castlelake Aviation has secured its first-ever credit rating from Fitch Ratings for a $911.3 million securitization of aircraft leases.
Both Fitch and Kroll Bond Rating Agency expect to assign a single-A ratings to the senior tranche of notes to be issued in the transaction, Castlelake Aircraft Structured Trust 2018-1. The sponsor’s prior three deals were rated by Kroll and S&P Global Ratings.
This time, the fleet is slightly younger, reflecting an evolution in Castlelake’s investment strategy. The company, which was founded in 2005, until recently acquired midlife to end-of-life aircraft that had depreciated significantly in price, providing the potential for an attractive return. Airlines often prefer to sell and lease back aircraft when they approach 10 years in age, keeping their newer planes on their own books. Recently, however, Castlelake launched an investment fund focused on midlife aircraft, sensing an opportunity in this part of the market as well.
The initial weighted average age of the 31 narrowbody aircraft (77.4% by value) and five widebody aircraft (22.6% by value to be acquired by the securitization trust is 9.7 years, and the remaining lease term is approximately four years. By comparison, the initial weighted average age of the aircraft backing Castlelake’s three previous transactions ranged between 12 and 15 years.
Fitch considers the assets backing the new deal to be strong; most are midlife Airbust A320s and Boeing 737s, though four A330s and one B777-300ER, widebodies prone to higher transition costs, make up 22.6% of the pool.
However, the rating agency considers the concentrated maturity profile to be a negative: No aircraft will reach lease maturity until 2020, at which time 13 aircraft making up 38.8% of the pool will come to lease expiry.
Both Fitch and Kroll cite as a risk the fact that up to 23 of the aircraft are not currently owned by Castlelake, though the current owners have agreed to sell them to the securitization trust. So in the event that the purchases are not completed, there would be a change of the composition or size of the portfolio of collateral.
In addition, the window of time during which ownership of the aircraft can be transferred to the trust, 360 days, is much longer than the 270-day delivery period for most aircraft lease securitizations. The additional 90 days also increases the possibility that the composition or size of the portfolio could change.
Assuming there is no change, Kroll considers the initial portfolio to be more diversified in terms of both lessee and country than either Castlelake’s previous transactions or other aircraft ABS transactions. The three largest lessees (by value) are Alaska Airlines (11.6%), Air Canada (9.8%) and Qatar Airways (9.7%). On the other hand, concentration limits permit up to 65% of the portfolio (by value) to be made up of the three largest lessees, which is higher than the majority of recent aircraft ABS transactions. And the composition could easily change as planes come off lease and are either re-leased or disposed of.
Fitch seems more concerned about the creditworthiness of the 18 lessees than how concentrated they are.
And while most are either unrated or speculative-grade credits, which is typical of aircraft ABS, Fitch does rate five lessees, including Alaska Airlines (BBB-), Air Canada (BB-) and Southwest (BBB+), a factor it considers positive.
Three tranches of fixed-rate notes will be issued in the transaction, Castlelake Aircraft Structured Trust 2018-1. In addition to the $731.2 million single-A-rated tranche senior tranche of Class A notes, there is a $114.6 million tranche of triple-B rated of Class B notes, and a $65.5 million tranche of double-B-rated Class C notes. All three tranches have an expected maturity of June 2025 and a legal final maturity of 2043.
The Class A Notes and Class B Notes amortize on a 14-year straight-line schedule for the first three years and a 12-year straight-line schedule thereafter. The Class C Notes amortize on a seven-year straight-line schedule.
Citigroup Global Markets is the lead structuring agent and joint lead bookrunner.
Funds managed by Castlelake, the sellers of the aircraft to CLAS 2018-1, will initially retain the Class C notes and will also provide equity to the transaction, consistent with previous deals, according to Fitch.
“Therefore, Castlelake will have a vested interest in performance outside of merely collecting servicing fees,” the presale report states.
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Corrected June 10, 2018 at 10:05PM: The original version of this article incorrectly stated that Castlelake's prior four securitizations were rated by Kroll alone.