Castlelake boosts widebody exposure in next aircraft ABS
Castlelake’s next aircraft lease securitization features slightly higher exposure to widebody aircraft, which may have experienced some softness in valuations over the past year, according to Fitch Ratings.
However, the lessor is borrowing less heavily against the collateral than in its prior deal, completed in June 2018. The notes to be issued in the latest transaction also amortize more quickly, reducing investor exposure to a potential decline in the valuation of the assets.
The $867.6 million Castlelake Aircraft Structured Trust is backed by a pool of 32 aircraft, 28 of them (93% of the pool) on lease to 13 airlines in 12 countries and four (7%) financed with loans guaranteed by MN Airlines, LLC d/b/a Sun Country Airlines, according to Fitch Ratings.
The pool is made up of largely liquid, midlife A320s and B737s with a weighted average age of nine years. There are also two widebody B777-300ERs and one A330-200 totaling 28.4% of the pool, which are prone to higher transition costs. Notably, 13.8% of the initial contracted cash flow is from one of the B777-300ERs. By comparison, 22.6% of the collateral for Castlelake’s prior deal, which was also rated by Fitch, were widebody aircraft. No aircraft in the latest deal will come off lease until 2020, and 48.1% of the pool comes off lease in 2024-2025.
In its presale report, Fitch cites the “general opinion of appraisers” that the B777-300ER and A330-200 aircraft have been experiencing softness in the past year, especially the B777-300ER. “There are a material amount of them coming off lease in the next two to three years, and lease rates have already been softening,” the presale report states. “Meanwhile, the A330-200 has much more availability than the -300 which is generally the preferred variant by airlines.”
While the collateral may be slightly weaker than that of Castlelake’s prior deal, the structure of the deal may help insulate investors from a decline in valuations. All three tranches of rated notes to be issued represent lower loan-to-value ratios, though the presale report does not provide comparable figures for the 2018 deal. The $679.4 million of Class A notes with a 65% LTV are rated A; $115 million of Class B notes with 76% LTV are rated BBB; $7.2 million of class C notes with 83% LTV are rated BB.
Also, the Class A notes amortize with a 12.5-year schedule for the majority of the assets, pus 10-year schedules for the widebody aircraft and 6.5-year schedules for the four Sun Country loans. This compares to, in the prior transaction, 14 years for all assets for years one to three and then 12 years thereafter.
Goldman Sachs is lead structuring agent and joint bookrunner, along with BNP Paribas Securities, Deutsche Bank Securities and Citigroup.
Among other key rating considerations, funds managed by Castlelake, the sellers of the aircraft to CLAS 2019-1, will provide a portion of the equity to the transaction, consistent with similar investments made by the funds in prior deals. “Therefore, Castlelake will have a vested interest in performance outside of merely collecting servicing fees,” the presale report states. It notes, however, that Castlelake does have the ability to sell their equity position in the future.
And Fitch is concerned that 14 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. However, if any aircraft or replacements are not transferred, the applicable debt amount will be prepaid to noteholders from the acquisition account, offsetting this risk.