A series of bonds backed by commercial aircraft leases managed by GE Capital Aviation Services (GECAS) has been downgraded, tied to the increasingly poor financial health of several foreign airlines from the COVID-19 shutdown in global air traffic.
Approximately $474 million in notes issued from the 2017-vintage START II lease securitization were given a one-notch downgrade by Fitch on Tuesday, including a $382 million Class A note tranche (as originally issued) that was shifted to a BBB rating from its prior A rating.
Also downgraded were a $69 million Class B notes tranche to BB from BBB, and a $23 million Class C tranche to B from BB.
“The rating actions reflect ongoing deterioration of all airline lessee credits backing the leases in each pool, downward pressure on certain aircraft values, Fitch's updated assumptions and stresses, and resulting impairments to modeled cash flows and coverage levels,” Fitch’s report stated.
The notes still carry their original ratings assigned by Kroll Bond Rating Agency. But as part of a sector-wide review of aviation ABS deals, Kroll is also looking at a potential downgrade to the START II notes that are secured by leases and the market value of 15 aircraft operated by nine airlines.
The original transaction featured 20 narrowbody passenger jets on lease to 13 international airlines, of which eight were in emerging aviation markets such as China, India and Indonesia. The pool was later reduced to 15 aircraft as five of the planes were ultimately not delivered to lessees in Argentina and Bangladesh, as well as Air China which was to have been the deal’s largest obligor.
(The reduction in the lessee pool contributed to Tuesday’s downgrade action, noted Fitch, as it lessened revenue, the collateralized value backing the notes and the deal’s geographic diversity).
Fitch had assigned an assumed CCC rating on more than 36% of the original pool’s asset value, based on the presence of emerging-market airlines on the lower-end of global credit carrier profiles. But that triple-C exposure in the pool has risen to 63% in the wake of the pandemic, as the airlines across Asia are cutting routes, parking plans and seeking deferrals on lease payments to GECAS.
According to an April 29 market report from aviation industry advisory firm MBA Aviation, scheduled flights are down 68% in Asia since January.
GECAS has approved three-month forbearance requests for 80% of the aircraft in both its START II transaction and the subsequent $446.4 million START III deal that priced in December 2019. (The START III note ratings were also under review, but were affirmed Tuesday – including the single-A rated $355.05 million Series A notes). The amount deferred is to be paid over a six-month period including interest – a factor Fitch considered in its review, the agency stated.
GECAS received only $3.9 million in lease receivables in its April servicer report, according to Fitch, down from $6.4 million in January.
“There continues to be elevated uncertainty around ongoing base and market values, and how the current environment will affect near-term lease maturities in each pool,” the report stated. “Fitch recognizes that there will be downward pressure on values in the short to medium term.”
