Issuance of bonds backed by aircraft leases is likely to increase as commercial airlines rely more heavily on leasing to finance new aircraft, according to Fitch Ratings.
However, Fitch expects enhanced equipment trust certificates (EETCs) will continue to represent the lion’s share of this activity. The rating agency does not expect lessors to securitize operating leases in a more material way over the next year.
Lessors have steadily grown their share of the aircraft finance market. Today, more than 7,000 commercial aircraft are on operating leases, which represents over 40% of the global fleet, compared with roughly 25% in 2000. Meanwhile, record expected aircraft deliveries and tightened financing sources have created the need for increased capital markets activity. The market has seen three aircraft lease securitizations or similar facilities so far this year. Fitch estimating more than $7 billion of issuance through mid-September, mainly in the U.S. but also including three transactions outside the U.S. (Air Canada, British Airways and Doric).
Fitch expects the healthy rate of EETC issuance will continue for the remainder of 2013 and into 2014, including additional international transactions.
Steadying airline industry and aircraft ABS performance is also making future issuance more likely. The improved health of commercial airlines in some regions has helped to lower default-related pressures in the near term. At the same time, lease rates and values on aircraft have firmed up following deterioration over the last several years. “Lease rates are closely tied to long-term interest rates, so securitizations with fixed-rate liabilities could be buoyed by a rising interest rate environment,” said senior director Bradley Sohl.
As always, however, emerging risks could create turbulence for these transactions. Proposed accounted changes regarding the treatment of operating leases also have the ability to shift the characteristics of lease demand in the future. Additionally, "New technology and increased narrow-body competition usher in new risks to aircraft securitizations," said Sohl.
It is important to note that current generation narrow-bodies comprise almost the entirety of recent ABS portfolios. Demand will remain strong for these aircraft into the next decade based on the sheer volume of the fleet. But "new technology calls for increased scrutiny regarding long-term lease rate potential, aircraft useful life and the amortization profile of ABS structures."
Fitch expects stable asset and rating performance for recent vintage operating aircraft ABS securitizations in the near term.
