The aircraft ABS sector appears ripe for new issue, according to some, however others question the wisdom of buying it.
Comments made by United Capital Markets President John Devaney during the opening session at Information Management Network's ABS West 2005 conference added fuel to rumors of an imminent pooled lease transaction from GE Capital Aviation Services. The last such transaction from GECAS was a $1.4 billion June 2001, offering via Credit Suisse First Boston. One source noted that talk of such a deal from the issuer has been circulating for three years. "I'll believe it when I see it," the source said.
Yet most agreed that slating a deal for sometime in the first half of 2005 would make sense. In light of the precarious situation of the legacy carriers, GECAS could be looking to rid its balance sheet of some of those riskier assets, while yield hungry investors could be willing to take them on. "Considering that everything is on top of each other, from subordinated debt all the way up to top tier senior debt, it would be a good spread product," one investor said.
Moreover, aircraft bonds are looking more liquid these days due to the spike in secondary trading activity in the sector during the second half of 2004. However, the secondary market has cooled somewhat recently, and pricing levels have come down slightly in 2005, sources reported. "Those who were reaching for yield and needed product have bought it, and the [hedge funds] that initially bought it in the secondary market have taken their gains," a market observer said.
One skeptic said it was primarily the market's shortsightedness that would enable GECAS to sell new-issue pooled lease ABS in the current environment. Another investor at a large-scale fund manager said he wouldn't touch anything in the aircraft sector without a wrap. It remains to be seen who would step up to the plate down in credit. "It depends on how wide they are willing to price the subordinates," a source said. "There are a lot of new investors who didn't live through 01 and 02; they heard it was bad, but they didn't experience it, so they might be willing to jump in."
Some also claim that pricing in the secondary market has gotten ahead of itself, with outstanding bonds pricing assuming cash flows for the next 15 to 25 years without factoring in the risk of another terrorist event. In addition, current pricing levels do not reflect the very real risk of one of the major airlines being forced to liquidate, a source said.
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