GECAS' next aircraft ABS has heavy focus on emerging markets
GE Capital Aviation Services, the largest fleet operator in the aircraft leasing business, is returning to the securitization market to finance a fleet of young aircraft operating mostly in emerging countries.
GE’s START II Ltd. transaction is a $474 million issuance of three long-term note series backed by a fleet of 20 Airbus and Boeing narrowbody aircraft, with an appraised book value of $588.7 million. The average 5.9-year age of the fleet in GECAS’ 15th overall asset-backed transaction is among the lowest for a portfolio of mostly mid-life/end-of-life planes, due to the inclusion of six planes under six years of age.
The portfolio does not include any Boeing 737 Max 8 planes that have been in operation for less than two years, and have been grounded worldwide since early March following a second fatal plane crash involving that model.
The START II transaction includes a $382 million Series A notes tranche, which has a preliminary single-A rating from Kroll Bond Rating Agency. GECAS will also market $69 million in BBB-rated Series B notes, and $23 million in BB-rated Series C bonds.
The note proceeds will finance the 20 planes that are on lease to 13 airlines in 11 countries.
Over 80% of the portfolio’s value is tied to Airbus A320-200 and A321-200 models and Boeing 737-800 types, all of which are in high demand among leasing airlines. That makes them a very liquid asset to re-lease or sell off in the event of a lessee default, Kroll’s presale report stated. The deal includes no widebody aircraft, which are typically more difficult to re-lease and more expensive to maintain and rehabilitate.
The six youngest aircraft in the fleet are all leased to three emerging market airlines: Air China, China’s Juneyao Airlines out of Shanghai, and Air India Express. This gives GECAS a higher-than-average top-three airline lessee concentration of 45.3%, a figure that can grow to as high as 65%. That’s not usual for GECAS, which had a top three airline exposure of 35.3% that was capped at 70% in its most recent transaction, the $586.9 million START 2018-1 deal that closed in June 2018.
Marketing the planes in China and India also expands the deal’s exposure to a 63% concentration in emerging market countries that expose GECAS to legal, economic and political risk. The cap on emerging markets can be as much as 85% of the portfolio.
Another geographic risk for GECAS is it does not restrict airlines into operating in “prohibited” countries and jurisdictions that are the subject of U.S. Treasury sanctions. No other aircraft-lease ABS issuer lacks this restriction, according to Kroll.
Much of the deal structure is similar to GECAS’ transaction last year. All notes classes are similarly rated, and the Class A and B notes each amortize on a 14-year schedule. The initial loan-to-value of assets backing the START II Class A notes (64.9%) are in line with last year’s 61.8% for the 2018-1 Series A bonds.
Deutsche Bank is the lead structuring agent and lead bookrunner on the transaction.
Unusual aspects to GECAS’ deal is that is has an lengthier 360-day period to deliver aircraft to lessors from sellers – most issuers in ABS deals rated by Kroll have a maximum 270 days. That could expose the portfolio to changes in plane composition, diversification or deal size if plane purchases fall through, but Kroll says GECAS has a track record of delivering a “vast majority, if not all of the aircraft within the prescribed delivery period.”
Another plus for investors is that a GE Capital affiliate, GE Capital Global Holdings (GECGH) guarantees 99% of the purchase payments made on the planes by the GECAS affiliates, regardless if a sale is completed. And for the new START II transaction, GECAS has added a further protection: it has secured those guarantees with standby letters of credits with Credit Agricole and Natixis, both of which will be obligated to provide funds equal to the outstanding principal balance of the Series A notes.
The B and C note obligations still represent unsecured claims against GECGH.
The transaction is only the second global aircraft securitization this year, following the March 15 closing of Merx Aviation Servicing’s debut $506.5 million collateralization of older mid-life/end-of-life aircraft (with an 8.4 year weighted average fleet age).
While lagging the 2018 issuance of 14 deals totaling $7.58 billion among a dozen issuers, the operating environment for aircraft lessors remains “largely favorable” with strong aircraft demand by airlines and “sound” passenger volume growth for 2019, according to a February industry outlook from DBRS.
According to Kroll, GECAS has assets valued at over $44 billion, among 1,520 owned and serviced aircraft.