Uncertainty in the airline industry has had an immediate impact on structured finance transactions, both in the EETC (enhanced equipment trust certificates) and pooled aircraft lease transactions.
According to Wall Street bankers, putting prices on the outstanding deals has been a challenge, but investors are asking for market valuations. Other sources said that market perception of airline-linked structured finance is largely weighing on the outcome of the pending industry bailout package from the Federal Government.
The airline industry came under serious stress following the World Trade Center and Pentagon disaster, when the U.S. shut down airports for several days. The slowing economy and passenger hesitation following the terrorist attacks are expected to cause even more damage to what was an already struggling industry.
Last week, Fitch put all of its rated aircraft structured finance deals, including the pooled lease deals, the EETCs, and CDOs with significant exposure to the airline industry, on watch with negative implications. Standard & Poor's put at least two synthetic transaction on credit watch negative because of exposure to Delta Airlines corporate debt.
"These will be the next wave of fallen angels," one analyst commented.
Concerns over EETC first went public when Continental Airlines said that it would not make interest payments on the 1998-1 and 1999-2 series.
Shortly after, Delta Air Lines announced that it had no intention to stop payment on it outstanding deals.
EETCs are not true securitizations, although they are generally viewed as corporate/ABS hybrids, secured by a specific group of aircraft that will be liquidated in the event of default.
The deals are also structured to have a liquidity facility that could continue making payments for approximately 18 months, should the issuer go bankrupt.
As Fitch noted in a release, EETC are riskier than pooled aircraft deals because they rely on payments from only one airline; they are heavily concentrated in the U.S.; and the ratings are linked to the corporate rating of the airline.
Pooled aircraft lease deals are securitizations of lease streams derived from a pool of aircraft owned by a finance company. The pools are considered diverse, and generally have significant exposures outside the U.S.
These deals, however, could be under pressure as well in an industry wide crisis, because they are dependent on the lessors' ability to pay, as well as the ability of the leasing company to find replacement lessors, which could be difficult in an industry slump.
The delay in the Continental EETC transaction sent some investors into full risk-management mode, as they spent a good deal of time examining their portfolios for potential exposure.
"A lot of investors are taking out the scrub brush and seeing what people really own," said an ABS buysider who was concerned about possible airline and insurance exposure in certain ABCP programs. "SIVs, ABCP and other arbitrage vehicles could theoretically own CMBS, insurance paper or EETC paper, so we are managing how big that exposure is."
While ABCP investors were extra cautious, it is atypical for ABCP programs to contain a lot of CMBS, and sources say that airplane exposure in ABCP is typically highly rated and therefore should not be a significant risk.