Standard & Poor's recent action to downgrade the senior unsecured ratings of nine major airlines from BB+ to BBB-, including British Airways, is largely expected to exacerbate the troubles of already pressured airline-related asset-backed deals.

If recalling the past paints a likely scenario, the latest action could indeed have implications for outstanding CDOs with airline exposure. In the recent past Moody's Investors Service downgraded the class C notes of Leonardo Synthetic plc to A3 from A2. "Leonardo Synthetic, where the underlying [collateral] is solely aircraft loans, could be particularly vulnerable," commented analysts at Dresdner Kleinwort Wasserstein.

However, analysts add that it is very difficult to judge how a deal might be affected in the face of further negative implications without knowing what the rating agencies assume from the outset. But what additional pressure could Leonardo face that wouldn't have already been addressed when action was take against the C notes? Not much, says one rating agency, because from the outset the ratings already reflected this possible scenario.

In its last action against the synthetic transaction Moody's Investors Service said it had in fact accounted for such a scenario, at which point the agency was able to determine how much more credit enhancement would be needed to buffer the downtrend for the remaining A and B tranches. According to Moody's, the ratings factor in the possibility of further weakening in the airline credit ratings.

Fitch, for example, benchmarks possible evolving scenarios with the background of the worst historic aircraft recession, which was in 1990 to 1992. The agency expects many of its rated airline-related transactions to be able to endure most economic scenarios, excepting those that would be exposed to serious performance issues "as a result of the simultaneous and instantaneous stresses that the aircraft industry is now experiencing."

Still, Fitch considers equipment enhanced trust certificates (EETCs) as deals that might be more vulnerable to continued ratings action because the debt is supported by payments from a single airline and its rating methodology links the EETC rating to the rating of the underlying airline. "Airlines in the U.S. are the most likely to experience payment delinquency and default but others could as well," forecasted Fitch in its assessment of the market shortly after Sept. 11. "We are constantly reviewing these deals as the situation arises."

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