Diamond Head Aviation 2015 Limited is prepping $260.8 million of bonds backed by leases on older aircraft, according to presale reports from Standard & Poor’s and Kroll Bond Rating Agency.
The deal will issue a senior tranche of $199.3 million class A notes with a loan-to-value ratio (LTV) of 54% and a junior tranche of $61.5 million class B with an LTV of 70.4%. Both S&P and Kroll assigned preliminary A’ and BBB’ ratings to the class A and B notes, respectively.
All of the notes are due July 14, 2028.
Wells Fargo is serving as the lead arranger on the deal; AWAS Ireland Ltd., a subsidiary of AWAS Aviation Capital Ltd., is the servicer.
There are 30 mid-life and older commercial aircrafts on lease to 16 airlines backing the deal, with narrow-body planes (59.7%), wide-body planes (38.1%), and freight planes (2.3%) serving as the main models. The top five airline lessors the deal represent 50.4% of the deal, but the well-capitalized lessees such as Air Canada (11.6%) and Korean Airlines (10.6) mitigate some of the risk.
The fleet is considered to be a vintage pool, as the aircrafts have a weighted average (WA) age of 16.4 years and WA remaining lease term of 3.7 years. Kroll notes that values of planes this age tend to be highly volatile and they tend to have high maintenance costs and to be difficult to release.
However S&P sees the experience of AWAS Ireland and the predictable nature of lease rental income as strengths of the transaction, as many of the aircrafts in the fleet just had lease extensions. The Royal Bank of Canada is also providing a liquidity facility to cover nine months of interest on the notes.
Both rating agencies cite the volatility of commercial air travel as a key weakness of the deal, as the industry tends to be cyclical and responsive to oil prices and economic conditions. Additionally, 51.7% of the portfolio of lessees is exposed to emerging market countries, which naturally tend to be more volatile than developed markets.