While ratings methodology has remained the same for aircraft-lease ABS, all three rating agencies have altered their underlying assumptions, panelists said at UBS' Opportunities in Structured Aircraft Debt conference. Assumptions that have been tweaked relate primarily to asset residual values and lease rates, while diversity and asset life are viewed as being still-viable assumptions for rating aircraft lease transactions.
All concurred that while demand has shifted greatly over the last two years and that "there are some older aircraft types that will never be in use again," the 25-year life expectancy for new narrow-body aircraft remains valid.
One basic assumption the rating agencies defended was asset diversity, as session moderator Stephen Finkelstein noted that a pool backed by leases entirely of the more favored Airbus A320 may perform better in the current environment, than one backed by less popular aircraft.
Standard & Poor's managing director Phil Baggaley retorted: "Unless you know which aircraft will remain in use over the next 25 years, asset diversity helps." He then used the Boeing 757 as an example of a once-hot aircraft, which has since experienced a glut of supply from bankrupt air carriers, lessening the secondary market value.
Moody's Investors Service managing director Jay Eisbruck agreed, saying that a lack of diversity in a lease pool puts a transaction at risk to a shift in demand (or supply) and negatively impacts advance rates.
Don Powell, a senior managing director at Fitch Ratings, offered a unique point of view, in that aircraft diversity is of lesser importance to Fitch than lessee geographic diversity.
Moody's places a seemingly greater importance on the servicer than its rivals, although large, financially strong servicers are preferred by all. "Stronger servicers have done a better job at re-leasing aircraft and managing cashflows," added Moody's Eisbruck.
Fitch and S&P seemed to place a lesser importance on the strength of servicer. "If a deal's servicer were to go away," noted Powell, "aircraft would perform better than most assets." In the view of S&P's Baggaley, "The portfolio drives performance more than the servicer."
Panelists representing all three rating agencies remain negative on the sector going forward, although they feel as though the aircraft lease market has bottomed. While in general panelists are working on the assumption that fundamentals will rebound, the timing and swiftness of a rebound is of much debate among participants.
The best-case scenario for the market as a whole is a full recovery sometime in 2005, but others were more skeptical. UBS Director Mostafiz ShahMohammed estimated a five-year recovery.