Having seen more than $11 billion in securitization proceeds since the first deal in 1992, the privately placed aircraft ABS sector is poised for growth, market watchers predict.
"I think that we will see more players enter the sector and volume may double," said Rochelle Tarlowe, an assistant vice president at Moody's Investors Service.
Of other players breaking into the aircraft securitization business, First Union Securities recently announced it would be underwriter of an Aviation Capital Group aircraft lease-backed securitization, which is slated to be the next transaction to take flight.
Some of the other major players in aircraft ABS are Morgan Stanley Dean Witter, which securitizes it own portfolio, GE Capital, Pegasus Aviation, and European-based AerCo Limited, who recently completed a $960 million Rule 144A-compliant transaction.
Turning to Synthetics
Recently the use of synthetics structures in aircraft deals has been increasingly popular.
Like most ABS deals, with synthetic securities, the cash flow is derived from an underlying asset. The underlying asset may be a pass-through of principal or interest or it may also be repackaged by means of a swap or by allocating different portions of the cash flow from the underlying asset to different investors. This way, the synthetic security holders will receive either the pass-through rate or cash flows that differ from those generated by underlying assets.
Many issuers find synthetic securities attractive because of the ability to tailor the securities to suit specific investor preferences by creating securities that may not be readily available in the marketplace.
Those that would receive the most benefit from packaging their aircraft deals as a synthetic transaction would be the manufacturers, Tarlowe said, because it allows them to displace their risks.
"Synthetics work well for manufacturers, who seek to shift risk of lessee defaults to the capital markets," she said. "It's sort of structured like a collateralized loan obligation (CLO)," Tarlowe added.
Cayman Islands-based Airbus Industrie G.I.E. (Airbus) used a synthetic structure when it came to market late last year with its $1.1 billion Air 2 U.S. equipment lease transaction.
More Deals to Come
Going forward, Tarlowe predicts that the market may see an aircraft-engine deal coming out of the sector. Aside from the synthetic transactions that will be issued, Tarlowe said that the market might see a total of six to eight asset-backed aircraft deals this year, in total.
In a research report issued by Lehman Brothers, the bank said that what the investor should look at when considering the sector is the type of aircraft and the aircraft manager quality. The report, dated before the last AerCo transaction, predicted that at least another $2 billion more in aircraft ABS issuance is expected by year-end.
