Morgan Stanley recently closed an innovative repackaging of impaired-aircraft ABS notes, issued through the bank's Combination Repackaged Asset Backed Securities II shelf, or CRABS II.

MS combined an interest portion from the A-9 notes of Airplanes Pass-Through Trust with zero-coupon Treasurys, which scores the new securities an A1' rating from Moody's Investors Service, compared to the Ba2' rating of the stand-alone A-9. The A-9 class, issued in March 2001 to refinance the existing A-4 and A-7 classes from the trust, was originally rated Aa2' by Moody's, noted Nicolas Weil, aircraft securitization analyst at the agency.

The $100 million CRABS trade allowed select holders of the impaired A-9 notes the opportunity to exchange their positions for the newly issued, principal-protected securities. The interest portion of the new A-2 subclass is based on the interest of the repacked A-9 notes, while the principal is based on the Treasurys. According to sources familiar with the transaction, investors in the A-9 notes might have opted for the exchange to avoid writing down their positions, or selling out at a loss. This would be particularly attractive if the noteholder believed the secondary market and/or lease market for aircraft - the health of which dictates projected cash flow and recoveries on pooled aircraft lease ABS - were going to improve down the line.

Investors in the new deal receive a coupon below the A-9's initial Libor plus 55 basis points. CRABS II also includes a non-rated B piece, which accrues principal paid on the original A-9 notes included in the transaction.

The Airplanes Pass-Through Trust was created in 1996, financing (what was then) a $4 billion portfolio of aircraft for debis AirFinance. GE Capital Aviation Services is the primary servicer on the trust.

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