Aircraft lease securitization hasn’t exactly taken off since the financial crisis, but there are promising signs for 2015.
While larger lessors such as Aercap and GE Capital Aviation Services have generally found funding via general corporate obligations to be more attractive, securitization has become an important source of capital for some smaller firms that would have difficulty tapping the high yield bond market. These players have found a welcome reception for deals backed by highly leveraged leases on lesser know aircraft manufacturers, even in the absence of insurance wraps that were common in pre-crisis deals.
A total of five deals totaling $3 billion were issued in 2014; that was up from just $1.7 billion in 2013.
The two most recent deals, completed in December by Aldus Aviation and Jetscape, are the first to feature Embraer E-Jets, a series of single-aisle medium-range twin-engine commercial aircraft produced by Brazilian aerospace conglomerate Embraer. By comparison, all previous aircraft lease deals have been secured by leases on newer aircraft manufactured by market leaders Airbus and Boeing.
The senior notes issued by Jetscape Aviation’s $381 million Eagle I earned an A+’ from Kroll Bond Rating and an A’ from Standard & Poor’s;
The senior tranche of Aldus Aviation’s $540 million ATLAS Series 2014-1 earned a single-A from Kroll; S&P did not rate the deal. By comparison, the $522 million of class A notes issued by ABS newcomer, Apollo Aviation Group, in November earned a similar single-A despite being backed by a pool of older Airbus and Boeing aircraft, with an average age of 14 years.
Goldman Sachs and Deutsche Bank Securities led the Aldus Aviation transaction, which had a loan-to-value ratio of 78%, the highest to date on any securitization of this type of asset. By comparison, Emerald Aviation, a deal issued in September 2013 by Avolon that was backed by Boeing and Airbus aircraft had and LTV of 77%.
The increase in leverage may not seem like such a big deal, relative to the Avolon LTV; but adding in the fact that Aldus, a new issuer in the space, also introduced a new manufacturer, makes the deal a tougher story to sell.
Matthew Little, the co-head of transportation financing in Goldman Sachs’ structured finance business said that the combination of the two factors (higher LTVs and new manufacturer )led to structuring in LTV maintenance covenants that tests the LTV annually to the transaction structure, which he said “helped offset investors’ concerns”.
Additionally, the deal has a back-up servicer Embraer. Little said this was also helpful in marketing the deal.
Anthony Nocera, a managing director covering commercial and non-traditional ABS at Kroll Bond Rating Agency, said that the inclusion of a back-up servicer certainly helped the rating of the transaction; however he doesn’t expect the feature to take on as a trend in future transactions structures. “In the Atlas transaction the back up servicer is viewed as credit strength but we would have been able to rate the transaction without a backup servicer,” he said.
By comparison, Jetscape Aviation’s deal had a higher level of borrower equity relative to both the Aldus deal and other aircraft lease deals that have come to market. The trust sold $380.5 million of bonds backed by a portfolio of leases on 21 E-Jets. Bank of America Merrill Lynch is the sole structuring agent and lead manager on the deal. DVB Capital Markets and Guggenheim Securities are joint bookrunners.
The deal has an LTV of 52.3%. Kroll rated the senior notes on the Jetscape deal, a notch higher than Standard & Poor’s at A+’ on the back of the lower initial leverage and the notes’ shorter amortization period. “The more conservative capital structure of the Jetscape deal is viewed as a strength, compared to the Atlas deal,” said Nocera.
However the S&P’s rating does not reflect the lower LTV because, according to the ratings agency presale report, the deal is backed entirely by E-Jets and the servicer, Jetscape Commercial Jets Malta, is a very small aircraft lessor that focuses on the E-Jets niche market. E-Jets have a relatively short operating history compared to the extensive historical track record of Boeing and Airbus narrowbody aircraft. The company was founded in 2008.
Another structural difference was the inclusion of a non-investment grade tranche on both the Jetscape and Aldus transactions. The ability to place double-B rated, class C tranches demonstrates the continued investor receptivity to aviation collateral. “The aviation marketplace has a long history of observable data points and investor demand for aircraft collateral and has been extremely flexible in allowing issuers to do noninvestment grade tranches,” said Little.
Structuring isn’t the only thing in this asset class that is evolving. Each of the six deals done by Goldman Sachs since the financial crisis has included new investors. Little said that the universe of investors has been broadening on its own, as opposed to deal specific features designed to capture the interest of new investors. This trend is part of broader trend of investors looking to pick additional spread versus comparably rated products that has impacted all non-traditional asset classes.
On the sell side, issuers that can’t avail themselves of the senior unsecured bond market have found that the securitization market offers attractive capital markets financing. “Bigger leasing companies like Aercap have the option to finance themselves through issuing unsecured bonds but smaller specialized lessors that have private equity capital bases have less access to the senior unsecured market,” said Little.
A big consideration for issuers looking to tap the ABS market is up the front costs of setting up a new structure. Little believes that now that the frequency of aircraft lease ABS issuance has picked up, it is likely to encourage many management teams on the costs to do a deal. “It is no coincidence that the first servicer to reignite the market in 2013 was a GE,” said Little. “The increasing investor receptivity has led other, new players, to make the upfront investments in doing these types of transactions”.
Little expects a substantial amount of aircraft lease ABS issuance in 2015 that will be more representative of the fleet of aircrafts used today.
“The vast preponderance of aircraft operated in the world are newer narrow body and wide body aircraft. The securitization market financed a lot of assets that don’t fit into that category and what I expect in 2015 is to see more assets that are actually representative of the make up of the global fleet to make their way into the securitization market,” said Little.
Deutsche Bank shares this view. In its 2015 securitization outlook report the bank predicted $5 billion in issuance this year. Issuance should continue “at a regular enough pace that more market participants will consider it worth their while to explore and ultimately enter the sector in order to diversify their exposure to different ABS classes.”
