BOCA RATON, FLA. - The double-digit yields and increasing liquidity of senior pooled aircraft tranches are turning heads in the ABS market. In fact, they may be attractive enough for investors to look the other way when it comes to the rather ugly headline risk associated with the airline sector.
"There will be a lot of new money chasing aircrafts in the next few months," said Mostafiz ShahMohammed, a director at UBS, during a panel discussion at Information Management Network's ABS East conference held here last week.
The panel came on the heels of US Airways'second Chapter 11 filing in as many years, another negative headline in the endless crawl of bad news afflicting the airline industry. Nonetheless, the consensus on aircraft ABS was surprisingly bullish.
"There are a lot of senior tranches looking to yield in the high single and double digits," said Michael Loop, a vice president at Piper Jaffray & Co. "Repricing these securities offers some value play."
UBS's ShahMohammed noted that there is no other sector where investors can find that kind of yield with such a negative outlook.
Sources put current trading levels on senior tranches at between 45 and 70. John Devaney, president of United Capital Markets, said that there is value to be found throughout the capital structure on these bonds. His recommendation: "Buy seniors at 50 - they're too cheap right now."
A lot of the initial assumptions on these bonds were too conservative, panelists said. Moreover, a fundamentally sound structure is getting a bum rap, and the senior portions look to hold up well. "The structure is not the problem, " Loop added. "It's the timing of the stress - it happened too early. These deals needed more time to leverage."
Moody's Investors Service has doled out 13 downgrades on aircraft ABS for a total of $9.4 billion in the past year, according to an analyst at the agency, and the downgrades are expected to continue.
Nonetheless, in addition to the money expected to come in from new sources, some previous investors may be coming back to the aircraft sector. "Some of the traditional insurance companies are kicking the tires again," Piper Jaffray's Loop said.
Broadly speaking, the forecast is mixed for the future of the airline industry. Nobody is contesting the obsolescence of the legacy carriers' hub and spoke model. "The costs associated with this model are too high in today's revenue environment," said Richard Baudouin, a managing director at Aviation Capital Group.
Discount carriers currently account for close to 25% of the market, Baudouin said, and the traditional carriers can't compete on price. However, the good news is that passengers are coming back. For the past three years, growth in airline traffic was flat. Currently, the industry is on track to edge up 5% in 2004, Baudouin said. "Supply and demand for aircraft are more in equilibrium," he said.
Lease rates for narrow body jets have risen by 50% during the
past 12 to 18 months, Baudouin said, which translates into higher prices.
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