What’s behind the growth in aircraft lease securitization – the burgeoning number of new issuers, or the expanding collection of investors clamoring for high-yield, long-duration bonds?
According to a structured finance director who works on esoteric ABS transactions at Deutsche Bank, it’s more of a “virtuous circle.”
“Because there’s been growth in volume of issuance, there have been incremental investors who have realized, well, there is sufficient scale ... to be profitable,” said Simon Simonsky, speaking in September on a panel at the ABS East industry conference in Miami, Fla. “That’s gotten additional investors into the space, which has led to some spread compression and yield compression ... and that’s attracted incremental issuers.”
As small as $1.7 billion in sector ABS issuance in 2013, last year the industry grew to $4.6 billion worth of new aircraft lease securitizations, according to Moody’s Investors Service. Thus far in 2017, six publicly rated deals totaling $3.6 billion have come to market.
This year, Sky Aviation and Dubai Aerospace Enterprise are among a bevy of new, smaller issuers that have made first-time securitization, joining ranks with longtime issuers such as Castlelake Aviation and Apollo Aviation Management.
Their deals (sometimes privately placed) since 2016 have contributed to elevated ABS issuance levels that are also expanding thanks to larger deals from the merger of major leasing companies (such as Avalon’s purchase of CIT Group’s aircraft leasing business) and even the expansion of asset types including helicopters and prop turbo plane leases.
The ABS market remains attractive to issuers like Apollo because, as chairman Bill Hoffman explained on an ABS East panel, the transactions offer better rates better rates than bank loans, and give Apollo more flexibility to add or subtract from portfolios of passenger jets as they are bought and sold.
“And in the event of an [economic] down time, it gives us the time and flexibility to work through that,” said Hoffman.
For investors, deals are evolving with more investor-friendly terms, as well. There is a more “equitable” allocation of excess proceeds to Class A note cash flows in deals today, according to Simonsky, vs. earlier generation aircraft-lease deals that are helping portfolios de-lever more quickly.
For instance, recent securitizations have included a single waterfall payment that incorporates the funds from portfolio asset sales or end-of-lease payments into the Class A principal payment stream. In earlier deals, those funds were paid separately from lease proceeds in a pre-determined step across note classes.
Such structures make "the jobs of investors somewhat easier,” said Mark Hirshorn, a senior vice president at bond rating agency DBRS. “It also ensures that the payments coming in are allocated consistently to debt and equity investors.”
ABS investors in aircraft lease securitizations are attracted to the unique blend of high-yield and long durations – a perfect fit for the matchup of assets and liabilities of New York Life Investors, said Elena Serdyuk, a director for the group. “We being an insurance company are trying to match our assets and liabilities,” she said.
The sector’s pre-crisis deals notoriously underperformed for investors, so what’s different?
Older deals often had static pools that had limits on sales and predispositions of the aircraft assigned to the portfolio at launch, according to another panelist, Mark Lessard, a partner with Pillsbury Winthrop Shaw Pittman. Lessee pools consisted only of less-creditworthy airlines more at risk of defaults, and high cash reserves for expenses often left the allocations short to service the debt.
Another problem was the accounting for depreciation of the planes. Before 2001, Simonsky said, the amortization was based on a future projected value of planes with no “catch-up” mechanism should the value fall short of actual depreciation. “Post-9/11, there was really no means to get back on-sides with respect to (loan-to-value) on the senior tranches,” he said.
Deals were also smaller and more concentrated in geography and the obligor pool, unlike today’s more diverse pools in which leasing companies can do business with a mix of credit types.
According to Apollo’s Hoffman, his company can take on lessees of higher risk because it deploys a five-member internal credit rating team out of its home base of Dublin that will do on-site management visits to understand operations. As such, it has limited exposure to the recent bankruptcies of clients Alitalia and Air Berlin have had no consequence to Apollo.
“Diversification is your friend,” said Hoffman.