S&P downgrades bonds in 23 aircraft lease/engine securitizations

Update: On Thursday, after this story was published, Kroll Bond Rating Agency announced it had downgraded 81 global aviation ABS securities and affirmed that ratings of 74 tranches within 55 transactions. Kroll cited declining cash flows, delinquencies (ranging from 24% to 77%) and deferred lease payments by obligors for the leasing companies. Thirty-five of the transactions also had falling debt-service coverage ratios that triggered amoritization events.

S&P Global Ratings on Wednesday downgraded 54 of 60 bond tranche ratings on 23 aircraft lease and aircraft-engine asset-backed securities deals it rates, amid concerns about ongoing uncertainties in global airline travel and operations amid the coronavirus pandemic.

According to the ratings agency, the downgrades came after a six-month credit watch review that commenced in March, shortly after the COVID-19 outbreak began grounding flights and curtailing domestic and international travel across Europe, Asia and North America where most aircraft leasing firms contract their fleets.

The downgrades affected ABS deals sponsored by several major aircraft leasing companies, including Castlelake LP, DVB Bank SE, Dubai Aerospace Enterprise Ltd. Carlyle Aviation Management, BOC Aviation, Goshawk Aviation, World Star Aviation, Wings Capital Partners and GE Capital Aviation Services.

Most of the ratings were downgraded one or two notches, including some being bumped down from investment-grade status. DCAL Aviation’s 2015 Series Class A-1 bonds and the Class A loans for Harbour Aircraft Investments’ 2017 Series, for instance, were each lowered to double-B status from previous BBB+ grades.

Only two transactions (one each from Castlelake and Falcon) maintained single-A ratings for senior tranches after the sector-wide downgrades from S&P.

Brendon Thorne

The 23 aircraft deals and 60 tranche ratings represent all but one of the aircraft lease ABS transactions rated by S&P.

S&P stated most lessors are confronted with the increasingly troubled financial health of airlines, which has led to a sharp drop in aircraft values and lease rates, as well as an array of requests for deferrals or delayed payments on rental contracts. Without the payments, lessors are unable to pay interest to ABS investors, resulting in rising overall loan-to-value ratios that affect credit quality on the securitized portfolios.

With a steep drop in travel demand – air traffic was down 70% year over year on Aug. 17, per TSA Checkpoint data – airlines are also reconsidering their widespread use of leased aircraft, S&P noted, meaning a “significant portion” of planes in lessors’ fleets will be parked as they come off lease over the next 12 months.

“The impact of the pandemic on the sector is far more severe than both 9/11 and the 2008 financial crisis,” S&P’s report stated. “According to Collateral Verifications, at the end of July, 40% of the total aircraft fleet remained in storage.”

The actions are the second wave of downgrades from S&P, which in June lowered ratings on 23 tranches of notes in deals while affirming eight others.