Sky Aviation Leasing International is tapping the securitization market for the first time with a $780.8 million notes offering backed by aircraft leases of newer, high-demand commercial passenger jets.
The transaction, S-JETS 2017-01, includes a $657.8 million senior tranche rated A by Kroll Bond Rating Agency and S&P Global Ratings; a BBB-rated Class B tranche totaling $81 million, and another $42 million subordinate Class C tranche rated BB.
All of the notes will pay interest at a fixed rate and are scheduled to mature in August 2042. The Class A rate is 3.97%.
The ‘A’ senior-note rating is standard in most corporate- and passenger-jet securitizations, from established issuance platforms from Castlelake L.P., Air Lease Corp. and GECAS to more fledgling firms such as Dubai Aerospace Enterprise Ltd.
Sky Aviation is a newcomer to the commercial aircraft leasing sector, launching in October 2015 under former management of experienced aircraft leasing firms Pegasus Aviation and Jackson Square Aviation.
The collateral pool consists of 21 narrow-body and wide-body aircraft on lease to 16 lessees in 13 different countries. The aircraft backing the deal are relatively young with an average age of 3.4 years (within an assumed useful airframe life of 22-25 years) and aggregate appraised value of $991.8 million (maintenance adjusted) for the life of the transaction.
A young fleet gives lessors the benefit of lesser maintenance and aircraft that is easier to lease out, boosting liquidity and preserving values longer. While some of the aircraft have been succeeded by newer models, all of the pool’s models are still in production.
However, the deal’s average remaining lease terms of 7.5 years is longer than typically found in other aircraft ABS deals.
Most of the planes in the fleet are narrow-body (18), including eight Airbus A320s, eight Boeing BB737-800s, a single Boeing B737-700, and one Boeing737-900ER. The remaining three are wide-body: an Airbus A330-300, an A330-200 and a Boeing B787-8 Dreamliner.
Holding wide-body aircraft represents more risk to an aircraft lease transaction, according to Kroll, since wide-body planes have higher fuel, maintenance, reconfiguration, and transition costs, and can be more difficult to re-lease.
But the three wide-body aircraft in S-JETS 2017-1 are just under 31% of the pool’s collateral value, and the largest plane in the fleet, the Boeing Dreamliner, was just delivered in March to Sky Aviation with an initial appraised value of $131.5 million – a credit positive for the deal, noted Kroll.
Sky is further shielded from deteriorating values by requiring 16 of the initial 21 lessees to cover monthly cash maintenance reserves; 12 also have end-of-lease adjustments for maintenance costs to bring planes back to a required condition for redelivery, S&P stated.
None of the A320 or B737 planes in the pool includes the newer fuel-efficient engines manufactured by Airbus (the ‘NEO’ option) and Boeing (known as ‘MAX). But S&P does not believe that will affect near-term valuations for those current models until the next decade due to the long backlog of fuel-efficient engine orders and the large size of existing A320 and B373 fleets.
Among the weaknesses to the credit profile are the fact many of the lessees are of low-credit quality and 71% of the pool’s leases are with airlines in emerging markets. Ethiopian Airlines is its largest lessor in the pool, with 12% of the leases.
But having low-credit obligors in non-developed markets is not uncommon in aircraft lease deals (the most recent GECAS deal had 75% emerging-market exposure), and more global airlines turn to leasing rather than owning fleets: over 40% of the global commercial airline fleet is maintained through operating leases, a level expected to grow to 50% within the next five to 10 years.
Headquartered in Dublin for tax purposes, Sky Aviation Leasing International is an aircraft leasing company focused on providing sale-leaseback financing solutions to airlines for new and young mid-life aircrafts as well as providing capital to the secondary market for aircraft lessors.