Editor's note: This is the ninth in a series of 10 articles revisiting some of our most-read stories of the past year.
A pickup in aircraft lease securitization over the past couple of years has created a virtuous circle. The higher volumes attracting incremental investors who realize there is not only an attractive yield but sufficient scale; this, in turn, brings down funding costs, attracting still more issuers.
Global Jet, a lessor founded in 2014 by several veterans of GE Capital Corp. and backed heavyweights such as the Carlyle Group and the Blackstone Group, attempted to take advantage of this dynamic when it launched its inaugural deal in September. The transaction was backed by a portfolio of 181 business jets it acquired from GE Capital two years ago. Kroll Bond Rating Agency assigned preliminary A ratings to the senior tranches of notes to be issued.
A couple of weeks later Fitch Ratings, which was not asked to rate the transaction, published an unsolicited report saying that the notes did not merit an investment-grade rating.
It was a rare example of a rating agency calling out a competitor, and it apparently prompted a number of investors to take a closer look.
Fitch said the transaction “fell short” of standards that it normally requires for either an A or BBB rating on corporate aircraft lease securitizations and “exposes investors to multiple risks including performance volatility of the underlying asset, transaction structural risks and lack of sufficient credit enhancement, and a servicer with a limited track record.”
The rating agency also noted that the six classes of notes to be issued do not begin repaying principal until two years from the transaction's close.
Exacerbating the deal structure concerns, Fitch wrote, was the “heavy reliance” on the two-year-old GFJ as the servicer. Kroll's presale report lauded GJC for bringing along an experienced aviation lease management team that oversaw the $2 billion portfolio of aircraft at GE Capital after it completed its acquisition.
But Fitch said Global Jet itself “has limited operating history, particularly in the releasing of aircraft in regions outside the U.S.”
Moreover, the deal allows Global Jet to add additional collateral, which could expose investors to “lower credit quality obligors” and “weaker jurisdictions” in volatile and undeveloped markets in the Asia-Pacific and African regions. “GJC has very limited historical operating history adding to the complexity of servicing aircraft in these regions,” Fitch's report stated.
The deal also does not account for potential macroeconomic volatility that could impact aircraft asset values and recovery rates, according to Fitch.
In its presale report, KBRA acknowledged that there has been volatility in business-jet values in recent years, and that the less-frequent use of corporate jets vs. commercial jets makes it a niche leasing area requiring unique remarketing and reconfiguration strategies to find new obligors among a limited number of users.