As the market had anticipated (see ASR 6/10), several aircraft lease securitizations were either further downgraded or placed on review for downgrade last week. Fitch Ratings took down several classes of Pegasus Aircraft Securitization 1999-1 (PALS I) and Airlines Pass Through Trust, including class A notes in both transactions, downgraded to A+' from AA'. The rating agency removed the AIRPT classes from watch, though PALS I is still under review.

Fitch also downgraded all classes of Aerofreighter Finance Trust.

Meanwhile, Moody's Investors Service, which had only rated the A class notes on the PALS 1999-1 and PALS II, placed both sets of A notes on watch for downgrade.

According to a source familiar with the Pegasus Aviation securitizations, the class Ds have already defaulted. The interest payments made on the C class notes have been covered via deal reserves since October 2001, and the B class notes have been tapping reserves for interest payments since March of this year. At the end of May, the source indicated that there was $2 million left in reserves for C class notes, which would allow for four more months before default, should conditions not improve. At the end of May, there was $7.6 million in reserves for the B class notes, which would allow for 15 months of interest payments, should conditions not improve.

Though certainly not the sole reason for this recent spate of rating actions - as the industry has been under pressure for the some time now - Pegasus Aviation, Airlines Group, and AerCo Limited were all known to have been directly or indirectly impacted when Vanguard Airlines was rejected for a loan guaranty from the Air Transportation Stabilization Board. Vanguard was a major lessee of the Boeing MD-80 family of aircraft, so a financial strain from that particular airline placed downward price pressure on MD-80s and potential delinquent payments on leases.

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