Wells: Aircraft lease ABS deals remain insulated from COVID-19 impact
The escalation of the coronavirus outbreak into pandemic status, as well as the newly enacted European air travel restrictions imposed by the U.S. on Wednesday, will impact some global airlines’ bottom line – but aircraft lease securitizations remain well shielded from potential losses in the near term, according to Wells Fargo ABS research.
In a report issued Thursday, Wells Fargo analysts reported that senior bonds in aircraft-lease securitizations “can withstand most haircuts to lease cash flows” because of built-in deal protections such as cash-trapping features triggered by declines in debt-service coverage ratios or individual aircraft values.
In addition, such cash diversion efforts would not happen in the near-term because DSCR figures are frequently calculated using trailing six-month figures – “meaning DSCR triggers are not in immediate peril,” the report stated.
(In such events, excess cash flow from lease receivables and commercial passenger aircraft sales are diverted from equity to reserve accounts to the benefit of senior bondholders.)
In its report, Wells Fargo says any cash flow stress in aircraft lease ABS deals will likely begin this month for lessors with exposure to Asia Pacific airlines that may enact lease-payment deferrals. The bank also plans to watch carefully for any deferment of maintenance payments, as well as any “uptick” in off-lease aircraft that smaller airlines might return from the Pan Asia region.
But those off-lease returns, like cash trapping triggers, are also likely to be lagging indicators, the report said, since “many utilization tests do not label an aircraft as ‘off-lease’ until the aircraft is off-lease for 90 days.”
Since the December coronavirus outbreak, analysts have warned that aircraft lessors may face future stress should the COVID-19 outbreak elevate into a pandemic, which the World Health Organization declared on Wednesday.