Willis Lease Finance is returning to the securitization market for the first time in five years with $335.7 million of notes secured by leases for 56 aircraft engines, according to a presale report by Fitch Ratings.
The transaction, Willis Engine Structured Trust III, has structural features not found in the prior deal, completed in 2012, that Fitch describes as positive for all noteholders. These include “turbo” features for excess proceeds and debt service coverage ratio (DSCR) triggers for cash traps and rapid amortization.
As a result, Fitch is assigning both an A to the $293.7 million of senior notes and a BBB to the $42 million in subordinate notes. By comparison, Fitch only rated the senior notes of the 2012 deal.
Both tranches pay fixed rates of interest and have an expected maturity of July 2027 and a legal maturity of July 2042.
Bank of America Merrill Lynch, MUFG Securities Americas, Wells Fargo Securities and BNP Paribas Securities are the joint bookrunners.
Fitch describes the quality of the collateral supporting the notes as “strong.” More than 80% of the engines support Boeing 737’s and Airbus 320’s, the most popular narrowbody aircraft in the world. In Willis’ previous securitization, these types of engines only accounted for 66.9% of the total pool. Fitch deems the increased concentration of narrowbody aircraft engines in the transaction as “positive.”
However, Fitch noted that the engines are not compatible with the latest models of both aircraft and may decline in value over the long-term, posing some degree of technological risk.
Although popular airlines such as Southwest, Delta, and American Airlines are leasing some of the engines in the pool, the majority of the 27 lessees are either unrated or have speculative-grade credits. In its ratings process, Fitch assumed a ‘B’ issuer default rating for all non-rated lessees.
Furthermore, the geographic distribution of the lessees poses some geopolitical risk. Besides the U.S., the top two countries leasing engines in the pool are Argentina (11.3%) and Brazil (7.4%), both of which have stagnant or recessionary economies and are prone to political upheaval. Fitch also noted that 6.8% of the pool is concentrated in Middle Eastern countries, where political turmoil in Syria and elsewhere has impacted demand. Lastly, 4.3% of the pool is concentrated in Russia, which has experienced increased sanctions for their annexation of Crimea, involvement in Syria, and alleged interference in the recent US election.
Headquartered in California, Willis Lease Finance leases aircraft engines in the short and long term and provides management services for third parties. Its portfolio of owned engines is valued at $1.4 billion and is operated by approximately 97 lessees in 56 different countries.