Aircraft Lease ABS Takes Off

Lease securitization has the potential to plug a yawning financing gap for non-U.S. airlines. With European banks, traditionally their biggest source of capital, less inclined to lend, these carriers are increasingly looking at options for leasing aircraft, rather than purchasing them outright.

That in turn, is prompting leasing companies to test investor appetite for deals that, before the financial crisis, came with an insurance wrap and  did not require them to do their homework.

In January, Goldman Sachs led the first post-crisis aircraft lease securitization, a $650.35 million deal for General Electric Capital Corp. Bankers at the firm says that there could be another five to 10 deals in the works from leasing companies that were waiting for a firm of GE’s caliber to test the waters.

Another option for financing aircraft is enhanced equipment trust certificates (EETCs), securities that are backed both by aircraft and by the credits of the owner of the aircraft. EETCs are offered under a special provision of the U.S. Bankruptcy Code, Section 1110.

Goldman also has the bragging rights for completing the first international EETC issued by a non- U.S. airline into the U.S. debt capital markets.

“There is a broad-based shift in the space,” said Greg Lee, the head of Goldman’s trade, transport and infrastructure finance group. “We are seeing a large amount of activity in EETCs in lease financing.”

Lee said that before the financial crisis, these airlines had access to cheaper and attractive financing options from European banks, in particular the German Landesbanks. Today, many of the banks that did aviation financing have left the business, and the lending capacity of the remaining banks has also decreased.

The $650.35 million AABS Limited Asset Backed Secured Term Loan is backed by lease payments and sale proceeds of a portfolio of 26 narrow body commercial aircraft manufactured by Airbus and Boeing. The portfolio was acquired by the trust issuing the notes, AABS, from General Electric Capital Corp. and is serviced by GE Capital Aviation Services (GECAS). The servicer is responsible for ongoing leasing activities, including remarketing and servicing of new leases, procuring maintenance and disposition of the aircraft, as directed by the board of AABS.

The deal consists of two tranches. A $557.01 million Series A tranche is rated ‘A’ by Fitch Ratings and ‘A+’ by Standard & Poor’s and a $93.34 million Series B tranche is rated ‘BBB’ by both Fitch and S&P.

The deal has some unusual features.  Michael Millette, managing director of the structured finance business in Goldman’s finance group, said that the deal was structured as an ABS transaction but, at issuance, was a term loan.

Millette said that the deal was sold this way in order to meet GE’s timing objective. The structure also helped the issuer to attract a new investor base of institutions that preferred loans. At the same time, the structure didn’t entirely put off securities investors, he said, as the transaction was over subscribed. 

Hylton Heard, a Fitch analyst who worked on the deal, said that because it was issued as a term loan, it was not a typical ABS transaction, but the agency still applied its operating lease securitization criteria to the deal. Fitch’s criteria centers on determining the amount of cash expected to be generated by a pool of assets under base-case and stress-case scenarios.

Assumed asset cash flows for each rating scenario are applied to the liability structure of the transaction to determine if they are sufficient to repay the associated debt in full in accordance with the terms of the transaction documents.

“The deal has some features that are applicable to secured term loan facilities,” said Heard. “But it’s still a loan that is backed by the operating leases and the aircraft itself.”

Compared to two transactions that the ratings agency last rated in 2007, Heard said that the AABS deal had LTV levels that are similar to and typical of what was sees in those securitization deals. The deals, Babcock & Brown Air Funding I, Series 2007-1 and Aircraft Lease Securitization Limited, Series 2007-1 were issued with LTV levels of 58% and 78.6% respectively. AABS was issued with LTC levels of 60% for the class A loans and 70% for the class B loans.