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Aviation experts share their views on the health of the aviation finance market, noting specifically the continued dominance of the capital markets. 

Aviation finance remains a “borrowers’ market”, as banks tussle for deals while airlines and leasing companies benefit from the continued wave of liquidity eager to deploy capital into the sector. 

Bankers report a continued clear deterioration of the general terms and conditions; while this of course applies to margins and fees, is has also spread to advances, balloon amounts and a host of other terms and conditions, including covenants, grace periods, voting rights, information requirements, etc. One banker sees this continuing until the aviation sector “hits a real downturn”, when he predicts that number of debt facilities with such cov-lite features will face difficulties. “Banks need to understand that they have to stay disciplined or else get into serious trouble,” he says. 

Karl Griffin, CEO of Genesis Aviation Capital, says that he focuses on those financial covenants to ensure the maximum flexibility for his assets: “For us in the midlife space, we are focused on those covenants and constraints that exist within our financing facilities to ensure that we can operationally manage the assets to extract or optimise their value with regard to moving engines or extending aircraft or selling aircraft at a particular time. We start off with underlying margins, but it’s not only about the cost of funds – we really focus on those covenants that may restrict our ability to generate the turnaround value for our shareholders.” 

There are signs that margins are beginning to pick up from “surprisingly low levels”, as there is a renewed realisation that there still needs to be a return on capital. 

“In recent months, have seen some pricing stabilisation, and in fact, the Deutsche Bank research team suggests that credit spreads generally in the markets will increase in 2020, that we’re talking generously across the board, and the question is by how much,” says Deutsche Bank’s Moody. “As we go into 2020, we don’t think pricing will see too much further tightening – but don’t forget, you’re coming from a pretty low level anyway. In terms of your actual financing cost for a borrower, they still get competitive funding on an all-in basis given that we are in a low interest rate environment. Remember rates are low as well, and for a lot of these fixed income instruments, it’s the absolute yield they are focused on as opposed to the spread/margin. At the end of the day financiers still need to make a return on their capital and if that can’t be achieved in aviation then that capital will seek an alternative home.” 

The finance environment is similarly competitive for all asset classes. In leverage finance today, there has also been a disappearance of covenants, which has been a lot more pronounced than the aviation market. As Investec’s Narayan explains: “If you look at the corporate lending market, many of those deals all feature covenant-lite balloon debt. I don’t think the aviation market has reached that stage. If you just put the aviation debt on par with general corporate debt, leverage finance, you’ll see that the aviation debt terms are still pretty good and quite secure.” 

Aviation commercial banks have traditionally provided the bulk of the funding requirements for airlines and leasing companies, alongside export credit agency support as well as some customer financing support from the OEMs and some capital market sources. Over the past decade, this mix has shifted, and the level of capital market financing has increased exponentially along with new liquidity provided by a wave of new investors from private equity, insurers and institutional money that have flocked to aviation assets in search of yield. 

James Meyler, CEO of ORIX Aviation, states that as leasing companies have moved more into the unsecured capital markets for their funding needs, the traditional banks have been more eager to regain their business. “The traditional debt market has been crying out for its own growth, and they’ve been finding it difficult to compete against the bond market and the ABS market, for example,” he says. “So, if there is a softening in any of the capital markets and the bond markets, the traditional debt markets are all too willing and ready to step back in to lend more money.” 

As we go into 2020, we don’t think pricing will see too much further tightening – but don’t forget, you’re coming from a pretty low level anyway. In terms of your actual financing cost for a borrower, they still get competitive funding on an all-in basis given that we are in a low interest rate environment.

Richard Moody, Deutsche Bank

Once the upcoming final changes to the Basel IV banking capital requirements regulations – once they have been finalised, this shift towards the capital markets will likely become even more pronounced, putting more pressure on European banks to become more creative with their market offerings. 

“The basis of the Basel risk capital regulation is that, historically, risk weights allocated to asset backed transactions by banks were inadequate to reflect the risk they were taking,” says Deutsche Bank’s Moody. “There is certainly a view taken by regulators in Europe in terms of the European Capital Market Directive to try and generate a more efficient and deeper market, and that longer-term financing should be provided by those institutions that are more efficient in providing this. Although we’re waiting for the rules to be finalised, what we do know is that we are going to be moving towards a capital floor construct that will result in holding higher risk-weighted assets. For banks and in the run up to full implementation, the cost of capital will increase, a likely focus on shorter to medium term financing will prevail, and a smaller balance sheet focused on aviation lending will probably be the result of all of this.” 

Many commercial banks, particularly European aviation and shipping finance banks, are already shifting their business models to prepare for limitations that will be imposed once Basel IV is implemented in 2021. For Deutsche Bank, for example, this means that the bank is now having to be more creative in the way it provides capital to its clients. “Under the current drafting, with the change in regulation, there will be a ratchet on capital floors starting from 2022 to a 72,5% level, but this timing may be moved out. This means that if you are factoring in these changes today when analysing transactions, longer-term deals will be increasingly more penal,” adds Moody. “The transactions that we’ve been involved in today, tend to be shorter-term in nature. The traditional banking model in the industry is to provide 10 or 12 years of secured debt amortising to zero or to a balloon. However, if you apply what we understand the new Basel regulations are for that transaction, it will result in a significant increase in capital. As a result, we’re actually factoring in the implications of the potential Basel changes now to understand the impact on returns and RORWA. For us, it means that medium-term more structured deals work better as we can deploy capital more efficiently.” 

[Basel IV will] wash away the bank’s experience and the banks will actually be incentivised to take far greater risks.

Bertrand Dehouck, BNP Paribas

For non-European banks, the new regulations should bring opportunities as their key competitors reduce their balance sheet capabilities. 

Once the Basel rules are finalised, the aviation market will move even further towards a reliance on institutional money at the expense of banks. The question then is what those future products will look like and how banks will play a part in that overall funding construct. 

“Basel III and IV will have a significant impact on our lending business,” confirms one aviation banker. “Particularly, the Basel IV regulations will penalise secured lending by requiring higher equity ratios and thereby making long-term bank lending considerably more expensive. As such, I foresee banks taking on more of an arranger/underwriter role with a clear focus on placing out the majority of the arranged loans to third parties, including institutional investors.” 

For BNP Paribas’ Dehouck, Basel IV will cause less differentiation between banks, which will completely “wash away the bank’s experience and the banks will actually be incentivised to take far greater risks”. 

While the precise details of the impending regulations remain uncertain, banks have continued to fund their aviation clients, although with a more reduced pipeline than they were expecting due to the MAX grounding. The funding mix for aviation assets tends to be around 30-35% each for bank debt and capital markets funding, with export credit agency (ECA) and other supported financing taking a small 5% share of the market and institutional investors making up approximately 5-10%. Finally, cash accounts for around a quarter of the funding mix. This is expected to remain more or less the same heading into 2020, given that real regulatory change will not come online until 2021 at the very earliest, and and with the real impact more likely to hit in 2024 or 2025. 

Supported finance

Export credit support remained muted in 2019, as the US Export-Import Bank (Eximbank) was effectively muzzled for much of the year. Even though, in May, the bank regained the quorum (that had been lost in 2015) needed to allow the board to approve spending over $10 million, the bank has also had to fight to regain its reauthorisation. However, President Donald Trump signed legislation on 20 December 2019 reauthorising the bank for seven years; this is the longest extension in the agency’s 85-year history, and formed part of the $1.4 trillion spending package that helped avert a potential government shutdown. Bankers expect Eximbank to come back on stream for Boeing aircraft in 2020 – hopefully in time to help support deliveries of the MAX aircraft once it is safely recertified. 

Airbus ECA transactions were also few and far between in 2019, as the manufacturer retains a conservative approach to ECA financing following the SFO-investigations. That dearth of export credit agency-supported deals did however help the growth of other supported financing products. 

Marsh USA’s Aircraft Finance Insurance Consortium (AFIC), which is a syndicate of insurance companies, has supported the financing of approximately $4bn of aircraft assets, including narrowbody, widebody and cargo aircraft for airlines and leasing companies. 

In 2019, AFIC closed its most significant aircraft financings to date and introduced a new Japanese consortium, Japanese AFIC, to support the DBJfunded, Sompo of Japan-fronted, AFIC-supported JOLCO financing for two Boeing 787-9 aircraft for EL AL Israeli Airlines, which was arranged by ABL Aviation. AFIC also supported the French Overseas LODEOM tax lease of two Boeing 787-9s for Air Tahiti Nui, which was awarded the Airline Economics Aviation 100 Asia-Pacific Supported Deal of the Year 2019. AFIC also supported the financing for Carlyle Aviation Securities Partners (CASP) of a Boeing 787-9 aircraft for Norwegian, which was funded by seven Japanese regional banks. 

Basel III and IV will have a significant impact on our lending business. Particularly, the Basel IV regulations will penalise secured lending by requiring higher equity ratios and thereby making long-term bank lending considerably more expensive. As such, I foresee banks taking on more of an arranger/ underwriter role with a clear focus on placing out the majority of the arranged loans to third parties, including institutional investors.

Senior aviation banker

A similar insurance backed consortium for Airbus aircraft, Project Balthazar, also closed its first deal in 2019 using a 12-year, dual-currency, Balthazar French Lease for five new A321NEO aircraft delivered to Turkish Airlines, arranged and funded by BNP Paribas. 

A further insurance-supported structure will be launched in 2020 by BGC Insurance Group (BGCI), which created its new global aviation and space (re)insurance brokerage in June 2019. Bruce Fine joined the company in September 2019 as managing partner for US Aviation and Aerospace as well as president of its Aviation Industry Financial Solutions Division. Fine was previously the global leader of the team at Marsh that devised AFIC in 2017. Moreover, after a long career at Boeing Capital, Kostya Zolotusky has joined the BGC Aviation Industry Financial Solutions Division, which is working on a set of credible aviation financing products backed by insurance guarantees to offer alternative sources of financing for airlines and aircraft operators. Rather than focusing only on new aircraft, this new venture will assess midlife aircraft, as well as looking at products like pre-delivery payments and mezzanine debt, along with aviation assets such as engines, spare parts, and maintenance reserves. 

Outside of insurance-backed products, Aviation Capital Group established its own supported-finance division, Aircraft Financing Solution (AFS). In August 2019, AFS structured, arranged, and provided a guarantee of a senior secured loan by Apple Bank to finance a portion of the purchase price of one Airbus A350-1000 aircraft delivered to Virgin Atlantic Airways. Rand Merchant Bank, through FirstRand Bank (London Branch) (RMB), provided a subordinated secured loan for a portion of the remainder of the aircraft purchase price. 

“There are several firsts for the AFS program connected with this transaction,” said Robert Lewandowski, managing director of ACG, at the time the deal closed. “This is the first Airbus aircraft to be funded through the AFS program, and Virgin Atlantic is a new customer for ACG. In addition, this is the first AFS transaction that included a subordinated loan in the structure. Together with the cooperation and hard work of Virgin Atlantic, Apple Bank, RMB and all the transaction participants, the AFS team was able to successfully structure and arrange this financing in a way that addressed everyone’s needs.” 

Japanese equity

Since only very few rated airlines are able to access the public bond markets, most aircraft will be financed with secured loans, supported debt or other taxefficient products. The most popular and available low-cost equity structures in the aviation market today are Japanese Operating Leases with Call Option (JOLCOs) and French Tax Leases. 

The JOL and JOLCO market has matured substantially over the past few years. The negative interest rate environment in Japan has contributed to the demand for dollar denominated, tax-efficient investment products. Over a period of about five years, the JOL and JOLCO market has more than doubled in size as investors clamour for aviation lease deals that deliver very attractive returns compared to what investors would earn on any deposits or other investments that are available in Japan. For airlines, JOLCO products provide 100% finance at very competitive rates, while the JOL operating lease has a value risk that is also very competitive. 

ORIX Aviation is an investor-focused leasing company where most of its clients are the top 40 credit airlines in the world, which means they are suitable for the Japanese operating lease market. ORIX has sold over 50 aircraft this year, half of which have been sold to the Japanese market. Being such an active player, CEO James Meyler has observed a noticeable increase in demand for the operating lease product in Japan. “The JOL market has matured and developed. Historically, it was more JOLCO products, so a finance lease with a purchase option, very much kind of a quasi-lease – essentially, the investors were less comfortable with the metal and the leasing environment. However, many new players are now looking at the operating lease space on the JOL side and are getting comfortable with the product. Aviation is very stable and dollar assets are very attractive to many Japanese. We’ve seen this proliferation of investors that are not coming for the tax benefits, they’re actually coming because they like operating leasing the dollar assets and the return they’re getting. If there are some tax benefits available as well that’s on top but it’s not the primary driver that it was maybe 10-plus years ago.” 

The JOL market has matured and developed. Historically, it was more JOLCO products, so a finance lease with a purchase option, very much kind of a quasilease – essentially, the investors were less comfortable with the metal and the leasing environment.

James Meyler, ORIX Aviation

Japanese investors are also becoming less stringent regarding the airline credits in which they are willing to invest. Ten years ago, only the top rated, tier one airlines had access to the market. Today, as investors become more educated and gain experience with different airlines, different products and the broader market, they have become more receptive to other names such as Aeroméxico and Pegasus, for example. Industry experts believe that the market will continue to go from strength to strength with much more competition. The change in Japanese law in 2019 requires lenders to book the majority of the debt in Japan. Although there are still concerns that the debt capacity in Japan will be insufficient to serve demand, this does not seem to have curtailed deals so far. In fact, many arrangers have become more creative when syndicating debt in Japan, finding new players eager to enter this market for the first time. 

While players such as ORIX Aviation, SMBC Aviation Capital and FPG Amentum have been very active in this space for many years, there has also been a flurry of new entrants. In November 2018, ABL Aviation formed a partnership with SBI Group to offer aircraft investment opportunities to Japanese investors using JOL and JOLCO products. ABL is able to leverage SBI’s debt capacity in Japan to secure deals. A major transaction for ABL Aviation with SBI in July 2019 was the AFIC-supported JOLCO for EL AL Israeli Airlines, which Airline Economics dubbed the “Jerusalem JOLCO”. 

“This 100 percent Japanese deal was very attractive to the market in Japan,” says Ben Lmadani. “The debt and equity were Japanese and the AFIC insurance was fronted by a Japanese insurance company. The fact that this was all Japanese meant the bank was able to sell more than 50% to the Japanese local banks within a few months.” 

Combining a JOLCO with insurancebacked debt gave the deal a higher loan-to-value ratio, providing a more competitive product in the crowded Japanese market. “In the last few years, exactly the same JOLCO products are being sold again and again in the market. Having a more innovative JOLCO structure is more appealing to the Asian banks. They don’t want to just invest in debt,” adds Ben Lmadani. 

In November 2019, ABL Aviation followed up this deal with another JOLCO for EL AL with $125 million financing for one 787-8, this time combined with UK Export Finance (UKEF)-supported debt provided by ING. 

Innovation is another way to improve returns for investors. In a crowded market, returns for lenders have been falling, even though they are very attractive for airline customers since because they are so thinly priced. 

Bank of China’s Fiscel believes that the strain on Japanese bank debt capacity, along with the huge pipeline for JOL and JOLCO deals, could cause pricing to tick upwards. “Japanese players are strong lenders in aviation and many of the other key players including Bank of China have a Tokyo office. The question is whether the increasing pipeline of JOL and JOLCO transactions can be solely absorbed by financial institutions booking in Japan. We could start seeing re-pricing on both the debt and the equity sides, with lower returns going back to airlines or lessors so that the equity investors can absorb the tax cost associated with the booking of a significant share of the loan outside Japan.” 

The one factor that could quickly curtail the Japanese market is any further change in tax regulation. Changes in tax laws almost always have a dramatic effect on tax-efficient financing structures, as was seen over the past 20 years in aviation finance with the loss of the US leverage lease, the German KG product and others. However, a downturn will also impact this market first since the investors are very conservative; in the words of one airline treasurer, “Japanese investors all run for cover as soon as you start making a loss”. 

In the last few years, exactly the same JOLCO products are being sold again and again in the market. Having a more innovative JOLCO structure is more appealing to the Asian banks. They don’t want to just invest in debt.

Ali Ben Lmadani, ABL Aviatiom

Secure versus unsecured lending

Over the past few years, the shift from secured to unsecured lending has increased significantly. Financiers expect this trend to continue, especially since more and more aircraft leasing companies are achieving an investment grade rating, making capital markets funding in particular much more attractive (this issue is discussed in more detail in the lessor section earlier in this report). For leasing companies, a ratio of 80% unsecured debt to around 20% secured debt is preferable to enabled it to gain a higher, IG rating. 

The benefits of investment grade credit ratings are clear, but the process of achieving them can be a long and laborious one. However, as Aircastle’s Inglese explains: “We started with 100% secured debt in the first four or five years of our existence. With the global financial crisis, many traditional aviation banks pulled back completely from lending against mid-age aircraft. All they would finance were brand new planes. Before the crisis, we had a portfolio of roughly $4 billion that was funded in the secured market and in the ABS market. We started to see great investment opportunities, but nobody was willing to lend. We decided to take our precrisis track record and balance sheet to the rating agencies and secured ratings of BB+ from both Moody’s and S&P. We entered the unsecured debt market in the US in 2010, and our initial offering was extremely pricey: effectively a 10% yield for $300 million. At the time we were investing in aircraft with 15% levered returns. We believed if we could build the unencumbered asset base and become a repeat issuer in the unsecured market, we’d be able to meaningfully drive our funding costs down. It took a while, but ultimately with that transformation, we became effectively 80% unsecured, 20% secured. We were upgraded in the spring of 2018 to BBB- and equivalent from Fitch, Moody’s and S&P, and that’s enabled us to continue to drive down the cost of debt.” 

DAE Capital is still on the IG journey, but remains focused. “When we acquired AWAS two and a half years ago, both companies were secured funders, and in the investment grade metric, having a large portion of your balance sheet funded with unsecured debt is key,” says Tarapore. “So, we embarked on that very conscious journey. We met all of those quantitative criteria not too long ago, and now we’re qualitatively figuring out what the next steps should be. Getting there sooner rather than later is an essential priority from our perspective.” 

Although the 80:20 ratio of unsecured to secured debt is the one used as a benchmark by many in the industry, the rating agencies take a more complex view on whether a company warrants the IG rating. “We don’t have a specific number that we go by,” says Marjan Riggi, senior managing director at Kroll Bond Rating Agency (KBRA). “The ratio of unencumbered assets to total assets isn’t the only measure since a company may not have that much unsecured debt; it’s really the senior unsecured debt volume that matters. For us, that’s a much more important ratio. But we also look carefully at each businesses model that all have a different dynamic. If a leasing company only does sale-leasebacks, it’s okay to have a secured portfolio, because those deals are all match funded. If you don’t have a lot of unsecured debt, it doesn’t really matter, and you have a lot more flexibility in these match-funded debts; so, in a liquidity crisis, you don’t have to worry about it because you don’t have big bullets coming in. For aircraft leasing companies that have orderbooks, it’s even more important, since they need to be stronger because they have a lot of PDP liabilities.” 

Capital markets

On the secured side of the aviation capital markets, as in 2018, 2019 was a major year for asset backed securitisation (ABS) transactions, with fewer enhanced equipment trust certificate (EETC) deals coming to the market. 

The aviation ABS product has become far much more commoditised over recent years, while the introduction of the tradeable equity portion – the E Note – has allowed many more ABS portfolio sales to come to market as the struggle to find an equity buyer has eased somewhat. The ABS product is also still being widely used by lessors as well as being an efficient form of refinancing. Indeed, as well as new issuers coming to the market, 2019 also saw a number of older ABS deals being refinanced back into the ABS market. In 2019, 18 ABS deals were closed, with a total value of $9.87bn.

The ratio of unencumbered assets to total assets isn’t the only measure since a company may not have that much unsecured debt; it’s really the senior unsecured debt volume that matters. For us, that’s a much more important ratio.

Marjan Riggi, KBRA

GECAS, BBAM and Carlyle Aviation Partners each came to the ABS market twice in 2019. GECAS was the largest issuer with two STARR deals totalling $1.020bn, while BBAM’s two Horizon deals reached a total of $925 million. Moreover, Carlyle’s ASSET programme in 2019 reached a total value of $895 million. Other regular issuers such as Castlelake, ALC’s Thunderbolt series, DAE Capital, Global Jet Capital and Wings Capital, also came to market with notable deals in the past 12 months. New issuers also dipped into the ABS market for the first time with noteworthy deals, including ACG with its inaugural MACH ABS brand that brought in Korean equity and achieved the lowest blended yield on A and B tranches on any aviation ABS portfolio sale – A at 3.5% for five-year WAL bond, and B at 4.375% for five-year WAL bond. Stratos and JP Lease also stunned the market with their innovative JOL Air 2019-1 ABS, which brought in Japanese equity via the JOLCO market for the first time in this structure. 

Other first-time issuers in 2019include Airborne Capital and Stellwagen, which closed their inaugural ABS transactions in the fourth quarter. Airborne Capital’s $637 million Tailwind 2019-1 ABS, which was secured on a portfolio of 17 aircraft, comprised three tranches of notes. Airborne purchased at least 10% of the equity certificates supporting the E Note issued by Tailwind 2019-1. The deal was led by Deutsche Bank, Mizuho and Credit Agricole-CIB as joint lead structuring agents and joint lead bookrunners. 

Stellwagen’s ABS, the $726 million Raptor Aircraft Finance I, was secured on a portfolio of 19 aircraft, comprising three series of notes. Seraph Aviation Management was the servicer, while Stellwagen Group was the administrative agent. Lead bookrunners were Deutsche Bank, BNP Paribas and Standard Chartered. 

GECAS, BBAM and Carlyle Aviation Partners each came to the ABS market twice in 2019. GECAS was the largest issuer with two STARR deals totalling $1.020bn, while BBAM’s two Horizon deals reached a total of $925 million. Moreover, Carlyle’s ASSET programme in 2019 reached a total value of $895 million. Other regular issuers such as Castlelake, ALC’s Thunderbolt series, DAE Capital, Global Jet Capital and Wings Capital, also came to market with notable deals in the past 12 months. New issuers also dipped into the ABS market for the first time with noteworthy deals, including ACG with its inaugural MACH ABS brand that brought in Korean equity and achieved the lowest blended yield on A and B tranches on any aviation ABS portfolio sale – A at 3.5% for five-yearWAL bond, and B at 4.375% for five-year WAL bond. Stratos and JP Lease also stunned the market with their innovative JOL Air 2019-1 ABS, which brought in Japanese equity via the JOLCO market for the first time in this structure. 

Other first-time issuers in 2019include Airborne Capital and Stellwagen, which closed their inaugural ABS transactions in the fourth quarter. Airborne Capital’s $637 million Tailwind 2019-1 ABS, which was secured on a portfolio of 17 aircraft, comprised three tranches of notes. Airborne purchased at least 10% of the equity certificates supporting the E Note issued by Tailwind 2019-1. The deal was led by Deutsche Bank, Mizuho and Credit Agricole-CIB as joint lead structuring agents and joint lead bookrunners. 

Stellwagen’s ABS, the $726 million Raptor Aircraft Finance I, was secured on a portfolio of 19 aircraft, comprising three series of notes. Seraph Aviation Management was the servicer, while Stellwagen Group was the administrative agent. Lead bookrunners were Deutsche Bank, BNP Paribas and Standard Chartered. 

The ABS market continued its year-over-year growth in 2019 and we expect the same trend to continue in 2020 as investors become more comfortable with the asset class. The majority of capital continues to come from developed markets, e.g. US and Europe, however Asian investors are becoming a growing presence and we would expect to see more capital come from this region as investors gain more comfort and experience with the product.

David Butler, Stellwagen

“The Stellwagen Group closed our first ABS transaction under the name of Raptor,” says David Butler, chief executive officer of Stellwagen. “In terms of looking forward, the ABS market continued its year-over-year growth in 2019 and we expect the same trend to continue in 2020 as investors become more comfortable with the asset class. The majority of capital continues to come from developed markets, e.g. US and Europe, however Asian investors are becoming a growing presence and we would expect to see more capital come from this region as investors gain more comfort and experience with the product.”

He adds: “Stellwagen intends to be a repeat ABS issuer, the execution of Raptor 1 was a major milestone for Stellwagen and we are pleased with the overwhelming support from Institutional partners on the execution of this transaction and validation of our platform.” 

CALC Group has also participated in the ABS market, albeit in China. “We launched the first ABS product in Shanghai Stock Exchange two years ago,” says CEO Mike Poon, who notes that the company continues to monitor the global ABS market. “The global ABS market is a growing, mature market. I have no doubt that ABS will continue to be a key funding source for lessors and other players in this industry. I look forward to seeing more ABS deals in China.” 

The tradeable E Note structure gained in popularity in 2019 and also continued to evolve. BBAM’s Horizon Aircraft Finance III $541 million ABS was the first-ever 144A aircraft equity Dutch-auction process with streamlined bidding, as well as the first-ever noanchor equity portfolio sale. The deal also achieved the lowest yield on Class A tranches on any aviation ABS portfolio sale – Class A at 3.45% for five-year WAL bond. 

Ruth Kelly, CEO of Goshawk, which closed its Pioneer ABS with a tradeable E Note structure in 2019, comments that the ABS vehicle is an essential part of its toolkit as a major trader of aircraft. “We trade aircraft all the time and the ABS product is a good vehicle for that. It gives investors access to aircraft leasing without needing a stand-alone platform. It allows us to maintain the servicing of the aircraft, achieve our objectives around portfolio management, and earn servicing fees. For our ABS transaction in 2019, Pioneer I, we were really happy with market engagement, the product worked and the deal closed very quickly. We expect the ABS product to be utilised generally in the market for years to come.” 

The jury is still out on the efficacy of the tradeable E Note market, which is still in its infancy. For SKY Leasing’s Austin Wiley, the debate over whether these E Notes are genuinely liquid misses the point. “Ultimately, this structure gives investors access to diversified pools of assets at a much lower overall ticket size. There is a lot of talk about if these E Notes are really liquid. What really matters is that these buyers can buy $5 and $10 million equity slices in a diversified portfolio of assets, whereas four or five years ago, if you were going to buy an ABS E Note, the ticket sizes were $80 to $120 million, which is a completely different investor profile. The tradable E Note market will continue to grow. I think the investment banks will be successful in getting CLO buyers and other structured product buyers into this asset class, and that’s ultimately good for the stability of these assets, and certainly for midlife aircraft.” 

Despite its evident popularity, not all lessors are convinced of the benefits of the ABS product. AerCap CEO Kelly has not tapped the ABS since 2008 because he doesn’t see the value in effectively renting out his valuable franchise. 

We were really happy with engagement with the market, with the product and the fact that the deal closed very quickly. We trade aircraft all the time and the ABS product is a good vehicle for trading, because it allows us to maintain the servicing of the aircraft; it’s good in terms of servicing fees and it helps us to achieve our objectives around portfolio management as well.

Ruth Kelly, Goshawk

“We’re always looking at the ABS market because we’re keenly aware that many of the 540 airplanes we have sold in the last five years end up in the ABS market,” says Kelly. “For every portfolio we sell, we model it against the ABS market. On average, about 44% of what we sell is widebodies. The ABS market hasn’t fully evolved for those aircraft types in large quantities. We feel that overall, we can better achieve our portfolio objectives over the longer term with outright sales rather than cherry-picking assets for the ABS market. AerCap is the best platform in the business. It’s the most active platform and the most capable platform. We’re light-years ahead of anyone else and we are not willing to rent it out on the cheap. In the ABS, the fees, on top of the waterfall, you get 3, maybe 3.5% lease revenue, but then your next fee is way down the waterfall with the equity and whether you’ll get that or not over the life is unknown. I should be doing a lot better if I’m using my platform than 3.5% lease revenue as my pre-tax margin.” 

Although AerCap appreciates that the ABS market is an excellent and efficient market, for his franchise, more innovative transactions such as the company’s strategic partnership with Saudi bank NCB Capital make more sense. AerCap’s second deal with NCBS was financed through a $500 million Shariah-compliant non-recourse revolving warehouse facility, with a two-year availability period and a fiveyear tenor, which is the first of its kind. Citi and BNP Paribas co-underwrote the warehouse Murabaha facility for a structure managed by NCB Capital initially used to finance the acquisition of a large seed aircraft portfolio from AerCap. 

AerCap’s Kelly says: “This deal opened up a new equity investment market to us out of Saudi Arabia and they are the key player in that market. So, it was a different transaction to an ABS where you do one you’re done. This deal is repeatable.” 

There are some concerns that there is an oversupply of ABS deals, with many in the fourth quarter of 2019 coming to the market around the same time. However, all of the deals that came to market have closed successfully, even if some took a little longer than expected. The majority of industry experts that participated in this report do not expect ABS issuance to reduce in 2020; in fact, upon analysis of the first quarter 2020 pipeline, the annual issuance is expected to be on par with 2019. There are signs that investors are becoming more discerning about the servicers on the ABS transactions that they choose to invest in. This is simply good practice and possibly also the result of investors becoming more experienced with the aviation industry and ABS product. The bankruptcies in 2019 have impacted some ABS transactions; for now, however, those events have given the servicers the stage to display their remarketing skills, although this has been helped again by the buoyant leasing market, distorted as it is by the MAX grounding (as previously discussed). 

“The whole idea behind an ABS is diversity,” says Carlyle Aviation Partners CEO, Robert Korn. “An investor has some exposure and there’s so much continuing cash flow from that pool that it should continue to remain healthy. It’s only when a significant amount of assets in a pool go bad that things start to unravel. I don’t know of an ABS vehicle that is struggling to continue to service the assets in the marketplace. I do think [the increased number of bankruptcies] raises the point of whether all of the ABSs are managed equally by different servicers. We certainly have a strong opinion about our capabilities as a servicer ,and we’ve been very much a repeat issuer. Investors are aware of differences in managers, and investors are very much aware of differences in portfolio composition.” 

Moreover, Castlelake’s Carruthers says: “We do see more differentiation across the spectrum of servicers, and so the bar is set higher for smaller sub-scale servicers to issue in the ABS market. Perhaps they can get the debt placed but they can’t sell equity, as an example. We do see that trend continuing. There’s also a more cautious approach today towards the pools of airplanes that are getting securitised. There is a heightened sense of scepticism around the credit risk inherent in the portfolios and the concentrations on widebody airplanes that is creating a more challenging environment for the issuers. The E certificate market is still fairly thin and is therefore much more susceptible to weakening or shutting down than the debt market. The debt market is just deeper; there are more institutional players that are comfortable and willing to continue pooling debt capital than there are those willing to pool equity.” 

On average, about 44% of what we sell is widebodies. The ABS market hasn’t fully evolved for those aircraft types in large quantities. We feel that overall, we can better achieve our portfolio objectives over the longer term with outright sales rather than cherry-picking assets for the ABS market. AerCap is the best platform in the business. It’s the most active platform and the most capable platform. We’re light-years ahead of anyone else and we are not willing to rent it out on the cheap.

Aengus Kelly, AerCap

With headwinds building, the more cautious industry players are wary that in an economic downturn, the capital markets are often the first to weaken and can even close down completely, usually without warning. 

“Capital markets have windows of opportunity that open widely and can sometimes close down altogether,” warns Fiscel. “I believe it’s always important to keep a fine balance between banking and capital markets. The banking market remains strong in Asia and Europe, although certain banks in the latter have lately been more active in structuring and distributing, rather than balance sheet financing. However, with a potentially fading investor appetite, those very experienced banks may start using more of their balance sheet resources, for the right returns.” 

Although there were few EETCs that closed in 2019, those that did come to market received unprecedented pricing due to the low interest rate environment and the dearth of airline paper. 

JetBlue Airways’ $772 million 2019- 1 EETC, secured on a portfolio of 25 A321NEO aircraft, was the airline’s first issuance in this market since 2004; and as such, investor demand for a new name was high. JetBlue was able to secure pricing at 2.75% on the AA notes at T+95bps and 2.95% on the A notes at T+121bps due to significant oversubscription on both tranches. Citi and Goldman Sachs were joint structuring agents and lead active bookrunners with Morgan Stanley and Barclays. A further notable feature of this EETC structure is that Citi was able to optimise the issuance LTV to achieve 46.5% on the class AA notes compared to 37-42% on comparable airline EETC deals. The bank was also able to optimise the amortisation profile with a blended 8.5-year WAL on the class AA and A notes. 

British Airways returned to the EETC market in 2019 – and remains one of only three non-US EETC issuers to date. The UK flag carrier priced its $806 million Series 2019-1 EETC on July 15, 2019, secured on a portfolio of eight Airbus aircraft – seven A350-100s and one A320NEO – which combined EETC debt financings with JOLCO tax equity and allowed the airline to raise additional funds at a lower financing cost compared to US EETC issuers. Oversubscription allowed for pricing on the AA notes of 3.30% and 3.35% on the A notes, which resulted in a blended coupon of 3.311%. 

Secured and unsecured bond issuances also continued to be a strong market in 2019. Aside from the usual jumbo issuances from the major leasing companies – AerCap and ALC, with its new MTN programme – TAP Portugal also came to market for the first time with a €375 million senior unsecured bond. After a troubled few years, the airline was privatised in 2015 by a consortium led by David Neeleman and Humberto Manuel dos Santos Pedrosa. Subsequent strong operational performance, allowed the airline to come to the market to offer €300 million in five-year senior notes at 5.625%. Demand for that paper allowed pricing to be tightened from the initial 5.875 area and the issuance to be upsized to €375 million. 

Looking at the financing market in 2019, debt and equity investors remain eager to deploy capital into the aviation sector. Although there are no definitive signs that the status quo will change significantly heading into 2020, the headwinds remain, and the markets remains at the mercy of economic and indeed geopolitical events that could alter that trajectory in a heartbeat. Savvy issuers and investors are becoming more discerning regarding airline and servicer credit quality and track record, which is expected to continue to build as the year progresses. 

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