12/05/2019

GECAS' second tradable E-note aircraft ABS

GECAS' second tradable E-note aircraft ABS

GECAS has closed its fifteenth asset-backed securitisation (ABS) backed by narrowbody leased aircraft - STARR 2019-1 and the second to involve a tradable equity note (E-note). 

START 2018-1, also known as STARR I, is a $586.9 million aircraft ABS that allowed multiple investors to buy, and then trade, smaller allocations of the E-note. By holding the E-note in a special purpose vehicle the E-note holder was able to issue 144A equity certificates to several investors which could then be cleared through DTC and traded. As in the last deal, STARR 2019-1 also used an independent asset manager, OZ Management.

Trevor Ricards, senior vice president, and head of GECAS US capital markets group explains that STARR II structured its financing to be exactly the same as STARR I.

Ishka understands that STARR II was oversubscribed approximately 2.7 times on the A notes and 4/ 5 times oversubscribed in the C notes and the E-note.  Based on the appraisers' views and valuations used in the deal the E-note in STARR II offers investors an IRR return of 17.5%. In comparison the E-note in STARR I offered IRR returns closer to 18%. 

“We’ve come a long way from STARR I to STARR II in terms of our reception in the market” explains Kumar Velayudham, a managing director at OZ Management, who confirms the deal was oversubscribed “across the whole stack”. 

The ABS issued by START II Ltd and START II USA LL (STARR II) acquired 20 narrowbody aircraft from GECAS with an average aircraft age of less than six years. The deal is split between three series of debt notes as well as an E-note with GECAS acting as the servicer for the transaction and OZ management as the senior asset manager.

KBRA, which rated the deal, viewed the average long-term lease rate and the relatively young portfolio as a credit positive but noted that 8 out of the 13 lessees (approximately 73.7% by value) are from emerging market countries.

 


Changes from START 2018-1


As in START 2018-1 OZ Management (OZ) serves as the asset manager for STARR 2019-1. Ricards describes OZ’s role as both an investor in STARR II,  and managing the “investor relations platform” on behalf of the buyer. Specifically, the firm provided regular updates to the Intex model and offered the buyer's investors detailed monthly, quarterly, and annual reports covering portfolio changes and updates on individual airline credits in the portfolio.  

OZ was also again a direct investor in the e-note through its LP. Ishka understands that the firm took approximately 20% stake in the E-note while KBRA notes that an affiliate of GECAS will also be acquiring a small minority percentage of the equity in STARR II.

Ishka notes that STARR 2019-1 included some changes from the earlier deal. Under STARR II, OZ Management’s senior fee was reduced and placed lower in the waterfall. OZ’s senior fee has decreased from 0.200% to 0.175% while the subordinated fee has been increased from 0.150% to 0.175% and gets paid after the B notes’ principal. The total fee (0.350%) remains the same. Ricards states that the new deal involved some “cosmetic differences” but essentially is the same as the previous transaction.  OZ and the buyer made a couple of enhancements to the structure and OZ agreed to subordinate the asset management fees further down the waterfall which was based on investor feedback.

Click here to download the data behind the chart.

 

Click here to download the data behind the chart.


The evolution of the tradable E-note market


STARR II has been well received but investors have still queried why there is a need for an asset manager in addition to GECAS’ role as a servicer provider in the transaction. GECAS argues that OZ performs an invaluable role in offering transparency to the buyer's investors which in turn helps bring additional investors to the buyer. 

Ricards states that one chief benefit that OZ provides to the buyer's investors was the ability to track how the deal is performing relative to the appraisal base case. This has been good not just for equity investors in the buyer, argues Ricards, but also for the debt holders too. 

The success of GECAS’s first STARR deal last year has prompted other ABS issuers to also include managed and tradable E-note structures.“Now there have been six transactions,” muses Velayudham. “I think there will be more differentiation between future E-note issuers. The STARR transaction has several unique components. You have a third-party asset manager that is not affiliated to the seller. You have an asset selection process which is more robust and there is not as much cherry picking, which you tend to get in other ABS transactions, and you have the best in class reporting. It is also a programmatic issuance from one of the biggest and best servicers in the world.  If you put all those things together then you tend to get pretty good reception in the market.


START 2018-1 and Jet Airways’ aircraft


The previous START 2018-1 deal initially included two leased aircraft to troubled carrier Jet Airways that has ceased operations and appears to be on the verge of bankruptcy (see earlier Insight). The ABS included a leased 2013 vintage A330-300 (msn 1391) and a 2008 vintage Boeing 737-900Er (msn 35227). Ishka understands that GECAS and OZ decided to remove the aircraft from the portfolio and offered to make investors whole with a 15% return. “Our buyer, with advice from OZ, and we agreed, to remove the aircraft from the STAR 1 portfolio as neither aircraft were novated at the time", explains Ricards.

“The two aircraft were taken out of the transaction and investors were offered a make whole for the period,” confirms Velayudham. “These decisions were made very early in the process even before Jet became delinquent and equity investors were made whole at a 15% rate of return. It goes to show that programmatic issuance aligns the parties to make the right decision.” 

Click here to download the data behind the chart.

STARR II (STARR 2019-1) portfolio
# MSN Lessee Asset Manufacture date Lease end MABV1 (Millions)
1 3990 Aegean Airlines S.A. A320-200 Oct 2009 Nov
2 34756 Aerolineas Argentinas S.A. B737-700 Mar 2007 Jan
3 43416 Air China B737-800 Sep 2016 Sep
4 43424 Air China B737-800 Feb 2017 Feb
5 60694 Air India Express B737-800 Mar 2016 Mar
6 30907 Americ an Airlines B737-800 Oct 2010 Oct
7 28648 Biman Bangladesh Airlines B737-800 Jul 2001 Jan
8 37283 P.T. Lion2 B737-900ER Jul 2011 Jul
9 38300 P.T. Lion2 B737-900ER Jul 2011 Jul
10 3933 Flynas Company A320-200 Jun 2009 Dec
11 4699 Flynas Company A320-200 May 2011 Oct
12 6701 Juneyao Airlines A321-200 Jul 2015 Jul
13 6855 Juneyao Airlines A321-200 Nov 2015 Nov
14 39863 Malindo Air3 B737-800 Jun 2015 Jun
15 4065 Aegean Airlines S.A. A320-200 Oct 2009 Nov
16 60695 Air India Express B737-800 Apr 2016 Apr
17 2773 Alaska Airlines A319-100 May 2006 May
18 2811 Alaska Airlines A319-100 Jun 2006 Jun
19 2287 Brussels Airlines A319-100 Sep 2004 Feb
20 6590 Thomas Cook Airlines Limited A321-200 May 2015 May
Source: KBRA

Click here to download the data behind the chart.



The Ishka View 


STARR II was always likely to receive a warm welcome from investors based on the relatively young age of the portfolio. Investors have also appeared to have welcomed the changes to OZ management’s fee structure. Leaving aside the issue of transparency arguably one of the best benefits OZ has brought to the table has been its influence in the asset selection for the latest deal.

Looking forward the success of the STARR programme is key to GECAS’s long-term growth plans. For the last five years GECAS has sold between $2 billion -$4 billion a year of leased aircraft. The bulk of this - between 70%-80% of this volume has been sold to other lessors through the trade sale market but the rest is going to the institutional market and as these volumes increase the ABS market is only set to becoming increasingly important to GECAS. 

 

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