24/10/2017

A growing pipeline of ABS - Ishka New York Conference

A growing pipeline of ABS - Ishka New York Conference

More lessors are seeking to issue aircraft asset backed securitisations (ABS), according to delegates at Ishka’s Investing in Aviation Finance Conference held last week in New York.

Sources indicate that a growing number of lessors, including new issuers, are preparing portfolios that will be turned into ABS issuances. Ishka understands that at least three lessors are seeking to issue an ABS before the end of the year while others state there is already a pipeline of between three to eight deals being prepped for 2018. Nearly all of these transactions are expected to be used to raise debt with the issuing lessors expected to retain the E-note in the various transactions. 

“Some of this may come or go, but several lessors want to attack the market while it remains relatively hot,” explained one delegate at the sidelines of the conference. ABS represents an increasingly cheaper source of liquidity for lessors investing in mid-life or older aircraft.  Lessors indicate that there has been increased number of parties bidding for assets that can fit into an ABS. 


A popular swell for ABS

The rise in popularity of the aircraft ABS product has been linked to a widening group of investors willing to purchase the separate debt tranches of aircraft ABS.  At the Ishka conference panellists remarked that the investor base as increased from seven investors on one transaction to more than 40 or 50 separate names on recent deals. As a result pricing has significantly tightened in favour of aircraft ABS issuers.

Limited returns in other ABS transportation asset classes, and high yield bonds have driven more investors to aircraft ABS, according to panellists. Ratings agencies and investors continue to express confidence in the ABS structure, despite a number of European airline bankruptcies that occurred this autumn (see Ishka’s previous report: ABS optimism undented by spate of airline bankruptcies). However, panellists did question whether the interests of issuing lessors, and those of the ABS debt or equity investors were always aligned. The question revolves around how much “skin in the game” issuing lessors retained after receiving a servicing fee as they manage the underlying aircraft portfolio. Part of the problem lies around the opaqueness over asset prices and the disparity between appraisers over residual values, according to conference delegates.  Investors, at the conference, demanded more transparency around loan to values (LTVs) and more frequent reporting of how the portfolio is performing to help address some of these issues.


The evolution of ABS


The growing influx of investors have been also attracted by the changing nature of the aircraft ABS product itself. Aircraft ABS has undergone several transformations from the first generation ABS issued before 2001, to a second generation of ABS from before 2007 to the current third generation of aircraft ABS present since 2013. The significant structural adjustments found in the post 2013 aircraft ABS have broadly remained the same for most subsequent issuances.  These structural enhancements include, among other things, greater flexibility for the servicing lessor to buy or sell assets and incentives to encourage issuing lessors to refinance their ABS at the expected maturity through coupon rises. ABS deals continue to evolve and there is a considerable level of variety among ABS transactions ranging from the assets financed to the level of structural enhancements.


The Ishka View

The rise of the ABS has been instrumental in providing cheaper funding for lessors operating, and investing in, mid-life and end-of-life aircraft. This has encouraged several debut securitisations from aircraft lessors in the last year. It has also driven acquistion demand for used aircraft with leases attached. Fund managers confide there has been more active bidding of assets as lessors raise financing to acquire aircraft to create portfolios that can be securitised.

A lot of these aircraft, but by no means all, are being acquired from the largest lessors, most notably AerCap and GECAS. Sources indicate that the two largest lessors are still actively selling down aircraft into the secondary market. The ABS market has helped maintain a sellers’ market for many lessors looking to sell. One question is what might happen to the flow of ABS transactions if either of the two lessors would be tempted to slow down or stop selling aircraft. Some ABS issuing lessors with their own aircaft orders would be unaffected but others may take longer to assemble appropriate portfolios.  Crucially the conferene confirmed that investor confidence remains robust despite the number of recent European carrier bankruptcies.  Having more investors helps safeguard continued access to the ABS market for aircraft lessors. It also stabilises pricing and reduces the chance that the ABS market will close to lessors if, and when, yields return to other more traditional asset classes and bonds.

Comments:

Sign in to post a comment. If you don't have an account register here.