01/11/2022

Ishka NY 2022: Private placements pick up for airlines and lessors

Ishka NY 2022: Private placements pick up for airlines and lessors

Aviation credits have been quiet in the public debt markets for the last eight months but airlines and lessors have been actively issuing bespoke private aircraft securitisations using 4(a)(2) structures, US investors tell Ishka. Private debt investors confide they have seen several aviation deals cross their desks in the last six months.

British Airways (BA) priced a $299 million 4(a)(2) private placement split between two series of notes at the end of October. Ishka understands the A note priced with a spread of approximately 265bps over base rates. The deal is understood to be structured as a EETC involving JOLCO equity and secured against two Airbus A320neos and two Airbus A350-1000s.

It follows on from a $461-million private placement sustainability-linked EETC for Iberia signed in April, (Iberia Pass Through Certificates, Series 2022-1) which funded a similar pool of collateral (two A350s and three A320neos). IAG did not respond when contacted by Ishka.

In March this year, US carrier Sun Country priced a $189-million 4(a)(2) EETC using 13 older Boeing 737-800s as collateral. The $142,830,000 Class A Certificates have an 4.84% interest rate and mature in 2031 while the $45,447,000 Class B Certificates carried an interest rate of 5.75% and mature in 2029. The two tranches have a weighted average interest rate of 5.06%.  Investors state there have been more recent issuances from airlines than lessors in the private placement market but several lessors and asset managers have agreed to 4(a)(2) private placements of notes and term loan Bs. In the pandemic Ishka was aware several larger asset managers agreed a number of issuances with institutional investors via the 4(a)(2) market including lessor EETCs – a securitisation based on the cash flows from leased aircraft to a single lessee.

In contrast, there has been a noticeable absence of lessor and airline bonds in the capital markets since the Russian invasion of Ukraine (see Insight: ‘Lessor Bonds Q3 2022: Chinese firms sole issuers in another slow quarter’). In the same vein, there have been just two aircraft securitisation issuances in 2022 to date (the $522.5-million Carlyle Aviation Management Limited’s AASET 2022-1 and the $609 million BJETS 2022-1 by business jet lessor Global Jet Capital).

When will there be new aircraft ABS issuance?
 

The big question at Ishka’s New York: Ishka Aviation Investival held last week was how quickly would the aircraft ABS market return. Opinion was split. One aviation banker and a lessor argued that the earliest a new deal could likely happen would be Q2 2023. However, one aviation financier was noticeably more bullish, believing an aircraft ABS could issue before the end of this year. Others pointed out that the window for a new aircraft ABS was rapidly shrinking if issuers wanted to catch investors before the US Thanksgiving holiday in November.

One panellist pointed out that aircraft ABS issuance would likely resume in earnest when rates stabilise, even if they stabilise at a higher rate. “You can't issue debt in such a volatile market. It's not just aircraft ABS, it's across unsecured debt, it's across yield, it's across every debt instrument there is because you don't want to be an investor that buys a bond today at a hundred dollars predicting the Fed's going to increase rates by 75 basis points on 2nd November, and instead they raise by 150bp, and suddenly a bond is worth 90 cents on the dollar… So, what they're doing is they're building in a cushion in the credit spread to account for the volatility in the rates, which is unfairly penalising the issuer, but it's totally understandable from the investor's standpoint.”

One investor at the conference stated that hedges were helping with the current volatility in interest rates, but stated that while there was interest in buying certain discounted senior notes in the secondary market the potential volume on single notes was a "hurdle". A lack of detailed information on the performance of some existing ABS transactions has also been a deterrent, forcing investors to make "punitive" assumptions in the absence of information. In contrast, the investor added one benefit of the private debt deals was that investors were typically afforded more visibility around the initial portfolio.

Panellists explained that rising interest rates have been having a chilling effect on new issuances leading to an aircraft ABS "log jam”. Some issuers had seen projected yields effectively triple in six months. Because of the inability of underlying leases to generate enough cash to match that increased level of debt, issuers were being forced to reduce the leverage on newer deals. “Something's got to give and what's giving is leverage. So, your single A advance rate, which used to be 65% [LTV] standard across all aircraft types in most vintages for around seven years is now coming down to around 55% [LTV] or 57% [LTV] because interest cost has tripled. So, we either need lease rates to come up, in order to match the cash flow production that will support that higher interest rate environment, or rates have to come down. One of the two has to happen, until then, you're in a bit of a lock jam.”

One question raised at the conference was how would lessors with near-term maturing warehouses choose to refinance themselves if the ABS market remains frozen for a further six to 12 months. Panellists explained that banks were extremely supportive of lessors and that the bank market remained considerably more attractive than the ABS market for new transactions. As one senior lessor argued, given prevailing higher interest rates there is very little incentive for any asset manager that had acquired a portfolio of aircraft last year to empty their warehouse.

Ishka understands there are at least four leased commercial aircraft ABS portfolios have been documented and are ready to issue if the aircraft ABS market reopens in the near-term.  In the meantime, one source stated that many banks had already offered to extend current warehouses, often at a higher cost, to help lessors wait for the aircraft ABS market to thaw. Another avenue and one that several lessors are exploring is to potentially refinance using bank term loans, 4(a)(2) private placements or term loan Bs.


The Ishka View
 

BA achieved impressively cheap financing last week using the private debt markets. Private debt investors have provided a vital and competitive source of liquidity for a range of better-rated airlines and asset managers for over a decade. They have been particularly useful for airlines seeking to issue sub-$500 million secured portions of debt.  

What is new is the absence of the public ABS market, which is driving some lessors to explore a possible refinancing of parts, or all of their warehouse facilities via a bank term loan, term loan B or a privately-placed ABS-type structure.  Investors confide that private debt markets have deep pockets of capital and while pricing may be more expensive, lessors face less execution risk than they appear to currently in the public markets.

But the challenge some lessors face is reconciling the higher cost of debt they are likely to have to pay with the relatively low-yielding leases negotiated in a historic lower-interest-rate environment. The covenants associated with maturing warehouses mean asset managers face exploding interest rates as these facilities term out.   In theory, some asset managers may choose to stay within these facilities and accept higher rates, which may be lower than their immediate refinancing options, in order to buy time for rates to settle. However, if rates continue to climb then asset managers may simply be delaying an inevitable reduction in returns as they seek longer-term refinancing options.

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