Lessors eye bank debt as aircraft ABS issuance grinds to a halt
Market meltdown puts most deals on hold, well-established auto ABS programmes have best chance of survival with primary issuance through crisis
25 Mar 2020 | Michael Marray

With the aviation industry among the hardest hit by the coronavirus pandemic, aircraft issuance has now been stopped in its tracks.

This comes after the last couple of years during which deals backed by aircraft lease receivables, in addition to the traditional asset classes of residential mortgage-backed securities (RMBSs), auto asset-backed securities (ABSs) and credit card ABSs, have seen strong growth.

One of the last aircraft deals to price came from Avolon Holdings on February 20. It achieved the lowest debt yield of any aircraft ABS issuance over the last decade.

Special purpose companies (SPCs) Sapphire Aviation Finance II LLC and Sapphire Aviation Finance II Limited (collectively, SAPA 2020-1) sold a total of US$620 million of fixed-rate notes due in 2040.

The issue comprised US$490 million of Series A notes issued at a 3.250% yield, US$86 million of Series B notes issued at a 4.375% yield, and US$44 million of Series C notes issued at a 6.875% yield.

Additionally, Sapphire Aviation Finance II Limited sold equity certificates representing the equity interest in SAPA 2020-1, with LibreMax Capital acting as the anchor investor and Avolon acquiring a minority share.

The notes are backed by a portfolio of 21 narrowbody and widebody aircraft acquired by the SPC from Avolon using the proceeds of the issuance. They are on lease to 19 lessees/airlines based in 18 countries. Avolon acts as the portfolio's servicer.

The Sapphire issuance vehicle was established in 2018. The notes and the equity certificates were offered in the United States to qualified institutional buyers under Rule 144A.

Avolon is 70% owned by Shenzhen Stock Exchange-listed Bohai Leasing, which is a subsidiary of HNA Group. After HNA ran into trouble and began an asset disposal programme, a 30% stake in Avolon was sold in November 2018 to Japanese aircraft lessor Orix Corporation, which is listed on the Tokyo Stock Exchange and the New York Stock Exchange.

A report late last year by Bloomberg said that HNA had subsequently sounded out Orix to acquire the remaining 70% stake, though this has never been confirmed by the company.

According to Chinese media, HNA is now being steered by a committee representing state-owned interests. On March 11, the company held a meeting with creditors to discuss its liquidity difficulties and debt issues. Creditors included Industrial and Commercial Bank of China, China Construction Bank, Agricultural Bank of China, Bank of China, Bank of Communications, and Shanghai Pudong Development Bank.

Last year, Avolon was upgraded to investment grade by Fitch, Moody’s and S&P Global, and made full use of its improved access to senior unsecured bond markets.

Most of the big global lessors had a buoyant 2019, and also took advantage of plentiful bank debt and cheap bond market financing. Thus, they entered what is going to be an extremely difficult year in a position of strength.

Another major Chinese lessor, Hong Kong Stock Exchange-listed CALC, has focused more on the Chinese domestic debt markets. 

Back in January 2018, China Asset Leasing Company (CALC) launched China’s first ABS denominated and settled in a foreign currency, and the first aircraft ABS in the public placement market.

The US$171 million Huatai Securities Asset Management - CALC Phase I ABS  Program was listed on the Shanghai Stock Exchange. The bonds were rated AAA by China Cheng Xin International.

In the unsecured bond market in June 2019, CALC sold 1 billion yuan worth of three-year corporate bonds at a fixed coupon rate of 5.20%. China Merchants Securities was the lead underwriter and bookrunner for the transaction, while CITIC Securities acted as its joint-underwriter.

Both the issuer and the corporate bonds were rated AA plus by China Cheng Xin International Credit Rating.

But the bulk of global issuance has come from US aircraft lessors, many of whom have adopted a so-called asset-lite strategy of securitising assets and acting as the portfolio managers.

One major issuer is Carlyle Aviation Partners, a unit of the private equity firm Carlyle Group, which has done a series of ABS deals after acquiring Apollo Aviation Group in October 2018. Carlyle Aviation Partners was in the market in January with a US$409 million deal.

Against the background of extreme market volatility and uncertainty about the size of the eventual hit to GDP caused by the coronavirus outbreak, primary issuance has almost ground to a halt for all types of ABSs in the European market, where there have also been some aircraft deals, though far fewer than in the US.

The European ABS market was just beginning to gather some momentum, having recovered very slowly from the 2008 financial crisis. Last year, a new EU securitization regulation was implemented, introducing a tougher set of rules on liquidity, risk retention and deal reporting, together with a new category of simple, transparent and standardized (STS) securitizations.

A steady pipleline of STS deals built up from March 2019 onwards, notably in auto ABSs and RMBSs.

The Driver Espana Six deal, which is STS certified, was priced in late February by Volkswagen and backed by loans originating in Spain. The VCL 30 from Volkswagen Leasing was next in line to be launched.

Analysts say that most deals across the market are currently on hold, though well estabished auto ABS programmes have the best chance of keeping going with primary issuance through the crisis.

Most German deals are certified as STS by the Frankfurt-based STS Verification International. In 2019, it also verified auto transactions from Globaldrive (Ford Bank GmbH) and various banks that provide auto loans, and certified the Driver and VCL deals.

The Driver China programme from Volkswagen is not STS compliant as the loans originated outside of the EU.

Last week, European securitization markets saw a steady flow of bids wanted in competition as investors tried to offload some of their holdings, mainly those with less-liquid collateralised loan obligations.

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