Highlights from Global Capital

Abstract

Despite consistent year on year issuance increases in the esoteric ABS sub-sector and strong demand from buyers, aircraft ABS investors say cracks are beginning to show. “Several aircraft ABS transactions have been underperforming their original underwriting,” said Mario Rivera, managing director of the Fortress credit funds business. “People have been quiet about it because they think these were smaller, oneoff transactions that were not widely received by the market to begin with.” Aircraft leasing has experienced heady growth since 2015, bolstered by increased global demand for air travel and favourable interest rates. As deal structures evolved over the years and investors grew more comfortable with the asset class, aircraft ABS issuance hit an all-time record last year, with 14 deals totalling $7.45bn of rated notes, according to data from Kroll Bond Rating Agency. The sector has also grown more liquid, according to Kroll, with trading volumes averaging $177m each month in 2018, compared with $89m and $62m in 2017 and 2016, respectively. “We were always attracted to [aircraft ABS],” said an ABS investor, just one of many higher yield investors who began eyeing the space over the past few years. “It’s the siren song, seeing that yield. It was one of the spreadier opportunities out there.” However, he added that his f irm has been hesitant to invest in recent deals, and has not participated in any transactions this year. This is the case for many investors who believe aircraft ABS has finally reached maximum altitude in 2019, especially considering where the market is in the credit cycle. Losses are already racking up in some transactions, such as BOC Aviation’s Shenton 2015-1 deal and Aergo Capital’s METAL 2017-1 transaction, market participants noted. The Shenton deal has been hit with defaults at the equity level, while the METAL transaction saw interruption of cash f low, impacted by the bankruptcy of Jet Airways in April. Some older aircraft engine deals are also performing below originally underwritten expectations. “There has quietly been a fair amount of airlines default. I don’t think the deals have suffered tremendously yet, but could that be an indicator of increased stress in Highlights from