Global Airfi talks with Cirium about air ABS
By Oliver Clark
In January, Goldman Sachs managing director Kalash Pandey predicted that the aircraft asset- backed securities (ABS) market could reopen for the right collateral in the second quarter, and similar upbeat views were shared during the ISTAT Americas conference in March.
The ABS market has been in a state of near-dormancy since Russia's invasion of Ukraine in February 2022, with just a few issuances to note and many of those being hybrid structures such as Castlelake's private aircraft collateralised loan obligation transaction and Ashland Place's APL Finance 2023-1.
Hopes that Willis Lease Finance's $410 million Willis Engine Structured Trust VII engine deal in October 2023 might be a precursor to new aircraft deals proved overly optimistic, and there should be caution about reading too much into Global Jet Capital's recent BJETS 2024-1 private jet ABS deal, which represents a completely different set of assets and market dynamics.
A recent report from US ratings agency DBRS Morningstar notes that aircraft ABS issuances have been "very limited", with only two deals issued in 2023, totalling $734.3 million – the lowest level since 2013 ($1.1 billion).
"With ABS markets being quiet, we expect the large lessors to continue leaning on the unsecured corporate debt market as well as bank facilities to meet most financing requirements. Lessors issued around $13 billion of unsecured debt in 2023, up notably from $4.8 billion in 2022," it adds.
But market sources have indicated that several ABS deals are being prepped by previous issuers and that these could hit the market imminently.
Stubbornly high inflation figures from the USA may make further rate cuts by the Federal Reserve less likely, or they may have no impact, but either way they add to a sense of uncertainty around the future direction of future monetary policy, and stability in rates could be key to the prospects for future aircraft ABSs.
One source was sceptical that market conditions are yet ideal for such a move.
"To my mind, not much has changed on the ABS front," says the source. "I think Carlyle have been keeping things warm for a while, but when the Fed is still repeating that it intends to lower interest rates three times in 2024, I am not sure why anybody would fix an interest rate today. I suspect there are parties looking to get the legwork done so that they can move quickly once interest rates drop, but it seems to me like bank debt is still more attractive."
CONVINCING INVESTORS
Aside from the challenges in issuing new aircraft ABSs, some market commentators have voiced concerns about the health of the secondary market for existing ABS paper.
In an interview with Cirium, Evan Wallach and Reno Bianchi, co-presidents and co-chief executives of Global AirFinance Services, argue that not enough is being done to provide investors with the
information they need to make informed decisions about buying ABS paper.
"The secondary trading market for aircraft ABS is not very deep. Whereas other ABS sectors had their problems during the global pandemic, the required information provided to investors in those other asset classes was much greater," says Wallach.
"That meant investors were able to model and continue to trade bonds in the secondary market in other sectors but trading was very weak in the aircraft ABS secondary market. The required information provided to aircraft ABS bondholders post-issuance is very minimal. We believe that if better information was provided, there could be better modelling which would provide better price discovery through more trading in the secondary ABS market.
"The typical ABS investor is managing a huge ABS portfolio and their aircraft ABS positions are usually a very small part. However, their continued participation in aircraft ABS is critical," he adds.
Global AirFinance Services has developed modelling analytics of aircraft ABS issues for investors. The model provides price context and the rate of return for a current portfolio based on projections for future cash flows.
The company is not privy to any more information than what is provided to bondholders by the aircraft ABS servicers. Wallach and Bianchi draw on a combined 70-plus years of aviation industry experience to build their forecast models for future cash flows, starting from the individual aircraft level.
"Our position is that investors should be given more detailed information about the aircraft leases and the performance of the aircraft ABS bonds during distressed conditions so they can make informed decisions about whether to sell, hold or buy more of their aircraft ABS positions," Wallach adds.
Bianchi, who is also president of Asterisk Advisors, says that compared with other ABS asset classes, there is a paucity of information available regarding the performance of aircraft issuances.
"You do not have the current cash flows. Contrary to other types of ABS bonds, you cannot see what the current maturity is for aircraft ABS.
"There are a couple of third-party providers that are actually quite focused on the ABS market and they provide very detailed models for most of the larger ABS structures. However, for aircraft ABS, they really do something I would describe as patch-up work. In order to build a correct aircraft ABS model, you have to look at each individual aircraft and determine how much money it's going to generate in the future.
"What is the lease rate? Is the lessee paying maintenance reserves? How long is it going to stay on lease with the existing lessee? What happens at the end of the lease?
"I mean, it's a very tedious and speculative exercise, and nobody does it. We have built a model over the last two years to do that."
Bianchi says his and Wallach's view is that aircraft ABS paper trades at a "substantial spread premium", or price discount, to everything else that investors can buy in the aviation sector.
"But right now, aircraft ABS is trading at a spread over treasuries of about 600 basis point and everything else you can buy in the airline sector is between 150 and 300 basis points.
"It is our contention that if investors are more comfortable with the analytics and they better understand these kinds of structures then the spread for aircraft ABS will compress," he adds.
He sees a "favourable" outlook for the aircraft ABS market, as airlines recover from the pandemic and secondary aircraft values are as "high as they have ever been", primarily because of all the manufacturing problems. The landscape for investing in the aviation sector in general is "very good", adds Bianchi.
"One of the many reasons why this sector is not as liquid as some of the other ABS sectors, and potentially why there may not be as many issuances, is that investors don't have analytics."
Amid today's heightened return rate appetites, ABS paper should be a good investment, Bianchi argues.
"This sector should perform very well just from a technical perspective. Investors are desperate to invest their money in something that is still reasonably yielding, and that's a challenge right now. We are in a period of massive spread compression where investors are not really getting compensated that much to take substantially more incremental risk."