507A7B86-7507-41CB-8F0A-9AD191E32DA5 513D0B9D-7474-4D61-863F-70F1B3696FB7 60F0322F-B5F4-4A4F-B505-A8773B90F3B9 Comments A5B32EC7-3D41-482F-8D63-40B8CC4B0807 86DDA3D7-F193-4FF9-BE89-5AF7F4C92A8F 1FAE3C2F-8600-47BE-8D04-C46DC4FFD6B0 47ACF625-4F24-4613-9C4E-5E81CABE1FBA FB57FEB0-874D-4585-BF2D-FAAE8EBC17F6 AD97905C-02C9-4A07-9EEA-DA1F36CC7FA8 8727CDE7-CFD1-40EA-A8AF-256882E677CA B052573C-CEE4-4CD1-B86F-C9CB0202622C 1FDA88B9-6396-4BE0-B01D-4DC4FA38A632 6CD0F19E-3C61-44FC-9723-C7737416CD7C 62D3F811-1C6C-477C-972B-FE52539070FC•• 1FAE3C2F-8600-47BE-8D04-C46DC4FFD6B0 47ACF625-4F24-4613-9C4E-5E81CABE1FBA FB57FEB0-874D-4585-BF2D-FAAE8EBC17F6 EF459BAF-1347-4C71-9008-BDB3136FCCE8 3BB10396-3999-4821-82D8-3568DE598D06 F3D95CB7-5CF3-4B27-8B55-AA78EDF89759 63057605-E453-4FDE-89BC-ABD2BC6600E2 Views 6CD0F19E-3C61-44FC-9723-C7737416CD7C

Cookie settings

When you visit any website, it may store or retrieve information on your browser, mostly in the form of cookies. This information might be about you, your preferences or your device and is mostly used to make the site work as you expect it to. The information does not usually directly identify you, but it can give you a more personalized web experience. Because we respect your right to privacy, you can choose not to allow some types of cookies. Click on the different category headings to find out more and change our default settings. However, blocking some types of cookies may impact your experience of the site and the services we are able to offer. Cookie policy

    image image

    Structured Insights: aircraft relaunch

    Structured Insights: aircraft relaunch

    September 09, 2021 Structured credit
    Maintaining the flexibility to invest in private format or esoteric structured deals can offer potentially compelling spread benefits for investors such as insurance companies.

    Staying flexible enough to keep private ABS on the table

    The benefits of private deals are becoming clearer as public ABS deals have been coming into the primary market up to 20 times oversubscribed over the past few months, a result of elevated demand from yield-hungry investors.

    Demand has already started spilling over into private deals too, resulting in tighter spreads.

    However, we still see three clear benefits in the private ABS market:

    1. Investors can more carefully structure security and collateral packages and facilitate private credit ratings
    2. Currently, credit spreads are still meaningfully wider than public deals of equivalent credit quality
    3. Investors can secure more sizeable allocations within deals

    Furthermore, certain sectors that struggled at the start of the pandemic, such as aircraft deals, are re-emerging as potentially compelling recovery stories.

    Aircraft ABS—a 2021 recovery story

    Aviation was one of the most distressed sectors at the height of lockdown and border closures, but the primary aircraft ABS market has reopened strongly amid the resurgent economy.

    New and improved structural protections

    New aircraft deals issued since the start of the pandemic have better structural protections, reminiscent of how structures became more investor-friendly following the 2008 crisis.

    New issuance now tends to include:

    • three-month debt service coverage ratio triggers, versus the traditional six months in ‘legacy’ transactions
    • minimum utilization triggers
    • liquidity facilities
    • higher quality underlying lessees
    • greater exposure to North America (where domestic travel has recovered particularly strongly)
    • longer-term leases
    • newer aircraft models as collateral

     

    Structural protections potentially make up for narrower spreads

    As recent primary aircraft deals have been met with heavy demand, pricing has been at tighter spreads than legacy deals. For example, we have observed newer senior tranches trade in between ~140bp to ~160bp above swaps and subordinate tranches trade in the mid 200bps above swaps, versus +300bp to +350bp for legacy aircraft deals pre-COVID.

    Nonetheless, on balance we still see new aircraft deals as more attractive than the legacy deals. Within legacy deals, investors are not provided clear insights into ongoing deferrals, modifications, extension or sales. We also expect relatively heavy secondary market aircraft supply later this year and early next year as operators and lessors attempt to streamline their fleets. As a result, valuations for certain aircraft types (that legacy deals are generally more exposed to) will potentially come under pressure.

    Playing an uneven recovery in aircraft structures

    Private deals: wider spreads and targeted exposure

    Investors able to consider private aircraft deals can potentially benefit from a ~45bp to 50bp spread pick-up relative to public deals, depending on the sector, structure or collateral (Figure 1).

    Table 1: Public and private aircraft ABS deals issued in Q2 compared1

     Public aircraft ABS dealPrivate aircraft ABS deal
    Rating A A
    WAL 5 years 5 years
    Current market spread 140bp 185bp

    Investors can also more easily target exposure. For example, we are seeing several private single operator deals, versus the traditional aircraft ABS structure with multiple underlying lessees.

    Geography is key: reopening trajectories will vary

    Global reopening efforts will be non-uniform and may even be volatile as countries and regions continue to move in and out of lockdown.

    In the US, the vaccination drive has allowed domestic flights to resume with particularly high demand. Canada’s vaccination drive started slowly but the nation now has the highest vaccination rate of major economies, indicating a path to reopening. China has also seen domestic travel resume.

    However, countries such as Brazil and India have been the global epicenter of cases in recent months. Other Asian economies, and even Australia, have recently had to enforce greater restrictions, indicating a slower return of travel within these regions.

    Europe has seen mixed fortunes. Vaccinations have been strong in the UK and are accelerating in countries such as France, Germany and Spain, indicating a measure of ‘catch up’ with the US and China over the second half of the year. However, the spread of the ‘Delta variant’ indicates a cautious trajectory of border reopenings.

    Collateral matters: be cautious on older and wide-body aircraft

    Newer aircraft are potentially more attractive as collateral and are materially outperforming mid or late-life aircraft from a valuation perspective.

    Newer aircraft are more operationally efficient, making for lower maintenance costs, which has become particularly important to operators as rising oil prices have pushed up fuel costs.

    Narrow-body aircraft have also outperformed widebody collateral, as the former tends to be used for domestic travel and the latter for international flights. Certain widebody models, like the A330 and 777-300ERs, have seen valuations fall by 50% since the start of the pandemic.

    Mid-to-late life widebody aircraft may even be increasingly retired given oversupply and the prohibitive expense of a transacting between operators (Figure 1).

    Figure 1: Older aircraft increasingly grounded and may be retired by the end of the pandemic2

    Accessing private debt sectors such as aircraft ABS

    Investors can access the private ABS markets through club syndications as well as through direct relationships with borrowers (see Structured Insights: Esoteric Market Map).

    Specialized ABS managers can tap multiple sourcing channels, create potentially more attractive deal structures with superior structural protections, influence funding timelines and coordinate private credit ratings from nationally recognized statistical rating organizations (NRSROs).

    In these cases, we believe that specialized managers such as Insight can essentially act as an extension of an investor’s own internal investment teams, complementing their wider corporate and structured credit exposure by aiming to maximize the opportunity within their private debt allocations.

     

    Contributors:

    Shaheer Guirguis, CFA
    Head of Structured Credit

    Jeremy King, CAIA
    Head of Business Development

    Back to top