DBRS Morningstar Releases DBRS Morningstar’s Aircraft Lease ABS and Secured Aircraft Debt Sector Outlook—Negative Due to the Coronavirus

DBRS Morningstar released a commentary, “DBRS Morningstar’s Aircraft Lease ABS and Secured Aircraft Debt Sector Outlook: Negative Due to the Coronavirus,” which highlights how the ongoing Coronavirus Disease (COVID-19) pandemic may adversely affect the aircraft leasing asset-backed security (ABS) and secured debt sectors.

DBRS Morningstar expects outstanding aircraft transactions to report continued deterioration in performance due to the ongoing COVID-19 crisis. As nearly 50% of the global fleet continues to be grounded going into the critical summer travel season and many travel restrictions (particularly international) remain in place, the near-to-medium future recovery prospects of the industry are uncertain.

The industry has been supported in the near term by mass furloughs, operator rent deferrals, interim government loans, and sovereign support. While DBRS Morningstar views aircraft values on a long-term basis, it has become apparent that as demand erodes, there may be adjustments on the attractiveness, value, and useful life of certain aircraft types.

Key highlights include:

• With schedule cancellations and traffic down by up to 90% in some cases, and revenues estimated by IATA to fall by more than $300 billion in 2020, it is estimated that more than 70% of airlines are requesting partial or full rent deferrals from lessors, which can range between three and six months.

• With reduced traffic, a significant number of aircraft are currently not operating and have been taken out of service; approximately 50% of the global fleet is in storage.

• Considering the number of aircraft in storage and related potential oversupply, values of older aircraft types would potentially suffer, which certain twin-aisle aircraft coming off lease in 2020 and 2021 would exacerbate.

• With little secondary market activity, it is not clear by how much market values of aircraft have declined; however, it is likely that the impact on values will vary based on class and type.

• One follow-on effect relates to the amount of time it takes to get a repossessed or end-of-lease aircraft transitioned to a new operator or sold. While DBRS Morningstar makes separate assumptions for these two situations, with COVID-19, due to the potential lack of operator interest in certain aircraft types, these periods may lengthen.

• Transaction structures may include a number of mitigants to the above considerations, though at the present time it is unclear whether these mitigants will sufficiently protect all liabilities against non-payment and/or downgrade. These mitigants include overcollateralization/subordination, transaction triggers, optional equity cures, and payment in kind (PIK) interest.

Notes:
The commentary is available at www.dbrs.com.

For more information on this industry, visit www.dbrs.com or contact us at info@dbrs.com.

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