ANALYSIS: Avolon’s transaction shows ABS market is open

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Avolon Aerospace Leasing, via special purpose company issuer Emerald Aviation Finance, has tapped the capital markets for the first time in a $636.2 million transaction that is expected to close mid-October.

The news shows the asset backed securities (ABS) market is open again and other lessors could follow over the next year. AerCap has been rumoured to consider ABS deals. Its chief executive Aengus Kelly recently said that AerCap would be considering an ABS transaction "if the market was right".

Avolon, which has 104 aircraft with another 76 scheduled between 2014 and 2021, has said in the past that diversifying funding was critical and capital markets were an important source.

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Pricing was attractive, despite a 10-year US treasury notes 85 basis point increase recorded in the second quarter of this year.

Yield on the 10-year US treasury notes was 2.66% on 26 September, which is up more than 40% from 1.86% at the beginning of the year.

The $546 million class A-1 notes, priced at 4.65% a coupon, while the $90.2 million class B-1 notes, priced at 6.35%.

GECAS closed a similar transaction in January this year. The $650 million asset-backed secured term loan facility, issued by AABS, partially finance the purchase of 26 aircraft from the lessor. The $557 million A notes priced at 4.875%, and a $93.3 million B tranche priced at 6.875%.

Avolon will acquire the junior notes in Emerald Aviation Finance Series 2013-1.

Kroll Bond Rating Agency says in a pre-report that the notes amortize to a targeted schedule on a 16-year straight-line basis. Seven years after the closing date, if the notes are not refinanced, principal payments are accelerated, with no further payments made to the unrated Class E-1 notes. The Class E-1 notes represent the equity interest in the Emerald transaction, and total $165.7 million.

Emerald Aviation Finance Series 2013-1, like GECAS's AABS, is a transaction without monoline wrap. The previous two transactions: AerCap's Aircraft Lease Securitization in May 2007 had the financial guarantee insurance policy provided by MBIA, while in December 2006, Genesis Funding had a monoline guaranty provided by FGIC.

Avolon’s ABS transaction is secured by 20 narrowbody aircraft initially leased to 15 airlines in 14 countries.

Kroll Bond Rating Agency says Emerald Aviation Finance Series 2013-1 notes mature in October 2038.

The class A-1 notes, have a 66% loan to value. The class B-1 notes have a 77% loan to value.

The pooled aircraft lease securitization involves approximately 72.9% of narrowbodies, by value, 20.9% widebodies while the remaining 6.2% are Embraer 190s.

The Airbus A320 makes 49.5% of the portfolio, another 13.6% of the aircraft in the pool are Boeing 737-800s, while the A319 represents 9.8%.

The A330-300 model represents 12% while the A330-200 series makes 8.9% of the portfolio.

The two A319s are on lease to American Airlines, while one 737-800 is leased to GOL, one to Skymark Airlines and another to Lion Air.

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Two A320s are leased to Air Berlin, another two to Alitalia, and two with Frontier Airlines. Other A320s lessees include Air Arabia, Spring Airlines, IndiGo Airlines and Wizz Air.

The A330-200 is with Aeroflot Russian Airlines while the A330-300 is on lease to virgin Atlantic Airways.

The two E-190s are with Virgin Australia.

The appraised value of the 20 aircraft is $824.7 million, according to the report.

“The size of the portfolio is small compared to other aircraft lease securitizations, resulting in high lessee and regional concentrations. The risks associated with higher concentrations are partially mitigated by the quality of the aircraft and the ability of the servicer to manage these risks,” writes the rating agency.

Preliminary rating for the A-1 notes is A(sf), says Kroll Bond Rating Agencywhile the B-1 notes were rated as BBB (sf).

The transaction was also rated by Standard & Poor’s.

BNP Paribas and Wells Fargo are the underwriters of the deal. The French bank is the liquidity provider in the transaction. Wells Fargo is the indenture trustee, security trustee and cash manager, structuring agent.