Aircraft securitisation has made a comeback over recent years as a means for funding aircraft sales and raising capital, with 28 deals closing since 2013, when the first post-financial-crisis asset-backed securities were issued.
Like airlines using enhanced equipment trust certificates, lessors have used structured finance in the form of ABS to raise money or sell off portfolios.
Some industry players question the projected residual values of the equipment securing the transactions, while others argue that because ABS is a cash-flow investment, residual values are less consequential to the transaction.
However, it is clear that certain appraisers are hired to value transaction more than others.
"The same bunch of appraisers is being used by [the] ABS market, and it's also the same guys who are not being used," says Domhnal Slattery, chief executive of Avolon – the third-largest aircraft lessor in the world in terms of portfolio value, according to FlightGlobal data, and an issuer of ABS. "Is that going to change?" he asked a group of aircraft leasing chief executives at the ISTAT EMEA conference in Edinburgh on 26 September.
Based on a FlightGlobal research, for post-crisis ABS deals through September 2017 (excluding MRLN 2016-1 and SJETS 2017-1), Avitas has covered 17 deals while MBA has been used 15 times, BK Associates and IBA 12 each, Collateral Verifications seven, Flight Ascend Consultancy six, AISI five and ASG once.
"What drives it [ABS] are the appraisals," says Peter Barrett, chief executive of SMBC Aviation Capital. He notes also that investors are "savvy" and have their own valuation models, adding that they are often looking at cash flows associated with the assets more than the assets themselves.
This is not the first time that the issue of has come up. At the same conference last year, the same point was made by Bertrand Grabowski, formerly a board member at DVB Bank. He suggested that certain appraisers were chosen more frequently than others for ABS as well as EETC transactions.
Ultimately, some appraisers view the market more conservatively than others. And while the average of three appraisals is used for valuing an ABS portfolio, the numbers suggest that certain appraisers are clearly chosen more frequently than others.
"As the market matures, it will force that change," says Firoz Tarapore, chief executive of Dubai Aerospace Enterprise, which closed a $410 milliion ABS in January. "You cannot allow a discrepancy to exist like that."
He adds: "You can't form markets on what one would perceive as wide-open gaps... That doesn't work in the long term."
While there was a consensus among panellists that there existed a discrepancy between appraisers about base values, there was uncertainty as to which appraisers were right and which wrong.
"I would be provocative and say that they're both right and they're both wrong," says Khanh Tran, chief executive of Aviation Capital Group, which sold a $250 million aircraft portfolio to Avenue Capital and debt investors via ABS in December 2016.
"It depends on where in the cycle you're looking to sell," says Tran. "The residual is going to be effected by the cycle as well."
With $3.5 billion raised through this market across seven transactions so far this year, including Willis Lease Finance's $336 million engine-backed ABS, the market shows no sign of slowing nor investors being deterred despite disagreements among the appraisers about aircraft values.
"The market is going to still be very robust for people specialising in the industry," says Tran.
Source: Cirium Dashboard
