Air Lease’s inaugural foray into the asset-backed securities market with Blackbird Capital was not only a benchmark for the pricing it achieved but also it has introduced new investors to this market, which is becoming a common and critical refinancing tool for aircraft lessors.
While the deal came together in just six weeks from launch to close, Air Lease had been examining the ABS market for more than a year-and-a-half.
In mid-2015 the lessor set out to understand why aviation asset backed securities were trading nearly 300 basis points wider than its unsecured paper.
“We built a master-grid of structural features from other transactions to better understand why such a small group of investors were participating in the deals and what was making the paper illiquid,” says Ryan McKenna, head of strategic planning, Air Lease. “From there, we constructed a new and simplified structure with a strong set of protections for investors.”
In addition to introducing short-dated seniority with the AA notes, Blackbird Capital Aircraft Lease Securitization (BBIRD-2016-1) was structured to provide more debt protections in order to attract more investors than the typical 20 investors that invest in the secondary ABS market with transactions like those of Apollo Aviation and Castlelake, both of whom are repeat issuers.
For example, in this transaction all security deposits are set aside and pledged to the note holders, in excess of what is typically required by the rating agencies, and they can be used to pay the interest and principal on the notes.
“We retained a lot of elements of the current ABS deals to stay consistent with what investors have been seeing in recent transactions while adding these enhancements of the AA tranche and use of security deposits for the payment of expenses of interest and principal on the offered notes,” says Steven Chung, partner, Hughes Hubbard & Reed, who represented the Blackbird and the issuers in the deal.
YOUNGER MODEL
Unlike the other transactions closed this year by companies Apollo Aviation, Aergen and Castlelake, which focus on mid-life to older-life aircraft, BBIRD-2016-1 consists of a younger fleet with a weighted average age of 3.3 years.
The $800 million securitisation, which refinances a portfolio of 19 aircraft from Air Lease’s fund with Napier Park, achieved a blended rate of sub-4%. The transaction consisted of three tranches of $200 million AA, $540 million A and $60 million B notes and priced in early November at 2.478%, 4.213% and 5.682%, respectively.
By comparison, BOC Aviation securitised a $808 million 24 aircraft portfolio in October 2015 with an average aircraft age of 4.6 years and an average of 5.7 years remaining lease term. The deal priced wider than BBIRD-2016-1, with the $747 million A-notes pricing at 4.75% and the $60 million B-notes coming in at 5.75%.
“The overwhelming response from investors allowed us to set a benchmark that has not been achieved in any of the post-financial crisis aircraft ABS offerings,” says McKenna. “We have created a new model for this market that did not exist three weeks ago.”
BBIRD-2016-1 attracted blue-chip institutional investors to invest in the AA tranche because asset managers have to analyse credit risk only rather than metal risk.
One banker, who did not work on the transaction, says that the deal appealed to buyers who are new to the sector. “The AA notes had short dated seniority and were senior to the A notes, which allowed investors to get comfortable even if they didn’t know the equipment or industry well.”
By giving the AA notes faster amortisation with longer lease rollovers, investors do not have to take residual value risk on the asset because the leases expire after the notes mature. The weighted average lease term of the portfolio is 7.3 years.
In its ratings report, Kroll Bond Ratings Agency noted that the lease terms “modestly reduces reliance on releasing activities to amortize the notes” which the agency views as a credit positive.
Due to the addition of these structural enhancements and investor protections, Air Lease was able to convert some of their unsecured bond investors into ABS purchasers.
According to McKenna, Air Lease had over 110 institutional investors evaluating the transaction in the data room while 60 different investors put in bids, more than doubling the number of bidders for any post-crisis aircraft ABS.
The roadshow targeted investors globally, successfully securing accounts new to aircraft ABS says Carl Anderson, managing director, Bank of America Merrill Lynch.
“The education process leading to expanding the investor base needed to occur,” says Vinodh Srinivasan, managing director and co-head structured credit group Mizuho Securities USA. “Those who haven’t played in this space before will look at this now.”
“This deal has taken a bigger leap in terms of expanding the investor base,” he adds.
McKenna says that the Blackbird Capital platform provides Air Lease with the opportunity to "programmatically" access the ABS market. “Given the pricing and the broad investor demand, you have to think about potential other opportunities in this market that have now opened up.”
While it may be too early to tell if the Blackbird transaction has attracted enough freshman investors to truly increase the liquidity of this market, expanding the buyer base is a step in the right direction.
“At this point, some investors are still digesting the post-election move in interest rates, that said we anticipate healthy secondary market activity for this transaction,” says Anderson.
Source: Cirium Dashboard
