Fitch Ratings-Chicago-26 October 2018: Fitch Ratings expects to assign the following ratings and Outlooks to the AASET 2018-2 Trust (AASET 2018-2) notes:
--$488,309,000 class A asset-backed notes 'Asf'; Outlook Stable;
--$73,430,000 class B asset-backed notes 'BBBsf'; Outlook Stable;
--$51,401,000 class C asset-backed notes 'BBsf'; Outlook Stable.
The notes issued from AASET 2018-2 will be backed by lease payments and disposition proceeds on a pool of 35 mid- to end-of-life aircraft. Apollo Aviation Management Limited (AAML), a wholly-owned subsidiary of Apollo Aviation Holdings Limited (Apollo), will be the servicer. Note proceeds will finance the purchase of the aircraft from certain funds (SASOF funds) managed by affiliates of Apollo. AASET 2018-2 is the third AASET transaction rated by Fitch and will be the sixth aircraft ABS transaction to be sponsored and serviced by Apollo since 2014. Fitch does not rate Apollo or AAML.
SASOF IV, the primary seller of the assets to AASET 2018-2, will retain a position as a beneficial holder of an E certificate, consistent with similar investments made by funds managed by affiliates of Apollo in prior AASET transactions. Therefore, Apollo will have a vested interest in performance of the transaction outside of merely collecting servicing fees due to the European-style waterfall in SASOF IV. Fitch views this positively since Apollo has a significant interest in generating positive cash flows through management of the assets over the life of the transaction.
The aircraft in the pool will be transferred from SASOF IV to the aircraft owning entity (AOE) issuers during a delivery period ending 270 days after the closing of the transaction. However, there are certain aircraft in the pool that are currently not owned by SASOF IV or its affiliates that may be acquired by the AOE issuers from the third-party sellers after close. If aircraft in the pool (or replacement aircraft) are not transferred to the AOE issuers within 270 days of closing, the applicable amount attributable to each aircraft not transferred will be used to prepay the notes without premium, consistent with prior ASSET and other aircraft ABS transactions.
Citibank, N.A. will act as trustee, security trustee and operating bank and Canyon Financial Services Limited will act as managing agent.
KEY RATING DRIVERS
Stable Asset Quality: The pool has a weighted average (WA) age of 13.9 years and contains 66.6% good quality A320 and B737 family current-generation aircraft, consistent with AASET 2018-1. Further, the pool features an improved mix of widebody aircraft relative to 2018-1. The WA remaining lease term is 3.6 years, and 55.6% of the pool is on lease until at least 2022, a positive for future cash flow generation.
Weak Lessee Credits: Most of the 30 lessees in the pool are either unrated or speculative-grade credits, typical of aircraft ABS. Fitch assumed unrated lessees would perform consistent with either a 'B' or 'CCC' Issuer Default Rating (IDR) to reflect default risk in the pool. Ratings were further stressed during future recessions and once aircraft reach Tier 3 classification.
Technological Risk Exists: The A320 and B737 current generation aircraft face replacement programs over the next decade from the A320neo and B737 MAX. The A330 family also faces future replacement and competition from the A330neo, B777X and A350. While new variants will pressure current aircraft values and lease rates, mitigants exist.
Consistent Transaction Structure: Credit enhancement (CE) comprises overcollateralization (OC), a liquidity facility and a cash reserve. The initial loan to value (LTV) ratios for the class A, B and C notes are 66.5%, 76.5% and 83.5%, respectively, based on the average of maintenance-adjusted base values. These levels are in line with AASET 2018-1.
Capable Servicing History and Experience: Fitch believes AAML has the ability to collect lease payments, remarket and repossess aircraft in an event of lessee default, and procure maintenance to retain values and ensure stable performance. Fitch considers AAML to be a capable servicer, as evidenced by prior securitization performance and its servicing experience of aviation assets and Apollo's managed aviation funds.
Adequate Structural Protections: Each class of notes makes full payment of interest and principal in the primary scenarios commensurate with their expected ratings after applying Fitch's stressed asset and liability assumptions. Fitch also created multiple alternative cash flows to evaluate the structure sensitivity to different scenarios, detailed later in the report.
High Industry Cyclicality: Commercial aviation has been subject to significant cyclicality due to macroeconomic and geopolitical events. Fitch's analysis assumes multiple periods of significant volatility over the life of the transaction.
Asset Value and Lease Rate Volatility: Downturns are typically marked by reduced aircraft utilization rates, values and lease rates, as well as deteriorating lessee credit quality. Fitch employs aircraft value stresses in its analysis, which takes into account age and marketability to simulate the decline in lease rates expected over the course of an aviation market downturn, and the decrease to potential residual sales proceeds.
Rating Cap of 'Asf': Fitch limits aircraft operating lease ratings to a maximum cap of 'Asf' due to the factors detailed above, and the potential volatility they produce. For more details, refer to Fitch's "Global Structured Finance Rating Criteria" (May 2018) and "Aircraft Operating Lease ABS Rating Criteria" (March 2018), found at www.fitchratings.com.
Due to the correlation between global economic conditions and the airline industry, the ratings may be affected by global macro-economic or geopolitical factors over the remaining term of the transaction. Therefore, Fitch evaluated various sensitivity scenarios that could affect future cash flows from the pool and recommended ratings for the notes.
Fitch performed a sensitivity analysis assuming a 25% decrease to Fitch's lease rate factor curve to observe the impact of depressed lease rates on the pool. This scenario highlights the effect of increased competition in the aircraft leasing market, particularly for mid to end-of-life aircraft over the past few years, and stresses the pool to a higher degree by assuming lease rates well below observed market rates. Under this scenario, the A notes could be subject to a downgrade of one to two categories, the class B notes to one category, and the class C notes to two categories.
Fitch evaluated a scenario in which all unrated airlines are assumed to carry a 'CCC' rating. This scenario mimics a prolonged recessionary environment in which airlines are susceptible to an increased likelihood of default. This would, in turn, subject the aircraft pool to more downtime and expenses as repossession and remarketing events would increase. Under this scenario, the notes show some sensitivity to the increase in expenses due to increased defaults. Under such a scenario, each class could possibly experience a downgrade of up to one category.
Fitch created a scenario in which the A330-200s in the pool encounter a considerable amount of stress to their residual values. Fitch removed outlier appraisal values for each A330-200 in the pool and took the average of the lower two appraisals to determine maintenance-adjusted base values for modeling. All the A330-200s were assumed to be Tier 3 aircraft to stress recessionary value declines, and Fitch placed a higher 25% haircut on residual proceeds. Under this scenario the A330-200s are only granted part-out value at the end of their useful lives, and the notes show some sensitivity that could result in downgrades of up to one category.
USE OF THIRD-PARTY DUE DILIGENCE PURSUANT TO SEC RULE 17G-10
Form ABS Due Diligence-15E was not provided to, or reviewed by, Fitch in relation to this rating action.