Fitch Ratings-New York-26 March 2021: Aircraft operating lease asset-backed securities transaction performance remains weak, driven by fragile airline credit and depressed cash flows, Fitch Ratings says. Asset-backed securities (ABS) deals continue to be susceptible to negative market trends, despite some positive momentum from the vaccine roll-out. Limited improvement in aircraft lease collections observed over the prior three months is expected to continue at least through 2Q21, due to airline financial weakness and bankruptcies, lease deferral repayments and reduced asset utilization.
Passenger traffic remains depressed given prolonged domestic and international travel restrictions. Vaccination rates are improving but at a slow pace, and new coronavirus variants may cause further disruptions and stressed ABS performance.
Collections began to plummet in spring of 2020 and showed a brief uptick in the summer and fall, as lessees entered repayment-deferral periods. Across transactions, basic rent collections were down by 40%-60% in March 2021 compared with January 2020, driven by ongoing airline credit deterioration and declining asset values. Additionally, utilization rent collections were down by 60%-70% from pre-pandemic levels. Lessors trying to mitigate softening in collections have offered payment solutions to lessees, including power-by-hour schedules and lease deferrals, typically three to six months of reduced rent followed by a six to 12 month repayment period.
Weakened collections have resulted in almost all ABS note principal payments falling behind schedule, although transactions continue to pay timely senior interest payments. Several transactions drew on liquidity facilities last year, but these amounts have been repaid as of the end of 4Q20.
Almost all transactions tripped their debt-service coverage ratio (DSCR) triggers last year, resulting in early rapid amortization events. Pre-pandemic, DSCR levels were robust and well above typical trigger levels of 1.10x-1.15x, but as of March 2021 DSCRs remained low, with most in the range of 0.40x-1.00x. Currently, 70% of Fitch-rated transactions are below 1.15x, compared with only 5% pre-pandemic. Some DSCRs have spiked, driven by large end-of-lease payments, contributing to a short-term uptick in recent net collections.
Fitch’s coronavirus stresses capture continued deteriorating performance by applying stresses to asset values, airline credits and prolonged weak collections in our ratings analysis through at least 2Q21. Fitch has observed declining asset values and weaker airline credit concentrations across transactions, with the weighted-average portfolio concentration of unrated lessees stressed at ‘CCC’ and below increasing to 70%-80% from 30%-40% pre-pandemic.
On average, maintenance-adjusted base values (MABV) declined by 5%-10% yoy. Given the negative impact of the pandemic on air travel demand, Fitch applies average haircuts of 10%-15% to transaction maintenance-adjusted market values and MABV, plus hitting out-of-production and older planes values further, including an extra 5% haircut to widebodies. Furthermore, Fitch’s coronavirus stresses apply recessionary value declines to aircraft by age and tier in addition to stressed values.
Until aviation industry metrics improve and Fitch observes meaningful strengthening in ABS cash flow collections, Fitch’s asset outlook remains negative. Fitch’s coronavirus stresses reflect the uncertainty ahead, anticipating delayed airline recovery into 2023-2024.
Related research: Aviation ABS: Coronavirus Puts Unprecedented Pressure on Ratings
Gradual Decline in Airline Credit Quality For Aircraft ABS