Kroll Bond Rating Agency (KBRA) released a Year in Review and 2019 Outlook for aircraft lessors and secured aircraft transactions.
The global aviation industry experienced another eventful year in 2018 amid continuing consolidation and scale building. Sector trends included active lessor ownership exchanges, reentry of international sovereign funds, sizable investments by U.S. private equity (PE) firms as well as consolidation among original equipment manufacturers (OEMs). Notably, this trend coincided with a more difficult operating environment for airlines given volatility in fuel prices and the continued strength of the U.S. dollar against other currencies, both of which have pressured profitability for carriers, particularly for airlines whose revenues are not largely dollar-denominated. The magnitude of these headwinds varied globally, with several smaller, more exposed airlines affected more than others, while some were forced to file for bankruptcy with negative but manageable credit impact on lessors.
KBRA’s ratings of the aviation sector continued to expand in 2018, following 23 transaction ratings assigned to recourse debt (backed directly by an airline or leases to airlines, or by lessors). KBRA has assigned 83 ratings to recourse aviation debt since inception of coverage in 2013 and continues to maintain an edge for rating unique and complex structures. In 2018, as in previous years, KBRA assigned ratings to new structures and expects this trend to continue in 2019.
KBRA expects 2019 to be an active year for large-scale sales of aircraft portfolios as lessors continue to proactively manage their fleets. This will either lead to more consolidation and/or the emergence of new leasing platforms of notable size. The situation bodes well for a robust financing pipeline this year to include larger senior unsecured and secured aircraft issuance by lessors, as well as ABS financings for the sale of mid-life assets. Despite recent market volatility, financing markets for aviation debt should continue to remain robust in 2019 given strong OEM order backlogs and healthy industry fundamentals, albeit at higher costs because of rising rates. KBRA expects public issuance by lessors to be strong due to larger bond sizes and as lessors increasingly enter the investment-grade ranks with more tendency to tap senior unsecured financings.
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