Scope publishes aviation finance rating methodology and calls for comments

Scope Ratings calls for comments on its new General Aviation Finance Rating Methodology by 11 June 2018. The proposed methodology uses an expected loss approach to analyse all types of instruments and vehicles secured by commercial aircraft.

Scope’s aviation finance rating methodology goes beyond the traditional emphasis on probability of default, and systematically incorporates the severity to the investor of diverse credit-impairment events contributing to total expected loss. The rating agency believes that the focus on expected loss adds value for investors, as it improves credit differentiation and includes aviation industry specifics in the credit risk evaluation.

Methodology highlights

Expected loss. Scope’s aviation finance ratings reflect the expected loss on a debt instrument secured by commercial aircraft. This methodology focuses especially on the analysis of the severity to the investor by estimating recovery rates after an event of default.

Supported by real data. Aircraft are analysed individually based on their specific characteristics. Scope derives value-stress assumptions from historical data, linking stress to aircraft characteristics. These historical trends are also applicable to future market values of new aircraft sharing the same characteristics. This allows the consideration of new aircraft models and transaction-specific ratings with no general, overarching rating caps.

Industry perspective. The methodology incorporates and accounts for the factors and transaction characteristics which the industry believes impact credit risk. The methodology also integrates aviation-specific features. Scope’s approach results in credit ratings that focus on the same risk areas relevant to aviation finance investors.

Credit differentiation. Scope’s analysis relies on input assumptions which are instrument-specific. This fundamental, bottom-up approach captures the risk of each aviation financing transaction without resorting to top-down generic assumptions. Scope’s approach allows for greater differentiation between both ratings and aircraft types, ensuring appropriate credit is given to the underlying security.

Lessor involvement. Scope reflects the involvement of lessors and technical asset managers in a transaction, examining the alignment of interests between the service provider and the investor. This is an important driver of a transaction’s expected performance.

No mechanistic link to sovereign credit quality. Scope does not mechanistically limit the maximum rating an aviation transaction can achieve based on the credit quality of the country in which the the aircraft’s operator or owner is located. Instead, the agency assesses the efficacy of insolvency laws, convertibility risk, and the risk of institutional breakdown in the context of the tenor of each rated instrument. Scope also takes the macroeconomic environment into account.

Scope’s aviation finance credit ratings constitute a forward-looking opinion on relative credit risk. A rating reflects the expected loss associated with payments contractually promised under a credit exposure to aviation finance by its legal maturity, accounting for the time value of money, at the rate promised to the investor.

Scope’s General Aviation Finance Rating Methodology is applied in conjunction with Scope’s General Structured Finance Rating Methodology when portfolios of credit exposures to aviaton finance are securitised in a special purpose vehicle (e.g. aviation asset backed securities).

Call for comments

Scope invites sponsors, investors and other interested parties to comment on the methodology by 11 June 2018, as part of the agency’s ongoing commitment to transparency and open dialogue with market participants.

Please send your comments to consultation@scoperatings.com

Scope will review market participants’ comments on the proposed methodology and will publish the final version of this rating methodology report thereafter.

The ‘General Aviation Finance Rating Methodology – Call for Comments’ is available for download at www.scoperatings.com.