Scope’s aircraft NPI methodology adding value to investors

Scope has published its aircraft non-payment insurance (NPI) methodology, tailoring its general aircraft-finance rating methodology to measure the credit risk of these type of transactions. The analysis assesses the protection provided by insurers.

Scope analysts look at three key factors: the expected losses for investors in the underlying aircraft financing transaction before the NPI protection; the diversification of the portfolio of insurers offering protection; and the credit quality of the insurers. This approach is fully consistent with the fundamentals of the NPI products created by the industry.

The origins of NPI transactions to fund the acquisition of aircraft go back to Boeing’s search for an alternative to export-credit guarantees. Created by the plane-maker in conjunction with Marsh LLC, the Aircraft Finance Insurance Consortium (AFIC) programme was designed to offer insurance coverage for Boeing aircraft. Since then, Marsh S.A.S, a separate Marsh entity, has worked together with a pool of highly-rated insurance companies to launch Balthazar to offer a similar product for Airbus aircraft.

“We are likely to see more of these financing options arise as this product can be replicated for other aircraft manufacturers and other aviation assets,” said Helene Spro, aviation finance director in Scope’s project finance team.

Scope’s expected loss analysis focuses on the reduction in the severity of an airline default resulting from insurance protection. This protection is an additional source of security for investors, adding to the value of the underlying aircraft.

“The focus on expected loss in Scope’s NPI methodology adds value for investors because it credits the severity-mitigation effect of insurer diversification when NPI protection is provided by a portfolio of insurers,” said Spro. “A higher number of insurers will generally be a credit-positive because the final expected loss for the investor will be lower than in the case of a single insurer.”

Scope’s analysis also reflects the impact of the credit quality of the insurers protecting the transaction – in addition to their concentration. This aspect gives more latitude to arrangers at the time of structuring the NPI protection package for a given transaction.

Scope Ratings’ approach to the analysis of aircraft finance transactions goes beyond the traditional emphasis on probability of default. Scope systematically considers the severity to investors by analysing credit-impairment events contributing to total expected losses.

Scope is inviting sponsors, investors, arrangers and other interested parties to comment on the methodology by 17 February 2020, as part of its ongoing commitment to transparency and open dialogue with market participants.

The press release announcing Scope’s call for comments on its aircraft NPI methodology can be downloaded here.

Scope’s Aircraft Non-Payment Insurance Methodology is available for download here.