NEW YORK (S&P Global Ratings) Sept. 26, 2018--S&P Global Ratings today assigned its preliminary 'A (sf)' rating to Zephyrus Capital Aviation Partners 2018-1 Ltd.'s fixed-rate loans (see list).

The note issuance is an asset-backed securities (ABS) transaction backed by 21 aircraft and the related leases and shares and beneficial interests in entities that directly and indirectly receive aircraft portfolio lease rental and residual cash flows, among others.

The preliminary rating is based on information as of Sept. 26, 2018. Subsequent information may result in the assignment of final ratings that differ from the preliminary ratings.

The preliminary rating reflects the following:
- The likelihood of timely interest on the loans (excluding the step-up amount) on each payment date and the ultimate interest and principal payment on the loans on the legal final maturity at the rating stress.
- The 74.07% loan-to-value ratio (based on the lower of the mean and median of the three half-life base values and the three half-life current market values) on the loans.
- The aircraft collateral's quality and lease rental and residual value generating capability. The portfolio contains 21 in-production passenger planes, 18 of which are narrow-body aircraft and three of which are wide-body aircraft (10 A320 family, three A330 family, and eight B737-NG planes). The 21 aircraft have a weighted average age of approximately 13.3 years and a remaining average lease term of approximately 2.9 years, calculated as of the first payment date. These aircraft, though entering mid-life, are still liquid narrow-body aircraft models. While Airbus delivered the first A320neo in January 2016 and Boeing delivered the B737MAX in 2017, we expect that the new, more fuel-efficient models replacing all of the current A320 family and B737-NG will take many years; we view this as a moderate threat to aircraft values and incorporate it into our collateral evaluation.
- Many of the initial lessees have low credit quality, which is not uncommon in aircraft securitizations; however, only 29% of the lessees (by aircraft value) are domiciled in emerging markets. Our view of the lessee credit quality, country risk, lessee concentration, and country concentration is reflected in our lessee default rate assumptions.
- The loans follow a straight-line 12-years-to-zero amortization.
- During years six and seven of the transaction, if no rapid amortization event has occurred and is continuing, the scheduled amortization of the loans will be supplemented with 50% of the remaining available collections, after payments 1-11 of the payment priority.
- The transaction's capital structure, payment priority, loan amortization schedules, and performance triggers. Similar to other mid-life aircraft ABS recently rated by S&P Global Ratings, this transaction has a few structural features--such as rapid amortization and excess proceeds payment--that can, to some extent, mitigate the value retention risk of aging aircraft and the risk of an aircraft's green time monetizing.
- The existence of a liquidity facility that equals nine months of interest on the loans, as well as an additional liquidity account, which will be used to cover certain expenses in the event the amounts available under the liquidity facility are not sufficient to cover shortfalls. A deposit of $500,000 will be made into the account at closing.
- Morten, Bayer & Agnew Inc. (MBA) performed a maintenance analysis before closing. After closing, the servicer will perform a forward-looking 18-month maintenance analysis at least semiannually, which MBA will review and confirm for reasonableness and achievability.
- The maintenance reserve account will be funded at closing with proceeds of the E certificate offering and loans. The closing date deposit will be $25.5 million. If the expected final payment date has not passed yet, the junior maintenance reserve account must keep a balance of the higher of (a) the lower of $1 million and the preliminary rated loans outstanding notional amount and (b) the sum of forward-looking maintenance expenses. If the expected final payment date has been reached or passed, both the junior and senior maintenance reserve accounts must keep a balance of the higher of the lower of (a) $2 million and the preliminary rated loans outstanding notional amount and (b) the sum of forward-looking maintenance expenses.
- The senior indemnification is capped at $10 million and is modeled to occur in the first 12 months.
- The junior indemnification (uncapped) is subordinated to the rated series' principal payment.
- Zephyrus is the servicer for this transaction. Zephyrus is an aircraft leasing and management company founded by Virgo Investment Group (Virgo), the latter of which is a private investment firm that has been investing in aviation since 2010 and mid-life and older aircraft, specifically, since 2012.