Article
Source: Airline Economics
Article
12.01.14
After a fallow post-crisis period, investors in the hunt for yield are once again taking a close look at aviation asset-backed securities (ABS), or similarly structured asset-backed loans. These rated instruments represent non-recourse debt backed by a diversified portfolio of aircraft (or aircraft engines) on operating leases around the world. The ratings are based on projected cash flows that can be generated by the asset servicer in the worldwide aircraft leasing market, as well as the projected residual or disposition values of the assets in the portfolio.
These transactions are subjected to modeling stresses by rating agencies and structured with various forms of credit support to smooth payment profiles. While day-to-day lease management and remarketing is handled by the servicer (typically a leasing company), more fundamental decisions such as assets sales are left up to a board comprised of equity representatives and an independent director.
This article examines one particular legacy transaction—Embarcadero Aircraft Securitization Trust, or “EAST”—and the manner of its novel judicial unwinding after years of underperformance. We open with a brief survey of the evolution in transaction structures over the years and then turn to EAST in order to understand where that particular transaction encountered limits. We will review the EAST board’s pioneering efforts to maximize the value of a poorly performing aircraft pool by accelerating the disposition of assets, reducing overhead and ultimately returning cash reserves to bondholders. The article concludes by examining how current vintage transactions are being structured to incorporate some of the lessons learned.
Download: Working out those ABS