Market collapse puts most transactions on hold, well-established automotive ABS programs have best chance of survival with primary issuance during crisis
As the aviation industry is among the hardest hit by the coronavirus pandemic, aircraft emissions have now come to a halt.
This comes after the last two years in which asset-backed aircraft lease transactions, in addition to the traditional asset classes of residential mortgage-backed securities (RMBS), auto asset-backed securities ( ABS) and credit card ABS have experienced strong growth.
One of the latest priced aircraft deals came from Avolon Holdings on February 20. It achieved the lowest return on debt of all aircraft ABS issues in the past decade.
Special Purpose Companies (SPCs) Sapphire Aviation Finance II LLC and Sapphire Aviation Finance II Limited (collectively, SAPA 2020-1) have sold a total of US $ 620 million of fixed rate bonds due 2040.
The issue consisted of US $ 490 million of Series A Notes issued at a yield of 3.250%, US $ 86 million of Series B Notes issued at a yield of 4.375% and US $ 44 million of Series C Notes. issued at a yield of 6.875%.
In addition, Sapphire Aviation Finance II Limited sold certificates of participation representing the stake in SAPA 2020-1, LibreMax Capital acting as lead investor and Avolon acquiring a minority stake.
The notes are backed by a portfolio of 21 narrow-body, wide-body aircraft acquired by SPC from Avolon using the proceeds of the show. They are leased to 19 tenants / airlines based in 18 countries. Avolon acts as the portfolio manager.
The Sapphire issuance vehicle was created in 2018. Notes and share certificates have been offered in the United States to qualified institutional buyers under Rule 144A.
Avolon is 70% owned by Bohai Leasing, listed on the Shenzhen Stock Exchange, which is a subsidiary of the HNA group. After HNA encountered difficulties and launched an asset divestiture program, a 30% stake in Avolon was sold in November 2018 to the Japanese aircraft lessor Orix Corporation, which is listed on the Tokyo Stock Exchange and the New York stock market.
A report released late last year by Bloomberg said HNA subsequently probed Orix to acquire the remaining 70%, although this has never been confirmed by the company.
According to Chinese media, HNA is now run by a committee representing state interests. On March 11, the company held a meeting with its creditors to discuss its liquidity difficulties and debt problems. Creditors included the Industrial and Commercial Bank of China, the Construction Bank of China, the Agricultural Bank of China, the Bank of China, the Bank of Communications and the Shanghai Pudong Development Bank.
Last year, Avolon was reclassified in the investment category by Fitch, Moody’s and S&P Global, and fully utilized its improved access to senior unsecured bond markets.
Most of the world’s major donors had a dynamic 2019 and also benefited from abundant bank debt and cheap bond market financing. Thus, they have entered a position of strength in a year which promises to be extremely difficult.
Another major Chinese lender, CALC, listed on the Hong Kong Stock Exchange, has focused more on China’s domestic debt markets.
In January 2018, China Asset Leasing Company (CALC) launched China’s first foreign currency denominated and settled ABS, and the first aircraft ABS in the public placement market.
The US $ 171 million Huatai Securities Asset Management – CALC Phase I ABS program has been listed on the Shanghai Stock Exchange. The bonds have been rated AAA by China Cheng Xin International.
In the unsecured bond market in June 2019, CALC sold 1 billion yuan of three-year corporate bonds at a fixed coupon rate of 5.20%. China Merchants Securities was the primary underwriter and bookrunner for the transaction, while CITIC Securities acted as a co-underwriter.
The issuer and the corporate bonds have been rated AA plus by China Cheng Xin International Credit Rating.
But the bulk of global issuance has come from US aircraft lessors, many of which have adopted a so-called “asset-lite” strategy of securitizing assets and acting as portfolio managers.
One of the main issuers is Carlyle Aviation Partners, a unit of private equity firm Carlyle Group, which entered into a series of ABS deals after acquiring Apollo Aviation Group in October 2018. Carlyle Aviation Partners was in the market in January with a $ 409 million deal. .
Amid extreme market volatility and uncertainty over the magnitude of the possible impact on GDP caused by the coronavirus outbreak, primary issuance has almost stopped for all types of ABS on the European market, where there have also been some aircraft transactions, although much less than in the United States.
The European ABS market was just starting to gain momentum, having recovered very slowly from the 2008 financial crisis. Last year, a new EU securitization regulation was implemented, introducing a set of stricter rules on liquidity, risk retention and transaction reporting, as well as a new category of simple, transparent and standardized securitizations (STS).
A constant pool of STS transactions was formed from March 2019, particularly in auto ABS and RMBS.
The Driver Espana Six agreement, STS certified, was set at the end of February by Volkswagen and backed by loans originating in Spain. Volkswagen Leasing’s VCL 30 was the next to be launched.
Analysts say most market transactions are currently on hold, although well-established auto ABS programs have the best chance of continuing primary emissions during the crisis.
Most German transactions are STS certified by STS Verification International, based in Frankfurt. In 2019, he also verified the automotive transactions of Globaldrive (Ford Bank GmbH) and various banks offering auto loans, and certified the Driver and VCL offerings.
Volkswagen’s Driver China program is not STS compliant as loans originate from outside the EU.
Last week, European securitization markets saw a steady stream of competitive offers as investors tried to get rid of some of their holdings, mainly those with less liquid secured loan obligations.