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SCI Start the Week - 14 June

Category: ABS Capital Relief Trades CLOs


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A review of securitisation activity over the past seven days

Last week's stories
Arch markets MILN
Second Bellemeade deal of 2021 in the market, pricing soon
Execution queries
Questions linger over funded insurer SRTs
Positive prospects
Rating upgrades boost default outlook
Rebound continues
Second trade finance SRT inked
Low flying aircraft
Aircraft ABS remain slowest to recover from Covid
Aircraft lease ABS remains the black spot of the US ABS market, and has been the slowest to recover from the pandemic sell-off, note analysts.

While spreads in every other sector have now recovered from the pandemic sell-off, and, in fact are now trending at 24-month lows, the aircraft ABS market is still mired in the doldrums.

At the end of May 2021, there was $29bn outstanding in the aircraft ABS market

"We like to look at where spreads have traded over the past 24 months and right now most spreads are near the 24-month minimums, with the noticeable exception of aircraft," says Theresa O'Neill, senior ABS strategist at Bank of America in New York.

Average aircraft ABS spreads are currently around 100bp wider than pre-Covid levels and over 200bp wider than the pre-Covid 24-month average.

The continued restrictions on travel, especially international travel, are clearly responsible for this disconnection.  While the number of flights has increased from the depths of April 2020, they are still much below pre-pandemic levels. European flights, for example, are 60% lower than they were before the global lockdown took effect.

Prices for aircraft ABS have also become much more widely dispersed than they were before the pandemic, according to FINRA, and this is expected to continue as tranches with exposure to different types of aircraft and airlines recover more slowly than others.

As a whole, the aircraft ABS sector is most heavily exposed to the narrow body B737 and A320 families of aircraft. These aeroplanes are generally used for short haul flights so ABS predominantly composed of this type collateral should recover more quickly that ABS composed of wide body collateral.

Overall, 35% of aircraft ABS deals are composed of B737 family collateral and 33% are composed of family A320 collateral. Only 12% are composed of the wide body A330 family and 5% of the wide body B777 family.

This should bode well for the market going forward. For example, the number of flights on a A320neo have increased 26.4% in the most recent seven day average compared to a 2020 low of down 82.9% with January 2020 indexed at zero. The number of flights on a B737 Original has decreased 21.4% compared to a 2020 low of down 63.4%.

However, the number of flights on wide body B777s is still down 40% compared to January 2020, some 30% higher than the lows, while the number of flights on wide body A330s is down almost 50% compared to the January 2020 low of down 86.4%.

So while the overall numbers are still from encouraging, narrow body flights are picking up better than wide body flights, and the spreads for relevant ABS trades will reflect this disparity. But there are other factors to consider. A wide body aircraft could be on lease from a very strong airline and the terms of the lease could be favourable, and this will affect ABS pricing as well.

"It's not just the piece of metal, it's other things that go into it as well. The quality of the airline needs to be considered. If it's on lease to one of the larger, more financial secure airlines for five or more years, then you shouldn't have to worry too much," says O'Neill.

Despite the problems that continue to affect the sector, Bank of America expects that spreads in the aircraft ABS market will not take as long to recover as the aviation industry itself as passengers to begin to take to the air once more. The IATA predicts that air passenger numbers will not return to pre-pandemic numbers until 2023, but the ABS sector should return to pre-pandemic prices before then, suggests BoA.

Bank of America also recently updated its expected issuance in the aircraft sector in 2021 from $3bn to $6bn, in line with increased market share for aircraft lessors. Airlines are thought more likely to lease aircraft than buy as they shore up finances shattered by the effect of the pandemic and the global lockdown.

"The reason that the lessors will gain market share is related to the financial condition of the airlines. As the airlines look to recover from all that they have been through, they will prefer to lease rather than buy the aircraft outright," says O'Neill.

Another structure said to be in vogue are sale leasebacks, where the airlines sell the aeroplanes to the lessor and then lease them back.

It has been a busy week in the US ABS sector so far, with 10 deals worth $8.5bn priced across sectors by the close on Thursday and another couple expected to come before the close on Friday.

Overall ABS spreads remain range-bound, but levels in the student loan market could improve more than most due to strong fundamentals and positive market tone, suggests O'Neill.

Simon Boughey

Other deal-related news

  • European CLO new issue triple-A spreads are now out to 87bp-88bp from their post-Covid tights of 79bp-80bp, but could still soften (SCI 7 June).
  • Just under US$2bn in US CMBS loans were resolved with a loss last year, compared to US$5.3bn in 2019, according to Fitch's latest annual US CMBS Loss Study (SCI 7 June).
  • The Australian Prudential Regulation Authority has released a letter to authorised deposit-taking institutions (ADIs) on the implementation of the capital framework reforms, which will come into effect from 1 January 2023 (SCI 7 June).
  • Kensington is in the market with the UK's first green RMBS issuance (SCI 7 June).
  • The European Parliament and European Council have agreed on common EU standards regulating the transfer of non-performing loans from banks to secondary buyers while protecting borrowers' rights (SCI 10 June).
  • Finance Ireland Credit Solutions is in the market with its third Irish RMBS, Finance Ireland RMBS No. 3 (SCI 10 June).
  • Bayfront Infrastructure Management has priced an infrastructure ABS via Bayfront Infrastructure Capital II (BIC II), a wholly owned and newly incorporated distribution vehicle (SCI 11 June).
  • ICE Mortgage Technology is set to deploy an eVault solution for secure storage of digital mortgages and notes, based upon technology acquired from DocMagic (SCI 11 June).

Company and people moves

  • Charles Wakiwaka has joined McGuireWoods as partner in the firm's securities and capital markets practice in London (SCI 7 June).
  • Ocorian has appointed Mike Hughes as global head of service lines, with full responsibility for the group's client segments (SCI 7 June).
  • Schroders has united its specialist private assets investment capabilities under the newly launched Schroders Capital brand, with the aim of delivering an enhanced service for its clients (SCI 7 June).
  • Eagle Point Credit Management has appointed Nate Morse as head corporate trader, reporting to managing partner Thomas Majewski and principal and portfolio manager Dan Spinner (SCI 7 June).
  • Nishil Mehta has joined First Eagle Alternative Credit as md (SCI 7 June).
  • Varagon Capital Partnershas named Suraj Panjwani md, business development and investor relations (SCI 7 June).
  • Sound Point Capital Management has acquired the US direct lending platform of CVC Credit (SCI 10 June).
  • Andrew Rippert has joined Aspen in the newly created role of evp - head of mortgage, reporting to Christian Dunleavy, chief underwriting officer of Aspen Reinsurance (SCI 10 June).
  • David Ryan has joined Barclays as director, CLO syndication, based in New York (SCI 10 June).
  • Kawai Chung has joined Intriva Capital as md, based in London (SCI 11 June).
  • Seelaus Asset Management has received an allocation of US$50m from Boise-based Micron Technology (SCI 11 June).
  • Academy Securities has hired Paul Staples as director of CMBS sales and trading (SCI 11 June).
  • Chimera Investment Corporation has appointed Kevin Chavers to its board (SCI 11 June).
  • Miller has hired Erik Manning as head of ILS, reporting to Charlie Simpson, head of Bermuda for the firm (SCI 11 June).
  • Pagaya has named Theodore Douglas as svp, head of innovation US (SCI 11 June).

Data

Recent research to download
Synthetic Excess Spread - May 2021
TCBI Deal Profile - May 2021
CLO Case Study - Spring 2021

Upcoming events
SCI's 1st Annual CLO Special Opportunities Seminar
29 June 2021, Virtual Event
SCI's 3rd Annual NPL Securitisation Seminar
September 2021, Virtual Event
SCI's 7th Capital Relief Trades Seminar
13 October 2021, In Person Event

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