Fitch Publishes Updated Global Aircraft Operating Lease Rating Criteria

CHICAGO—(BUSINESS WIRE)—Fitch Ratings today published an updated Asset-Backed sector specific criteria report titled ‘Global Rating Criteria for Aircraft Operating Lease ABS’.

This report updates and replaces the prior criteria report with the title ‘Global Rating Criteria for Aircraft Operating Lease ABS,’ dated April 17, 2012. There have been no material changes from the previous version; therefore Fitch expects no impact on outstanding ratings.

The report presents Fitch’s analytical approach to rating securitizations backed by aircraft operating leases and outlines the unique features of these transactions. Additionally, the report details key rating drivers associated with aircraft operating lease ABS as detailed below.

Key Rating Drivers

Aviation Market Cyclicality: The commercial aviation industry has exhibited significant cyclicality tied to the health of the overall global economy. This cyclicality can produce increased lessee defaults, lower demand for off-lease aircraft, and deterioration in lease rates and asset values. Fitch stresses asset values, utilization levels, lease rates, and default probability during assumed market down cycles to account for this risk.

Asset Value and Lease Rate Volatility: During economic downturns, airline capacity tends to be reduced, leading to an increase in aircraft available for sale or lease. At the same time, the general demand for aircraft decreases, pushing down aircraft values irrespective of age. In its analysis, Fitch employs aircraft value stresses that take into account age and marketability, which simulate the decline in lease rates that are expected to occur in the course of an aviation market downturn and decrease potential residual sales proceeds.

Releasing Risk and Servicer Reliance: Operating lease transactions are reliant on the transaction servicer to remarket aircraft after lease termination and lessee defaults. Transactions also heavily rely on the servicer to adequately manage and monitor the technical upkeep of the aircraft and legally protect trust assets in multiple foreign jurisdictions. Fitch reviews the operational practices of the servicers of aircraft operating lease transactions. Additionally, Fitch requests historical data related to the servicing activities of the lessor to determine base and stress case cash flow assumptions.

Lessee Credit Risk: Lessee defaults can lead to repossession and remarketing costs and aircraft downtime. Fitch utilizes actual historical default probabilities based on the airlines’ corporate ratings to determine the likelihood that each lessee will default in the quantitative analysis of the transaction. Airlines that do not have a public rating (which represent the majority in typical operating lease transactions) are assumed to carry a rating in the range of ‘CCC’ to ‘B’. Additionally, as aircraft age, they are assumed to migrate to carriers with worse ratings than that of the initial airline, as it is typical for older, out-of-production aircraft to be leased to start-up airlines or in lower-tier markets.

Additional information is available at ‘www.fitchratings.com’.

Applicable Criteria and Related Research Global Rating Criteria for Aircraft Operating Lease ABS

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=704628