Engines: The Financier s View. Financing & Investing in Engines Roundtable

Transcription

1 Engines: The Financier s View Financing & Investing in Engines Roundtable May 2008

2 Agenda Overview Engines as Collateral Engine Lease Characteristics Engines vs. Aircraft the Financier s View Types of Financing Debt Markets Outlook for Engines Case Studies: Blade and WEST Q & A 1

3 Overview Old View Engines are SCARY Value changes dramatically relative to Mx condition Where is my collateral?!? It moves from plane to plane! Don t waste my time - $ size too small Current View Engines are HOT Value changes must monitor and/or enhance but is renewed repeatedly Capetown/FAA filing, serial numbers, too big to hide Let s do a package deal! 2

4 Engines as Collateral Components of Engine Value LLPs liquid, easily quantifiable Green time estimated relative to fleet median, will vary by airline and routes flown Core/Intrinsic value related to utility and will decrease over time Stability of Values No concept of YOB; age is related to Mx condition Value will be renewed several times over life Life is (theoretically) infinite Value will increase while engine is produced by OEM At times the sum of the parts may be greater than the whole Mx condition is a key variable Must be monitored and/or have reserves No reconfiguration cost/time to move to new operator Engines are an operating necessity for airlines Demand not directly related to pax demand 3

5 Engine Lease Characteristics Quite barbelled: LT (5+ years) and ST (<12 mos), not much in between Correlated to engine value and financing costs (comparable interest rates) Tend to be sticky 60 80% renewal rate is common Written as GTC ( good til cancelled) on lease until technically accepted Smaller $ value than aircraft leases Often form part of the technical budget, rather than finance budget Example: technical dept annual budget = $15 million 5 aircraft leases = $15 million 4

6 Engines vs. Aircraft: Financier s View Single engines, small $ - not worth the time Multi-engine, similar $ to aircraft now you re talking More diversity of collateral pool Better value retention Aircraft: depreciates from Day 1, has finite life Engine: value is renewable, potentially infinite life Know where it is in the maintenance cycle at all times Reserves are very important; shop visits are expensive Managing maintenance is key to generating positive returns Remarketing time/cost is greatly reduced for engines Eventually, value of the aircraft = the value of its engines 5

7 Types of Financing Applicable to Engines Secured Bank Debt Term loans Revolving credit facilities Bridge financing Islamic structures Finance Lease Operating Lease ECA/EXIM supported debt Capital Markets/Structured Finance EETCs Pooled lease vehicles 6

8 Debt Markets Outlook for Engines Bank Debt Market Open for business Reaping rewards from lack of alternatives Availability finite and shrinking (US/Euro bank writedowns) Will Asian/Middle Eastern banks pick up the slack? ECA/EXIM Financing Available for new engine deliveries Still uses bank balance sheet but less than direct loans Capital Markets/Structured Finance Currently closed Will they reopen? When? Will they be the same? *Engines will be competing against aircraft for available financing* *A downturn (in aviation) is coming* 7

9 Where do Engines fit in the Securitization Matrix? Engines are Hybrid Asset Backed Securities Servicing Management Real Estate ABS Future Flow Securitization Rail/Intermodal Securitization Unsecured Debt Pooled Aircraft Securitization Secured Debt Receivable Financing EETCs / Engine Securitization 8

10 Engine Securitization Program Options Master Trust Program Offers term notes backed by a discrete pool of assets; all Series Notes are cross collateralized by engines owned by Trust Format for all aircraft securitizations most common format Reduced management requirements collections, remarketing, repossession; no purchases and soft targets for diversification (in practice) Master Indenture Program Offers both Term Notes and VFNs backed by a single collateral pool; future term note issuance will refinance the VFNs Maintains leverage against depreciated value of the portfolio; draws on the VFNs to offset term amortization beyond depreciation amount Provides ongoing platform to sell engines to the program subject to maintaining pool diversity (new purchases subject to various criteria) Offers the ability to adapt the portfolio for changing market demand Allows substantial distribution to equity from Day 1 Future term note offerings relatively easy and low cost 9

11 Blade Engine Securitization Ltd. Master Trust This transaction enabled GECAS to manage concentrations in certain engine types and lessees while retaining the customer relationships Blade was a landmark transaction in the aviation securitization sector by placing structured equity to third party investors in the debt capital markets An optimal capital structure was achieved by creating longer debt matching the tenor of the useful life of the assets Not wrapped in the primary market but more than 50% of the senior bonds were wrapped by Assured Guaranty in the secondary market Class A-1 Notes Class A-2 Notes Class B Notes TOTAL Debt Class E Certificat es Initial Principal $226.0 $59.0 $45.0 $330.0 $32.0 Amount ($MM) Ratings Fitch A A BBB M oody s Baa1 Baa1 Baa2 Standard & Poor s A A BBB+ Initial Loan to Value 76.4% 76.4% 87.6% Expected Weighted Average Life (Years) Coupon Libor % 6.363%Libor % Price % % % Liquidity ($MM) $10.83Cash $4.05 cash Final Maturity Date 09/15/ /15/ /15/2041 Summary Portfolio Statistics $14.88 Cash Initial Appraised Value $ mm Number of Engines 50 Number of Lessees 26 Number of Countries 17 Weighted Average Remaining Lease Term 5.65 years Three Largest Lessees British Airways 11.50% GE Aircraft Engines 10.74% Air Canada 9.09% 10

12 Blade Securitization Structural Diagram HOLDCO EQUITY EQUITY Originator/Sponsor Servicing Agreement ISSUER E Notes Notes Notes A NOTES B NOTES Notes C NOTES Nominal Equity Charitable Trust Engine Owning Entity #1 Engine Owning Entity # X 11

13 WEST Master Indenture First Unwrapped Aviation Deal Post 9/11 Transaction structure tailored to company s objectives: Traditionally, spare engines were funded though short-term bank debt The securitization provides a capital structure that better matches the debt maturity to the long-lived nature of the asset with similar cost of funds Equity receives dividends from Day 1; cash is not trapped in the Trust Maximum flexibility in the financing structure at extremely attractive terms: The VFNs will enable the company to grow their engine portfolio significantly in the future They will be refinanced through frequent future securitizations off a Master trust program conveniently accommodating follow-on issuances Since issuance in August 2005, WEST portfolio has grown from 61 engines to 80 engines Virtually all of the additional engines have been new, improving the quality and diversity of the overall pool 12

14 WEST Transaction Background Assets, Company and Structural features Aircraft engines well suited for securitization this transaction includes primarily most popular commercial jet aircraft engines used on the leading Airbus, Boeing, and McDonnell-Douglas aircraft however, portfolio also has some challenges such as 30% of engines support outof-production aircraft Dynamic combination of Term and VFN notes Waterfall allows distribution to the company from day 1 Waterfall changes upon an early amortization trigger Structure allows adjustment to the portfolio through sales & purchase The transaction rating is influenced through notching mechanism by the underlying servicer rating Outstanding Debt and Overcollateralization $ (mm) Class A Class B OC (incl liquidity) ; 13

15 Recent Deals Engines and Spare Parts Issuer Blade WEST Jet Blue Continental Airlines Issue Amount $330.0 mm + $32.0 mm Equity $228.3 mm Term $113.6 mm VFN $123.5 mm EETC $320 mm EETC Date September 2006 August 2005 November 2006 May 2006 Coupon Class A-1: $226 mm, L % Class A-2: $59 mm, 6.363% Class B: $45 mm, L % Series A1: $200 mm, L % Series A2: $100 mm, L % Series B1: $28.3 mm, L % Series B2: $13.6 mm, L + 600% Class G-1: $74.1 mm L % Class B-1: $49.4 mm L % Class G: $190 mm L % Class B: $130 mm L % LTV of Avg. Base Value plus Cash Liquidity Class A: 76.4% Class B: 87.6% Series A: 70% of NBV Series B: 80% of NBV Class G-1: 45% Class B-1: 75% Class G: 43.9% Class B: 73.9% WAL Class A: 12.2 years Class B: 7.9 years Series A: 6.5 years Series B: 7.5 years 7.2 years 8.1 years Legal Final September 2041 July 2030 January 2014 June 2015 Wrap None None MBIA FGIC Rating Class A: A/Baa1/A Class B: BBB/Baa2/BBB (Moody s / Fitch) Series A: Baa1/A Series B: Baa3/BBB Class G-1: AAA/Aaa Class B-1: B+/Ba3 Class G: AAA/Aaa Class B: B+/B1 Servicing Fee 10% of rents servicing 3% of dispositions 11.5% of rents servicing 2.0% of rents administration 3% of dispositions NA NA Collateral Type 50 engines : 25% of GE90, 17% of CF6-80C2B, 6.5% of CFM56-5A/B Diverse pool of commercial jet aircraft engines (60 at close) Aircraft spare parts Aircraft spare parts (including appliances) Manager GE Commercial Aviation Services Willis Lease Finance Corporation Jet Blue Airways Corporation Continental Airlines Inc Comments WA Lease Term : 5.6 years 50% short term leases Underwriter UBS UBS Morgan Stanley Greenwich Capital Markets Morgan Stanley 14