Assessing the Impact of Recent Bankruptcies. Ishka: Investing in Aviation Finance: Europe April 12, 2018

Transcription

1 Assessing the Impact of Recent Bankruptcies Ishka: Investing in Aviation Finance: Europe April 12,

2 COMPANY INTRODUCTION Alton Aviation Consultancy is a boutique aviation consulting firm with deep domain expertise across the aviation value chain Aircraft Leasing & Financing Advisory Airlines Aviation & Aerospace Investors Business & General Aviation Aerospace Manufacturers & Supply Chain MRO & Aftermarket Airports Specialty Projects Agile. Global. Objective. 1

3 COMPANY INTRODUCTION Alton provides data-driven guidance and insight required to inform business strategies, allocate capital, prioritize resources, and manage risk Lessors, operators, lenders, and investors rely on Alton s professionals to provide independent, objective advisory support Market research & analysis Investment strategy Aircraft Leasing & Financing Advisory Commercial due diligence Maintenance and lease cash flow forecasting Aircraft appraisals/valuations Aircraft sourcing, remarketing, and technical services 2

4 COMPANY INTRODUCTION Alton supports a global client base from offices in the U.S., China, Hong Kong, and Japan New York Beijing Hong Kong Tokyo 380 Lexington Avenue 17 th Floor New York, New York USA 8 Guanghua Dongli China Overseas Plaza South Tower, Floor 11, Suite A053 Chaoyang, Beijing China 136 Des Voeux Road Central Suite 903 Central Hong Kong Konan Minato-Ku Tokyo, Japan New.York@AltonAviation.com Beijing@AltonAviation.com Hong.Kong@AltonAviation.com Tokyo@AltonAviation.com In China, Alton Aviation Consultancy is known as 德世国际航空咨询 ( 北京 ) 有限公司, or De Shi. 3

5 TODAY S AGENDA Setting the Context: Recent ABS Activity & Exposures Assessing the Cash Flow Impact Individual Aircraft Assessing the Cash Flow Impact Aircraft Portfolios Conclusions 4

6 SECTION 1 SCENARIO PLANNING SETTING THE CONTEXT 5

7 USD Billions SCENARIO PLANNING: SETTING THE CONTEXT Since 2014, asset backed securitizations collateralized by over 800 aircraft valued at approximately $20B have been issued $8 Initial Aircraft Value of Recent Portfolio Securitizations, YTD $7 $6 $5 $4 $3 $2 $1 $0 World Star Wings Merlin Aergo Labrador Air Lease BOC Aviation Harbour Sky ECAF Elix Castlelake KDAC Jetscape AWAS Air Lease DAE Capital CIT DCAL Apollo Castlelake Avolon Apollo Castlelake Apollo Apollo Apollo YTD Source: Alton Aviation Consultancy research; Fitch; KBRA; S&P reports 6

8 SCENARIO PLANNING: SETTING THE CONTEXT A number of these portfolios securitizations have had exposure to lessees that subsequently developed various degrees of distress Selected Challenged Lessees Alitalia: Italy s flag carrier filed for bankruptcy May 2017; operations continuing while in administration; rents being paid via government bridge loan Air Berlin: Germany s second largest carrier announced insolvency August 2017; operations ceased in October 2017; many aircraft placed with Lufthansa and easyjet Monarch Airlines: UK leisure airline entered administration and ceased operations in October 2017 Republic Airways: US regional carrier filed for Chapter 11 in February 2016; emerged April 2017 Island Air: Ceased operations in November 2017, at which point it was operating (5) Q400 aircraft Transasia Airways: Taiwanese airline suspended operations and shut down indefinitely in November 2016 Source: Alton Aviation Consultancy research; Fitch; KBRA; S&P; issuer reports Initial Aircraft Value in Recent Portfolio Securitizations Leased to Challenged Lessees Alitalia 26 Aircraft Air Berlin 10 Aircraft Monarch 6 Aircraft Republic 3 Aircraft Island Air 3 Aircraft Transasia 1 Aircraft E-Jet 737NG A320 Family A330 Family Q400 PENDING EARLY RETURN $0 $200 $400 $600 $800 $1,000 Initial Aircraft Value, USD Millions 7

9 SCENARIO PLANNING: SETTING THE CONTEXT Average ABS exposure to the returned aircraft was 3% of the initial value; 4% still have pending outcomes Aergo METAL Apollo AASET Apollo AASET Apollo AASET Avolon Sapphire ALC Thunderbolt Castlelake DAE Falcon 2017 KDAC Merlin Wings WAVE World Star SPRING ALC Blackbird AWAS Diamond Head Castlelake CIT CAF III Castlelake Total GECAS Labrador ECAF Apollo DVB DCAL SKY S-Jets Apollo AASET BOCA SAIL Aergen Harbour Elix Prop Jetscape Eagle Initial Exposure of Recent Aircraft Portfolio Securitizations to Challenged Lessees, by Value 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Performing Outcome Pending Early Return KBRA WATCH DOWNGRADE APRIL 6 Source: Alton Aviation Consultancy research; Fitch; KBRA; S&P 8

10 SECTION 2 SCENARIO PLANNING ASSESSING THE CASH FLOW IMPACT INDIVIDUAL AIRCRAFT 9

11 SCENARIO PLANNING: ASSESSING THE CASH FLOW IMPACT SINGLE AIRCRAFT In a base case scenario, the aircraft is leased consecutively without default for the entirety of its economic life The present value of these future cash flows totals $43.5 million, driven largely by lease rental income. Cash Flows of Leased Narrowbody Aircraft Over Economic Life Present Value of Cash Flows of Leased Narrowbody Aircraft Cash Flows/Value (USD Millions) $25 $20 $15 $10 $5 $0 ($5) ($10) ($15) ($20) Residual Transition Maintenance Security Deposit Lease Rental Value from Full-Life LEASE 1, 12 YR END OF LEASE LEASE 2, 6 YR RESERVE PAYER LEASE 3, 6 YR RESERVE PAYER PV of Cash Flows (USD Millions) $50 $40 $30 $20 $10 $0 ($10) Residual Value Transition Maintenance Security Deposit Lease Rental Total Base Case. Notes: 1\ In this example, the initial lease has end-of-lease maintenance payments, while future leases require reserves. 2\ Assumes 8% annual discount rate throughout presentation. 10

12 SCENARIO PLANNING: ASSESSING THE CASH FLOW IMPACT SINGLE AIRCRAFT Any default, early return, etc. will impact the downstream cash flows Cash Flows of Leased Narrowbody Aircraft Over Economic Life Cash Flows (USD Millions) $20 $15 $10 $5 $0 ($5) ($10) ($15) Residual Transition Maintenance Security Deposit Lease Rental DEFAULT LEASE 1, 12 YEARS END OF LEASE PAYER LEASE 2, 6 YEARS RESERVES PAYER LEASE 3, 6 YEARS RESERVES PAYER Note: In this example, the initial lease has end-of-lease maintenance payments, while future leases require reserves. 11

13 SCENARIO PLANNING: ASSESSING THE CASH FLOW IMPACT SINGLE AIRCRAFT As an example, future cash flows would change significantly after a default in year six Cash Flows of Leased Narrowbody Aircraft Over Economic Life Cash Flows (USD Millions) $20 $15 $10 $5 $0 ($5) ($10) ($15) DEFAULT EARLY RETURN LEASE 1, 12 6 YEARS END OF LEASE PAYER LEASE 2, 6 YEARS RESERVES PAYER Residual Transition Maintenance Security Deposit Lease Rental LEASE 3, 6 YEARS RESERVES PAYER LEASE 4, 6 YEARS RESERVES PAYER Note: In this example, the initial lease has end-of-lease maintenance payments, while future leases require reserves. 12

14 SCENARIO PLANNING: ASSESSING THE CASH FLOW IMPACT SINGLE AIRCRAFT The unique circumstances of each aircraft, lease, lessee, default, etc. will determine the actual impact on cash flows and economics Variables Affecting Cash Flows Lease Rental Income Maintenance Cash Flows Transition Costs Residual Value Security Initial Scenario Assumptions 1. Restructuring, Early Return, or Repossession Consensual Early Return 2. Timing of Default Variable 3. Contractual vs. Market Return Mid-Cycle 4. Maintenance Provisions in Lease EOL Payments 5. Condition of Aircraft and Return Good Records; Variable Condition 6. Interior Configuration, Modification Standard Typical Single Class; Basic IFE 7. Security Deposits, Letters of Credit Cash Security of Two Months Rent High Impact Medium Impact 13

15 SCENARIO PLANNING: ASSESSING THE CASH FLOW IMPACT SINGLE AIRCRAFT With our reasonable assumptions, the year six default would cause the future cash flows to decline by over $9 million in present value Present Value of Cash Flows of Leased Narrowbody Aircraft by Source (As Measured from Age 0) Change in Present Value of Cash Flows of Leased Narrowbody Aircraft by Source (As Measured from Age 0) PV of Cash Flows (USD Millions) $50 $40 $30 $20 $10 $0 ($10) $36.9 $34.1 Lease Rental $0.9 $0.5 Security Deposit Base Case Default after Year 6 $5.4 ($0.8) ($0.2) ($0.9) MaintenanceTransition $1.0 $0.8 Residual Value $43.5 $34.1 Total PV of Cash Flows (USD Millions) $4 $2 $0 ($2) ($4) ($6) ($8) ($10) ($12) Residual Value Transition Maintenance Security Deposit Lease Rental Total 6 Year of Default Note: In this example, the initial lease has end-of-lease maintenance payments, while future leases require reserves. 14

16 % Change from Base Case SCENARIO PLANNING: ASSESSING THE CASH FLOW IMPACT SINGLE AIRCRAFT Scenario analysis shows the aircraft to be most exposed in event of a default between 6-9 years, when the aircraft maintenance status is low On average, an initial lease default would reduce the present value of cash flows by 19% from base Change in Present Value of Cash Flows of Leased Narrowbody Aircraft from Base Case by Source vs. Year of Default (Measurement: Age 0) PV of Cash Flows (USD Millions) $4 $2 $0 ($2) ($4) ($6) ($8) ($10) Residual Value Transition Maintenance Security Deposit Lease Rental Total % of Base AVERAGE 0% (4%) (8%) (12%) (16%) (20%) (24%) ($12) Year of Default (28%) Note: In this example, the initial lease has end-of-lease maintenance payments, while future leases require reserves. 15

17 % Change from Base Case SCENARIO PLANNING: ASSESSING THE CASH FLOW IMPACT SINGLE AIRCRAFT Changing our assumption to Maintenance Reserves shows a reduction in the present value of cash flow by 12% from the average base case Change in Present Value of Cash Flows of Leased Narrowbody Aircraft from Base Case by Source vs. Year of Default (Measurement: Age 0) PV of Cash Flows (USD Millions) $4 $2 $0 ($2) ($4) ($6) ($8) ($10) Residual Value Transition Maintenance Security Deposit Lease Rental Total % of Base AVERAGE 0% (4%) (8%) (12%) (16%) (20%) (24%) ($12) Year of Default (28%) Note: In this example, the initial lease has end-of-lease maintenance payments, while future leases require reserves. 16

18 SECTION 3 SCENARIO PLANNING ASSESSING THE CASH FLOW IMPACT PORTFOLIO FINANCINGS AND FUTURE DOWNTURNS 17

19 Cash Flows, USD Millions Cash Flows, USD Millions SCENARIO PLANNING: ASSESSING THE CASH FLOW IMPACT PORTFOLIO FINANCINGS AND FUTURE DOWNTURNS Since ABS are issued with used aircraft, the change in cash flows needs to be measured from different measurement points $20 $10 $0 ($10) $20 $10 $0 ($10) SALE TO ABS Expected Cash Flows Actual Cash Flows with Default SALE TO ABS DEFAULT Indicative Impact on Individual Aircraft For a sample portfolio (different ages, sale dates, etc.), a random default during the initial lease would change the PV of that aircraft s future cash flows: End-of-Lease Payers: Reserve Payers: 50% EOL, 50% MR: ~70% of base ~83% of base ~77% of base 18

20 SCENARIO PLANNING: ASSESSING THE CASH FLOW IMPACT PORTFOLIO FINANCINGS AND FUTURE DOWNTURNS The same analysis, but with different assumptions, can be used to assess individual aircraft performance in a downturn Changes to Assumptions Restructuring, Early Return, or Repossession Consensual Contested Return Longer Downtime, Higher Transition Costs Contractual vs. Market Return Mid-Cycle Weak Market Lower Re-Lease Rent Indicative Impact on Individual Aircraft With these more stressful assumptions, a random default during the initial lease would change the PV of that aircraft s cash flows to: End-of-Lease Payers: Reserve Payers: 50% EOL, 50% MR: ~60% of base ~75% of base ~66% of base 19

21 SCENARIO PLANNING: ASSESSING THE CASH FLOW IMPACT PORTFOLIO FINANCINGS AND FUTURE DOWNTURNS The recent ABS portfolios are expected to be well-equipped to withstand defaults in the current market, and defaults in a more stressed market Indicative Impact to Aircraft ABS Portfolios Average Recent ABS Portfolio (Early Return) Average Recent ABS Portfolio (Early Return, Pending Outcome) Highest Exposed Recent ABS Portfolio (Early Return) Highest Exposed Recent ABS Portfolio (Early Return, Pending Outcome) Portfolio Exposure to Challenged Lessees 3% Individual Exposed Aircraft Cash Flow Impact (% from Base) Portfolio Cash Flow Impact (% of Base) Typical Downside Typical Downside 99.3% 99.0% 7% 98.4% 97.7% 77% 67% 13% 97.0% 95.7% 29% 93.3% 90.4% Note: This analysis considers the specific impact of defaults on the cash flows, but does not consider a broader market downturn impacting lease rates and residual values for nondefaulting aircraft. 20

22 SECTION 4 SUMMARY & CONCLUSIONS 21

23 SCENARIO PLANNING: SUMMARY & CONCLUSIONS Summary & Conclusions Of the recent ABS issuances, the average initial portfolio exposure to recently challenged lessees is very modest, at 3% for aircraft returning early and an incremental 4% having outcomes still pending. Early returns negatively impact cash flows generated to service debt and earn equity returns, based on: Nature of early return and maintenance status of aircraft at time of return Market environment, variance between contracted and market rents Timing of default End-of-lease vs. reserve payer Alton s analytics here suggest the average ABS portfolios should withstand pressure -- from lease defaults / early returns -- in the current environment; some are more exposed. One of the most exposed issuances, with 13% of its portfolio returned, is now on watch downgrade. Investors still need to evaluate a range of other factors including higher default rates and renewal lease rates and residual values for non-defaulting aircraft driven by overall and model-specific supply and demand, fuel prices, interest rates, product technology / replacement cycle, etc. Sophisticated models may be developed to forecast cash flows in alternate scenarios for existing deals. 22

24 John J. Mowry, Managing Director ALTONAVIATION.COM NEW YORK HONG KONG BEIJING TOKYO 23