Scenario Planning Session

Transcription

1 Scenario Planning Session How would a downturn affect cash flows and portfolio transactions? Ishka: Investing in Aviation Finance - New York October 17,

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 Commercial due diligence Aircraft Leasing & Financing Advisory Maintenance and lease cash flow forecasting Aircraft appraisals/valuations Aircraft sourcing, remarketing, and technical services Investment strategy related to entry/exit timing 2

4 COMPANY INTRODUCTION Alton supports a global client base from offices in the U.S., China, and Hong Kong New York 380 Lexington Avenue 17 th Floor New York, New York USA New.York@AltonAviation.com Beijing 8 Guanghua Dongli China Overseas Plaza South Tower, Floor 11, Suite A053 Chaoyang, Beijing China Beijing@AltonAviation.com Hong Kong 136 Des Voeux Road Central Suite 903 Central Hong Kong Hong.Kong@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 675 aircraft valued at more than $16B have been issued $6 Initial Aircraft Value of Recent Portfolio Securitizations, YTD $5 Merlin $4 SAIL Labrador Harbour METAL Thunderbolt $3 ECAF Castlelake S-Jets $2 Eagle I Diamond Head Blackbird Prop Falcon $1 CAF III DCAL Apollo Castlelake $0 Apollo Castlelake 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 reportedly being paid via 600M government bridge loan Air Berlin: Germany s second largest carrier announced insolvency August 2017; rental payments ceased in August 2017; ~80 aircraft leases being acquired by Lufthansa 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 Transasia Airways: Taiwanese airline suspended operations and shut down indefinitely in November 2016 Initial Aircraft Value in Recent Portfolio Securitizations Leased to Challenged Lessees Alitalia 26 Aircraft Air Berlin 10 Aircraft Monarch 6 Aircraft Republic 3 Aircraft Transasia 1 Aircraft OUTCOME PENDING EARLY RETURN E-Jet 737NG A320 Family A330 Family $0 $200 $400 $600 $800 $1,000 Initial Aircraft Value, USD Millions Source: Alton Aviation Consultancy research; Fitch; KBRA; S&P; issuer reports 7

9 SCENARIO PLANNING: SETTING THE CONTEXT Average ABS exposure to the already returned aircraft was 1% of the initial value; a further 7% average exposure exists to those pending outcomes Initial Exposure of Recent Aircraft Portfolio Securitizations to Challenged Lessees, by Value Eagle I 2014 Harbour 2016 Labrador 2016 SAIL 2015 CAF III 2014 DCAL 2015 Apollo Castlelake Castlelake Diamond Head 2015 Apollo S-Jets 2017 ECAF 2015 Blackbird Thunderbolt 2017 Prop Merlin 2016 Falcon 2017 Castlelake Apollo Apollo Performing Outcome Pending Early Return 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Source: Alton Aviation Consultancy research; Fitch; KBRA; S&P 8

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

11 PV of Cash Flows, USD Millions 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 $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 Cash Flows, USD Millions 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 $20 $15 $10 $5 Residual Transition Maintenance Security Deposit Lease Rental DEFAULT $0 ($5) ($10) ($15) 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 Cash Flows, USD Millions 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 $20 $15 $10 $5 DEFAULT Residual Transition Maintenance Security Deposit Lease Rental $0 ($5) ($10) ($15) EARLY RETURN LEASE 1, 12 6 YEARS END OF LEASE PAYER LEASE 2, 6 YEARS RESERVES PAYER 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 PV of Cash Flows USD Millions PV of Cash Flows USD Millions 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) $50 $40 $30 $36.9 $34.1 Base Case Default after Year 6 $43.5 $34.1 $4 $2 $0 ($2) Residual Value Maintenance Lease Rental Transition Security Deposit Total $20 ($4) $10 $0 ($10) Lease Rental $0.9 $0.5 Security Deposit $5.4 ($0.8) ($0.2) ($0.9) Maintenance Transition $1.0 $0.8 Residual Value Total ($6) ($8) ($10) ($12) 6 Year of Default Note: In this example, the initial lease has end-of-lease maintenance payments, while future leases require reserves. 14

16 PV of Cash Flows USD Millions % 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) $4 $2 $0 ($2) ($4) ($6) ($8) ($10) ($12) Residual Value Transition Maintenance Security Deposit Lease Rental Total % of Base Year of Default Note: In this example, the initial lease has end-of-lease maintenance payments, while future leases require reserves. AVERAGE 0% (4%) (8%) (12%) (16%) (20%) (24%) (28%) 15

17 PV of Cash Flows USD Millions % 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) $4 $2 $0 ($2) ($4) ($6) ($8) ($10) ($12) Residual Value Transition Maintenance Security Deposit Lease Rental Total % of Base Year of Default Note: In this example, the initial lease has end-of-lease maintenance payments, while future leases require reserves. AVERAGE 0% (4%) (8%) (12%) (16%) (20%) (24%) (28%) 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 cash flows to: End-of-lease payers: Reserve payers: 50% EOL, 50% MR: ~30% from base ~17% from base ~23% from 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: ~40% from base ~25% from base ~33% from 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 Individual Exposed Aircraft Cash Flow Impact (% from Base) Portfolio Cash Flow Impact (% of Base) Typical Downside Typical Downside 1% 23% 33% 99.8% 99.7% 8% 23% 33% 98.1% 97.4% 13% 23% 33% 97.0% 95.7% 29% 23% 33% 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 challenged lessees is very modest, at 1% for aircraft returning early and an incremental 7% having outcomes still pending Early returns negatively impact cash flows generated to service debt and earn equity returns, based on: Nature of early return Market environment, variance between contracted and market rents Timing of default End-of-lease vs. reserve payer Precise simulation models can be developed to forecast the cash flow impact in alternative scenarios Our approximations here suggest the recent ABS portfolios should withstand pressure from lease defaults / early returns in the current environment, and in more challenging simulated environments Investors still need to evaluate factors influencing non-defaulting renewal lease rates and residual values: overall and model-specific supply and demand, fuel prices, interest rates, product technology / replacement cycle, etc. 22

24 John J. Mowry ALTONAVIATION.COM NEW YORK HONG KONG BEIJING 23