Engine Financing: A Capital Markets Perspective. Financing & Investing in Engines Roadshow

Transcription

1 Engine Financing: A Capital Markets Perspective Financing & Investing in Engines Roadshow April 2007

2 What is Securitization as it Applies to Engines? Securitization encompasses both EETCs and Portfolio ABS transactions Initially, securitizations were packages of self-liquidating financial receivables mortgages, HELOCs, credit card receivables The concept of adding structural and credit enhancement migrated to operating assets in the early 90s Operating asset securitization refers to a structured finance transaction designed to enable the structured transaction to achieve a much higher credit rating than the originator/issuer might achieve on its own. Includes EETCs of spare engines and spare parts and ABS backed by portfolios of leased engines The higher credit rating compared to a recourse corporate credit rating results from the following core structural features: The securitized assets are sold to an SPC created to be bankruptcy-remote from the originator/issuer The SPC will have a board of directors that will include at least one director who is completely independent of the originator/issuer Further credit enhancement is added by the following: The notes issued will be tranched and sold to distribute the risk among classes of investors based on their risk appetites The tranching is accomplished by different LTVs for different tranches; higher rated tranches will have lower LTVs and greater over-collateralization for credit enhancement than lower rated tranches Credit facilities or cash collateral accounts are typically added to provide liquidity for interest and high priority expense payments for a specified period For portfolio ABS issuances, a back-up servicer may be retained to ensure that the revenue earning assets continue to be managed no matter what happens to the originator/issuer The higher rating results in lower cost of funds; capital markets investors have appetite for longer tenor than do banks 1

3 Securitization is the Optimal Financing Solution for Engines Engine characteristics are well-suited to financing through securitization Long economic lives: Economic lives of 30 to 40 years match well with 25 to 30 year debt tenor Ability to continuously extend life through refurbishment/overhaul and LLP replacement; economic asset life limited only by retirement of aircraft that it supports Technological obsolescence is a risk for the airframe/engine combination, not the engine alone; technological changes cannot be introduced rapidly; manufacturers and others typically develop enhancements to address new requirements Cash flows are predictable with limited volatility: Cash received includes monthly or quarterly rents, often augmented by regular maintenance reserve payments Engine lease rates demonstrated very limited volatility in the most recent downturn compared to aircraft lease rates, despite a significant drop in short-term interest rates Demand for leased engines is driven by numerous factors, not just need for additional lift as with aircraft including coverage for shop visits or managing aircraft lease return conditions Average dollar value per asset increases diversity of portfolio: Greater granularity than with aircraft Engine values are stable for much of the economic life: Engine leasing serves multiple functions it offers both financial and operational benefits Often the sum of the parts is more valuable than the whole, particularly approaching the end of the economic life and in periods of high demand Leases typically require payments to compensate for the degradation of the engine through periodic maintenance reserve payments or end of lease adjustments that provide cash collateral for debt balances 2

4 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 3

5 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 Regional Aircraft / Engine Securitization 4

6 Indicative ABS Securitization Structural Diagram Administrative Agent Indenture Security Trustee Security Benefit Originator/Sponsor Ownership Servicing Agreement Staff Services ISSUER Security Interest Notes Notes A NOTES B NOTES Engine Owning Co. #1 Engine Owning Co. #2 Engine Owning Co. #N 5

7 Typical Priority of Payments Available Collections (i) Required Expense Amount to the Expense Account (vi) Class G Notes Minimum Principal Payment Amount (x) Class G Notes Scheduled Principal Payment Amount (ii) Class G Notes Interest Amount, Senior Swap Payment to any Swap Provider and reimbursement of Accrued interest on any Policy Drawings to the Policy Provider (vii) Class B Notes Interest Amount (xi) Class B Notes Scheduled Principal Payment Amount (xii) Class B Notes Outstanding Principal Balance (iii) Required Amount to the Senior Cash Account (viii) Required Amount to the Junior Cash Account (xiii) Class G Notes Outstanding Principal Balance (iv) Policy Premiums to Policy Provider (ix) Class B Notes Minimum Principal Payment Amount (xiv) Remainder for distribution to Equity (v) Required Amount to the Maintenance Reserve Account 6

8 Engine Portfolio Securitization Issues to Consider Manager s credit quality and performance record A low implied corporate rating for the Manager creates a linkage related notching concern Management team s good track record is essential Portfolio diversity Current production engines vs. out-of-production engines Lessee concentration and credit quality SG&A Interest rate risk management Historical data essential for securitization Utilization Lease rates Repossession history Storage cost Maintenance expense Collection history SG&A etc. 7

9 Securitization Process: Analytics Building the Cash Flow Model Select portfolio for transaction Show historic utilization rates, lease rates, maintenance expenses, remarketing times Show present lease terms and present lessees Determine appropriate useful life and depreciation schedule per engine type Project future lease rates over useful life of engines Availability of historical information is key Stressing Cash Flow Model Rating agency analysis S&P: Cyclical/recession focused Lessee defaults increased by multiples of historical experience Remarketing time/expense increased Lease rates reduced Moody s Squeeze margin over COF in lieu of manipulating lease rates and utilization Review both cyclical (adjusts for industry conditions) and non-cyclical (adjusts for portfolio composition vs. market demand) Engine life and portfolio value reduced as stresses Monolines Each uses analysis and stress runs similar to ratings agencies Use competitive bidding process among 3 or 4 to obtain most favorable pricing Reserves In place to handle fluctuation of cashflow collected Source can be proceeds from transaction or Letter of Credit 8

10 Preparation for Securitization Process Documentation/Information Requests for Engine Securitization: Operations Detailed description of business and ownership history, operations and competitive strategy; Location of offices and service area(s); Background of senior management team; Organization chart; Description of purchasing/pricing decision process; Sales incentive plan/policies; Description of supplier relationships or contracts; Description of maintenance policies general maintenance, repairs and lessee monitoring programs; Lessee credit underwriting policies and procedures; Payment terms, collection policies and procedures, charge-off policies, if any; Conflict management between owned vs. managed engines; portfolio management policies in terms of repairs, deliveries/returns, etc.; lessee concentration policies; geographic concentration policies; engine purchase and sales policies, priorities and procedures; Computer systems (hardware and software) in use for engine/lease monitoring and accounting. System capabilities, security and back-up procedures; Type and amount of insurance coverages maintained (provide copies of insurance policies), limits of coverages and applicable deductibles. Please provide names of insurers used and history of claims since inception. Types and amounts of uninsured losses since inception; Significant pending litigation, if any; 9

11 Preparation for Securitization Process Documentation/Information Requests for Engine Securitization: Portfolio Detailed statistical profile of engine leasing portfolio going back as long as possible including: Type of engine; Portfolio stratification by lessee, geography, lease tenor; Monthly utilization rates; Monthly lease rates by engine; Maintenance reserve rates by engine, where applicable; Expected return condition by engine; Monthly breakdown of operating expenses (disaggregated by expense type, i.e., maintenance, storage, etc.) in dollars and as a percent of gross leasing revenues; Monthly data regarding renewals and re-leasing, including the percentage of the obligor base that renews their leases (including any rate degradation). Of the percentage that does not renew, please provide details on how long it takes to re-lease, as well as any rate degradation; Current disk sheet for each engine showing LLP cycles Engine disposition history including sales proceeds Timing and outcome of repossessions and defaulted leases (if there have been any); please include recoveries from insurance carriers, lessees and any other types of recoveries, all including time to receipt of such recoveries, breaking down such receipts quarterly. Please provide an explanation for any amounts not recovered. Lease Agreements; Types of leases (long-term/short-term/spot or per diem) utilized and provide sample forms; Breakdown of leasing portfolio by lease type; 10

12 New Investor Base in Aviation Securitizations Hedge Funds and Private Equity Play Large Role Post 9/11, aviation securitization transactions had to attract new investor base in order to revive the primary issuance market Like many other non-flow products, new communities of investors, such as hedge funds, are dominating the scene and are becoming more important However, as the underlying industry continues to improve, traditional money, such as insurance companies and money managers, are returning to the sector Wrapped senior tranches In high demand from investors such as banks and money managers But, as the WEST, ACG III and Blade deals proved, unwrapped transactions or individual tranches can be executed at slightly higher cost Unwrapped senior tranches in bigger scale can be placed Most likely the demand will come from insurance companies, banks and money managers ACG III and Blade deals demonstrate that economically viable mezzanine and subordinated tranches are possible Most of these bonds were placed with the hedge fund community Traditional money such as insurance companies is showing interest as well Subordinated tranches with below investment grade rating are potentially attractive to the hedge fund investment community looking for yield and exposure to the sector High demand for equity and equity-like instruments in the structured market A lot of interest from hedge funds who are always in search of higher return and who are willing to take more risk to get the upside UBS is the only firm to structure and place nearly $1 billion of non-wrapped paper in this sector post 9/11 UBS is the Pioneer in Bringing in Passive Mezzanine, Junior & Equity Investors to Transportation Deals 11

13 Structured Equity Offering Changing the Debt/Equity Paradigm in Operating Asset Securitization UBS structured and arranged both debt and 100% of the equity in an engine lease securitization, Blade Engine Securitization Ltd., for GECAS This transaction has many structural innovations to deliver the best results for the lessor Some of the structural highlights are as follows: Structured equities that yield current cash by placing an equity dividend at a competitive rate relatively high in the waterfall; greater returns are subordinated Main selling point of the equity is cash on cash return expected on day one Low cost, slowly amortizing long term senior debt Combined with junior tranche of debt that is shorter than the senior tranche, offering decreasing COF 100% of the equity in the transaction was placed with passive investors in the structured finance market; a first time event to place such equity with third parties in the aviation securitization market Equity combined with senior and junior tranches of debt issued in the securitization market resulted in proceeds close to 100% of the appraised value of the engines in the pool The strategy of structuring debt and equity in tandem ensured optimal outcome for the sponsor in achieving gain on sale with the highest proceeds Retaining the servicing of the portfolio ensures ongoing returns to the lessor and sustains its relationship with the lessees This is the First Transaction in the Transportation Sector to Create an Effective Asset Management Vehicle Through Securitization 12

14 Blade Engine Securitization Ltd. Case Study On Sept. 15, 2006, Blade Engine Securitization Ltd. ( Blade ) issued $330 million of Notes and $32 million of E Certificates to fund the purchase of a diversified pool of 50 spare aircraft engines from GECAS who remains as the servicer This transaction enabled GECAS to manage concentrations in certain engine types and lessees while retaining the customer relationships While the second engine securitization, Blade was a landmark transaction in the aviation securitization sector by placing structured equity to third party investors in the debt capital markets UBS was the sole structuring agent for Blade and the sole arranger and placement agent for the Notes and the equity Even though Blade was not wrapped by a monoline, UBS successfully placed the Notes, executing them at the optimal level An optimal capital structure was achieved by creating longer debt matching the tenor of the useful life of the assets Initial Principal Amount ($MM) Class A-1 Notes Class A-2 Notes Class B Notes TOTAL Debt Class E Certificates $226.0 $59.0 $45.0 $330.0 $32.0 Ratings Fitch A A BBB Moody s Baa1 Baa1 Baa2 Standard & Poor s A A BBB+ Initial Loan to Value 76.4% 76.4% 87.6% Expected Weighted Average Life (Years) Coupon Libor % 6.363%Libor % Price % % % Liquidity ($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% 13

15 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 14

16 Blade Priority of Payments Available Collections (i) Required Expense Amount to the Expense Account (v) Class A Notes Minimum Principal Payment Amount (x) Class A Notes Scheduled Principal Payment Amount (ii) Class A Notes Interest Amount, Senior Swap Payment to any Swap Provider and reimbursement of Accrued interest on any Policy Drawings to the Policy Provider (iii) Required Amount to the Senior Cash Account (iv) Required Amount to the Maintenance Reserve Account (vi) Class B Notes Interest Amount (vii) Required Amount to the Junior Cash Account (viii) Class B Notes Minimum Principal Payment Amount (ix) Equity Minimum Dividends (xi) Class B Notes Scheduled Principal Payment Amount (xii) Equity Threshold Distributions (xiii) Class B Notes Outstanding Principal Balance (xiv) Class A Notes Outstanding Principal Balance (xv) Remainder for distribution to Equity 15

17 Contact Information Mostafiz Shahmohammed Managing Director Tel: Cecilia Park Executive Director Tel: Alison Mason Director Tel: Mark Sheridan Director Tel: Jennie Jiang Associate Tel: Gabriel Feghali Associate Tel: UBS Investment Bank is a business group of UBS AG This presentation has been prepared by UBS Securities LLC ( UBS ) for the exclusive use of recipient (together with its subsidiaries and affiliates, the company ) using information provided by the company and other publicly available information. UBS has not independently verified the information contained herein, nor does UBS make any representation or warranty, either express or implied, as to the accuracy, completeness or reliability of the information contained in this presentation. Any estimates or projections as to events that may occur in the future (including projections of revenue, expense, net income and stock performance) are based upon the best judgment of UBS from the information provided by the company and other publicly available information as of the date of this presentation. There is no guarantee that any of these estimates or projections will be achieved. Actual results will vary from the projections and such variations may be material. Nothing contained herein is, or shall be relied upon as, a promise or representation as to the past or future. UBS expressly disclaims any and all liability relating or resulting from the use of this presentation. This presentation has been prepared solely for informational purposes and is not to be construed as a solicitation or an offer to buy or sell any securities or related financial instruments. The company should not construe the contents of this presentation as legal, tax, accounting or investment advice or a recommendation. The company should consult its own counsel, tax and financial advisors as to legal and related matters concerning any transaction described herein. This presentation does not purport to be all-inclusive or to contain all of the information which the company may require. No investment, divestment or other financial decisions or actions should be based solely on the information in this presentation. This presentation has been prepared on a confidential basis solely for the use and benefit of the company; provided that the company and any of its employees, representatives, or other agents may disclose to any and all persons, without limitation of any kind, the tax treatment and tax structure of the transaction and all materials of any kind (including opinions or other tax analyses) that are provided to the company relating to such tax treatment and tax structure. Distribution of this presentation to any person other than the company and those persons retained to advise the company is unauthorized. This material must not be copied, reproduced, distributed or passed to others at any time without the prior written consent of UBS. 16