The asset-backed securitisation (ABS) market will be back in the medium term but in a low leverage format, according to Citi director, global structured finance Matthew Simonetti.
Speaking at the Airfinance Journal North America 2020 virtual conference, Simonetti says one of the themes is that strong airlines would like to execute sale and leasebacks because they can raise close to 100% loan-to-value.
“That could be an attractive source of liquidity for those airlines for their unencumbered assets. However the lessors are equally struggling to raise capital in this market,” he says.
“Many of the lessors that financed through the securitisation market through interim bank warehouse facilities are going to be constrained on their sources of leverage capital for thoses leases because at the end of the day, lessors were striking leases at the lease rates pre-Covid-19 on the base that they could leverage those assets fairly significantly, especially in the securitisation market.”
Simonetti believes that the absence of having bank capital to finance new sales and leasebacks will drive lease rates up and will cause some lessors to not have access or ability to strike a new and potentially attractive leases with some airlines.
“We will see that lease rates will start to gravitate up, lease terms will get quite long,” he comments, adding that terms could be between 10 and 14 years.
“Given that lessors are scrounging and try to find any source of potential leverage for the sales and leaseback, I believe that the securitisation market will come back in the medium term but at a significantly lower leverage point.
“Equally so, investors that are trading in that market today are generally taking the view that the class A tranche ultimately perform because they have reasonable leverage and are very tightly structured,” he adds.
“The securitisation market will come back in a low leverage format and there will be issuers that will be willing to take a reduced leverage point,” he concludes.
KBRA senior managing director, head of aviation and transportation Marjan Riggi says large leasing companies are doing decent sale and leaseback transactions with airlines.
“Those deals are now frequent in the private market,” she says.
But she adds that that smaller lessor platforms that don’t have access to such markets and may not be able to perform large scale deals with good credits.
“At some stage the ABS market will come back. Right now it is not possible because there is a negative sentiment regarding cash flow deferrals. You might see smaller leasing companies doing ABS transactions for the sake of finance but outright huge sales of aircraft that create large ABS deals, it will take some time,” she says.
The ABS market paused in March after five transactions were issued in the first quarter of this year.