09 Mar 21
New structural enhancements from the latest ABS issuance
Will they be the norm for future Aviation Asset Backed Securities (ABS) issuances?
New ABS issuances were halted since the outbreak of COVID-19 in 2020 and the first ABS issuance to close since the pandemic was the recent Castlelake ABS, named, Castlelake Aircraft Structured Trust 2021-1.
Given the ongoing liquidity issues with the aviation industry, there has been new structural enhancements to the ABS which are to provide additional protection to the senior noteholders. The enhancements include:
a collections test that redirects the Class B principal payments to Class A if the amount of rent collected falls below 75% of the contractual lease rents;
a triggering event for a Class A partial cash sweep through years four to seven;
the debt service coverage ratio (DSCR) trigger for cash tap and cash sweep events is now calculated for the previous three months instead of six months in prior ABS issuances;
a minimum number of aircraft in the portfolio test, whereby a full cash sweep event will be triggered upon the portfolio having fewer than eight aircraft;
excess security deposits may only be used for certain expenses and do not get swept down the waterfall; and
note amortisation schedules specific to each asset in the pool.
With the ongoing pandemic, most ABS structures have been redirecting cash flows from the subordinated tranches to the senior tranches pursuant to their various indentures and as of now, there has been no defaults in ABS structures. After the initial drop in the bond prices of the senior tranches of debt (at the start of the pandemic), most A tranche debt has recovered to par and some B note tranches are trading in the 90s despite a lot of ABS structures not paying the principal payments on the B tranche debt. This shows the strength of the ABS structures and represents an appetite for investors to invest in ABS structures.
Furthermore, with the structural enhancements mentioned above possibly being incorporated in future ABS issuances, the various stages of the vaccinations worldwide and the high level of demand for air travel there may be more ABS issuances soon.