Structured Products and Related Credit Derivatives: A Comprehensive Guide for Investors

CHAPTER 19

Aircraft-Backed Debt Securities

Chris van Heerden, CFA

Vice President

Wachovia Capital Markets, LLC.

Pooled lease aircraft-backed securitizations have been used since the early 1990s to finance the aircraft portfolios of leasing companies. This chapter reviews the development of the aircraft asset-backed securities (ABS) market and its overall place in aircraft financing. This is followed by an overview of deal modeling.

The aircraft ABS market can be divided into deals issued before and after 9/11. Over time, many of the original structuring assumptions for pre- 9/11 transactions have proved optimistic and most securities in this group trade at distressed prices. Bonds in these deals tend to trade at significantly discounted prices and the majority of the subordinated bonds have stopped performing. Post-9/11 transactions have employed monoline insurance, and have been structured with newer aircraft financed at lower leverage.

All transactions in the sector are characterized by complex amortization formulas and limited protection against deterioration in performance and therefore require careful analysis based on independently derived assumptions.

HISTORICAL BACKGROUND TO THE AIRCRAFT-BACKED DEBT MARKET

Before deregulation of the airline industry, which started in the United States in 1978, the industry was financed primarily by the banking sector with a combination of loans and mortgages on aircraft. A few large carriers maintained monopoly pricing in protected markets. ...