NEW YORK (S&P Global Ratings) March 22, 2022--Aircraft leasing companies have mostly been blocked by the Russian government from repossessing planes leased to Russian airlines. The situation remains unclear and is evolving, but it appears that the lessors' best hope for compensation may come from claims under their insurance policies.
Western sanctions in response to Russia's invasion of Ukraine, especially sanctions imposed by the European Union (most aircraft leasing companies are domiciled in Ireland, even those owned by Chinese companies), required that lessors terminate their leases to Russian airlines by March 28, 2022 (see our March 1 article, "Aircraft Lessors Hit By Western Sanctions On Russia"). Some planes have subsequently been recovered, but the vast majority remain in Russia. Even though the planes have not been "nationalized," recent Russian legislation requires a license from the government to allow them to leave, effectively blocking such a move. Exposure to Russia is about 2%-10% of total book value of the rated lessors' aircraft portfolio, with the highest exposure being that of SMBC Aviation Capital. For most, the figure is roughly 5%.
We understand there are several layers of insurance protection against potential loss due to confiscation or similar situations that make it impossible to repossess a plane. First, the Russian airline lessees are required to insure each plane, but that is provided under Russian requirements by Russian insurance companies and provides no protection in this situation. Second, the airlines must arrange for that exposure to be reinsured by Western insurance companies. We believe many of those policies may have already been canceled by the insurers on the basis that sanctions block them from providing insurance. Third, and potentially most consequential, coverage is provided by contingency policies on an aircraft lessor's entire fleet of planes. Those policies may limit the amounts insured and basis for claims, but could provide meaningful recovery. Insurance policies of various forms on aircraft generally insure them for an amount in excess of book value. Our discussions with aircraft lessors and insurance companies providing aviation coverage have produced a range of views on potential outcomes, and it is possible these claims could be subject to lengthy negotiations and litigation between the lessors and their insurers.
The lessors also have some exposure in regards to past-due rentals, though lessors state that most Russian airlines have historically been prompt and reliable in paying rent. Of course, this foregone amount will increase with time. Lessors typically have security deposits and maintenance reserves that partly offset their overall exposure. We believe that foregone revenue, while material, is less of an immediate issue than potential total loss of the planes and write-downs of some or all of their aircraft asset value. This is in contrast to what occurred early in the COVID-19 pandemic, when many airlines requested rent deferrals or lease restructurings. The write-downs would be mostly noncash in the period when they are taken, but represent potential reduced future lease cash flows and residual values. Auditors and the leasing companies will soon face the task of determining how this will be presented in financial statements for the period ending March 31, 2022.
We have not taken any rating actions on aircraft leasing companies, though we did place our ratings on seven aircraft-backed debt securitizations on CreditWatch (see "28 Ratings From Seven Aircraft ABS Transactions Placed On Watch Negative On The Russia-Ukraine Conflict," March 15, 2022). We will continue to investigate and evaluate risks and possible outcomes for aircraft lessors as more information becomes available.
This report does not constitute a rating action.
S&P Global Ratings, part of S&P Global Inc. (NYSE: SPGI), is the world's leading provider of independent credit risk research. We publish more than a million credit ratings on debt issued by sovereign, municipal, corporate and financial sector entities. With over 1,400 credit analysts in 26 countries, and more than 150 years' experience of assessing credit risk, we offer a unique combination of global coverage and local insight. Our research and opinions about relative credit risk provide market participants with information that helps to support the growth of transparent, liquid debt markets worldwide.
| Primary Credit Analyst: | Philip A Baggaley, CFA, New York + 1 (212) 438 7683; philip.baggaley@spglobal.com |
| Secondary Contact: | Betsy R Snyder, CFA, New York + 1 (212) 438 7811; betsy.snyder@spglobal.com |
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