As the anticipated repayment date (ARD) for some of the S&P Global Ratings-rated aircraft lease-backed securitization transactions is fast approaching, we analyzed 16 outstanding transactions, forecasting the values of selected metrics within our criteria framework that we believe could influence the transactions' ability to refinance or call notes upon ARD.

Background

Most transactions collateralized by aircraft leases incorporate an ARD, the date when the issuer is incentivized, but not obligated, to refinance or call the transaction and pay down all outstanding debt. If the debt remains outstanding after the ARD, structural features of the transaction accelerate the amortization of the remaining debt, provided sufficient funds are available. Upon ARD, noteholders are typically also entitled to a step-up interest rate (typically 2% per annum), which is paid at a subordinated step in the priority of payments and accrues if not paid without triggering an event of default.

An aircraft ABS transaction's ARD typically occurs seven years after the initial closing date. Our ratings address full repayment of interest due (excluding step-up interest due after ARD) and principal by the transaction's legal final maturity date, not by the ARD.

Issuers can typically exercise this option to call the transaction through a refinancing of the notes or by selling assets. A transaction's propensity to be called at ARD (or subsequently) is likely to change depending on the market environment and the aircraft leasing sector in particular.

In general, we believe that the following factors, among others, may affect the propensity to call a transaction.

• Loan-to-value (LTV)--the value of the assets compared to the liabilities,
• Weighted average coupon (WAC)--The transaction's current weighted average interest rate,
• Asset yield--the ability of the portfolio assets' net yield to support a new financing, and
• Market cost of capital--the prevailing market cost of financing alternatives, inclusive of both debt (whether a new ABS or other debt) and equity cost of capital.

We analyze 16 rated aircraft ABS transactions under various lease rate and depreciation scenarios.

This analysis excludes transactions:

• Collateralized by aircraft loans, business jets, and engines,
• With calculated LTVs below 50%,
• That do not incorporate the ARD or step-up feature, and
• That are already past their ARD as of our analysis date.

SCENARIOS AND ASSUMPTIONS

We tested three scenarios: "no stress," "LRF stress," and "depreciation stress." For each scenario, detailed in table 2 below, we forecast (i) cash flows until legal final maturity and (ii) whether the notes will be paid if all remaining assets are sold at ARD.

Under the lease rate factor (LRF) stress scenario, cash flows are forecasted using an LRF curve that is flatter and has a lower starting value than the curve described in our Aircraft ABS SIVR. The result is that lease rates for all aircraft are lower compared to our standard assumptions, but the magnitude of the reduction is greater for older aircraft.

The depreciation stress simulates an environment where aircraft depreciate at a faster rate than our standard assumptions. See Appendix I for more details on the LRF and depreciation scenario inputs.

We applied the general framework as stated in our criteria "Global Aircraft ABS: Methodology And Assumptions," published March 10, 2023 (the Criteria). However, we modified some of the assumptions as described herein, solely for the purposes of this analysis. The modified assumptions do not imply any changes to how S&P Global Ratings will apply the Criteria to rate new transactions or to monitor the outstanding transactions. For example, contrary to the forecasting associated with our Criteria, none of the three scenarios forecast an industry downturn and therefore no early lease terminations occur and no lease rates decline.

The table below details all the assumptions applied for each of the three scenarios. The value for each assumption in the table is the same as that used when forecasting cash flows outside of a downturn in accordance with our Criteria. Any aircraft previously on lease to a Russian airline is regarded as a total loss. We do not forecast any lease, sales, or potential insurance proceeds because the timing and amount of any such payment remains uncertain. See "S&P Global Ratings Reviews Aircraft ABS Exposure To Russian And Ukrainian Airlines" published Feb. 28, 2022, for a list of transactions that had exposure to aircraft on lease to Russia lessees at the outbreak of the conflict. Asset values shown and used in our forecasts reflect values of $0 for each such aircraft.

Table 1

Table 2

Additional Considerations

• Maintenance condition – we assume a half-life maintenance condition for each aircraft at the start of our forecast.
• Maintenance cash flows – we assume that all maintenance cash inflows, outflows, and end of lease payments both to and from the operator net to an outflow equal to 3% of lease cash flows per month and do not forecast cashflow from end of lease payments. In our forecast we debit this cash outflow first from the maintenance reserve and then from available funds (including liquidity facility), if needed.
• Disposition values – we forecast the residual value by depreciating the aircraft's half-life values from the latest appraisal date until the assumed disposition date.
• Portfolio updates – the analysis presented here incorporates data available to us as of our latest review. In some cases, subsequent developments in the portfolio may not be fully reflected in our analysis, including changes in market values for aircraft.

RESULTS

We forecast asset cash flows, tranche balances, asset values, and whether collateral cash flows under these scenarios are sufficient to pay interest and principal on the notes at the ARD. Further, we calculated the weighted average cost of debt of the transaction as well as a metric we describe as the "asset yield," which is the internal rate of return of future net cash flows versus forecasted asset value as of a given date. See Appendix II for a description of result outputs.

Impact of Scenario Analysis

• Under the LRF stress and depreciation stress scenarios, transactions are less likely to pay down their liabilities than under the no stress scenario, either by the ARD or the legal final maturity date. In these cases, the difference in asset cash flow is significant enough to prevent a full paydown of the transaction's liabilities.
• Asset yields for each transaction are typically higher in the no stress scenario than in the LRF stress scenario due to reduced lease cash flows that are the result of the lower, flatter LRF curve compared to the no stress case. In general, under the LRF stress scenarios, cash flows generated by the assets were 5%-10% lower when compared to the no stress scenarios
• Asset yields in the depreciation stress cases are lower than in the no stress case because lower residual cash flows and lower re-lease cash flows reduce asset yields. The depreciation stress scenarios tended to have 9%-15% lower cash flows than that of the no stress scenarios.
• In most cases, the LRF stress and depreciation stress scenarios result in slower amortization compared to the no stress case.
• Faster depreciation in the depreciation stress case results in reduced cash flows from both lease revenues and asset dispositions compared to the other two scenarios, which further drags on amortization.

Results Summary

Table 3

Note that the transactions that do not pay off all outstanding classes by legal final maturity under the no stress scenario have LTVs greater than 100%.

Also note that the subordinate tranches of the three transactions that do not pay off all outstanding classes by legal final maturity under our no stress scenario are currently rated 'CCC+' or below. This implies a one-in-two chance of default as described in our "Criteria For Assigning ‘CCC+’, ‘CCC’, ‘CCC-‘, And ‘CC’ Ratings," published Oct. 1, 2012.

Our credit ratings are based on the application of our Criteria and not on the analysis presented herein. The scenario analysis described below does not constitute a credit assessment or opinion on the credit quality of the transactions.

Transaction-Specific Analysis

The following provides a detailed analysis for each transaction. Note that:

• For outstanding classes not paid off in full where we forecasted a portfolio sale at ARD, the shortfalls shown were calculated as of the ARD.
• When we forecasted asset sales at the end of their useful lives, the tranche shortfalls were calculated as of the date the last asset reaches the end of its useful life.
• A shortfall at the ARD indicates that the cash flows from the sale of all portfolio assets are insufficient to pay off the liabilities at ARD.
• The shortfall percentage is calculated as a proportion of the tranche balance as of the calculation date.
• Tranche balances may be higher than the original balance if interest is capitalized. Accordingly, the shortfall can be greater than 100%.
• Forecasts of payoff or shortfall at legal final maturity do not account for any accrued and unpaid step-up margin.

AASET 2021-1 Trust

Under our no stress scenario, the transaction amortizes significantly by the ARD, providing sufficient asset coverage. Asset yield remains elevated above the transaction WAC for the duration of our forecast. At ARD we forecast a reduction of LTV to 62% and a rise in the transaction WAC to 6%, which levels out at 7.8% as the A and B notes are amortized.

The LRF stress scenario has reduced cash flow and therefore slower amortization. Nevertheless, we forecast a 65% LTV at ARD, only slightly worse than in the no stress scenario. However, asset yields are persistently lower than the no stress case.

The depreciation stress scenario falls between the no stress and LRF stress scenarios, exhibiting a slower initial LTV decline to 72% at ARD. However, higher lease rates allow for accelerated amortization compared to the LRF stress scenario. Asset yields are lower than in the no stress scenario due to depressed lease and residual cash flows.

Castlelake Aircraft Structured Trust 2017-1R

On the as-of date of our analysis, we calculate the transaction's LTV at 131.8%. The portfolio value and cash flow are insufficient to pay off the transaction's liabilities under the three scenarios, either at ARD or by legal final maturity. Note that in the charts below, LTV rises and remains beyond the scale of the y-axis later in our forecasts. Yield fluctuates later in the transaction's life, and drops to zero as lease cash flows fail to offset depreciation.

LTV improves slightly in the first seven years of our no stress scenario before subsequently deteriorating. However, it does not improve substantially in the other two scenarios. While asset yields typically remain above funding costs in each of our scenarios, at no point in any of our projections are assets sufficient to pay off the liabilities, either from asset sales or lease cash flows. The shortfall is smallest in our no stress scenario and worst in the depreciation stress scenario.

Falcon Aerospace Ltd.

The transaction has sufficient asset coverage to pay off the liabilities in each of our scenarios, both at ARD and by legal final maturity. Under our no stress scenario, asset yields are above transaction WAC even after the step-up interest starts accruing after ARD.

By contrast, under our LRF scenario the expected asset yield drops below transaction WAC (inclusive of step-up interest) after year two due to lower forecasted lease cash flows. Under our depreciation stress scenario, asset yield is above transaction WAC after ARD (again, inclusive of step-up interest) until after year three, when it dips below due to reduced forecasted residual and lease cash flows.

Harbour Aircraft Investments Ltd.

We calculate the transaction's LTV at 111.4% as of the analysis date. The portfolio value and cash flow are insufficient to pay off the transaction's liabilities in any of our three scenarios, either at ARD or by legal final maturity. Note that in the charts below, LTV rises and remains beyond the scale of the y-axis later in our forecasts. Asset yield fluctuates later in the transaction's life and drops to zero as lease cash flows fail to offset depreciation.

LTV improves initially in our no stress and LRF stress scenarios before subsequently deteriorating. However, it does not improve at all in the depreciation stress scenario. We forecast the shortfall to be smallest in our no stress scenario and largest in our depreciation stress scenario. In the LRF stress and depreciation stress scenarios the shortfall is worse at legal final maturity than at ARD due to cash flow shortfalls and accrual of interest on the C tranche.

KDAC Aviation Finance (Cayman) Ltd.

Under our no stress case, the transaction has insufficient asset coverage to pay off its liabilities at ARD but can pay off by legal final maturity. Note that due to cash outflows senior in the waterfall a transaction can fail to pay off its liabilities even when LTV is lower than 100%. Asset yields are above the transaction WAC even after step-up interest starts accruing after the ARD.

Lease cash flow is reduced sufficiently in the LRF stress scenario to prevent payoff at ARD or by legal final maturity. The shortfall is small at ARD but becomes more acute by legal final as cash flow from re-leases at lower rates amortize the liabilities more slowly than in the no stress case and the C tranche capitalizes interest. Asset yields are lower due to lower lease cash flows and is close to transaction WAC after step-up interest is considered. Yield fluctuates later in the transaction's life, and drops to zero as lease cash flows fail to offset depreciation.

Under the depreciation stress, the transaction does not payoff all outstanding notes by ARD or legal final maturity. Accelerated depreciation and reduced lease cash flow compared to the no stress case results in a greater shortfall at ARD compared to the LRF stress case, and accrual of interest on the C tranche results in a more acute shortfall by legal final maturity.

Labrador Aviation Finance Ltd.

The ARD for Labrador occurs as of the first date of our forecast. Under our no stress scenario, assets are sufficient to pay down the liabilities both at ARD and by legal final maturity. The asset yields are above transaction WAC, including step-up interest, for the life of the transaction.

The transaction can also pay off the outstanding notes immediately and by legal final maturity under the LRF stress scenario, though the asset yields are just above transaction WAC once step-up interest is included.

Under the depreciation stress scenario, the transaction would not be able to pay off the outstanding notes in the first pay period. However, our forecasts do not incorporate utilization rent inflows and are based on asset values as of year-end 2022. Further, the forecasted shortfall is relatively small at approximately $3.6 million.

Under our depreciation scenario, the transaction could pay off by legal final maturity, if it remains outstanding. Asset yields are lower than in the no stress scenario due to lower residual and lease cash flows, but higher than in the LRF scenario.

MAPS 2018-1 Ltd.

We forecast that the transaction's assets are sufficient to pay down the liabilities in all three scenarios, both at ARD and by legal final maturity. We forecast that the asset yields are above the transaction WAC in the no stress scenario.

In the LRF scenario, the transaction takes longer to amortize due to decreased lease cash flow relative to the no stress scenario. Further, the asset yields are closer to the transaction WAC in our forecast and dips below the transaction WAC (inclusive of step-up expense) by year five. However, there is still sufficient asset coverage to pay down the liabilities.

In the depreciation stress scenario, the asset yields are above the transaction WAC, though by less than in the no stress scenario due to reduced residual and lease cash flows. The transaction takes longer to pay off than in the no stress scenario, though not as long as in the LRF stress scenario. Again, there is sufficient asset value and cash flow coverage to pay down the liabilities at ARD and by legal final maturity.

MAPS 2019-1 Ltd.

Under the no stress scenario, the LTV declines to 98% by ARD, which occurs over two years from the start of our projections. The transaction cannot amortize at ARD despite a 98% LTV due to additional cash flow items in the waterfall, including disposition fees. Cash flow is sufficient to amortize the transaction by legal final. Asset yields are above transaction WAC for most of the life of the transaction.

A similar dynamic occurs under the LRF stress scenario, although the transaction takes longer to amortize. Asset yields are lower due to reduced lease cash flow, dipping below transaction WAC (inclusive of step-up margin) after year four.

The depreciation stress scenario also stresses the transaction sufficiently to prevent it from being fully redeemed either by ARD or legal final maturity. However, the shortfall in the latter case is less severe. Yield fluctuates later in the transaction's life, and drops to zero as lease cash flows fail to offset depreciation.

MAPS 2021-1 Trust

Under the no stress scenario, we forecast that the LTV declines from 76% to 50% at ARD, which is nearly five years from the start of the projections. Asset yields remain above transaction WAC throughout the life of the deal.

Performance under the LRF scenario is similar, despite the additional stress imposed by lower re-lease rates. Forecasted asset yields are lower than the no stress scenario. However, the transaction still de-levers and asset yields are still above transaction WAC, even inclusive of step-up margin.

Similarly, the depreciation stress scenario exhibits more stress than the no stress scenario, but the transaction can still redeem the notes fully. We forecast a 56% LTV at ARD. Asset yields are lower in this scenario than the no stress scenario as a function of accelerated depreciation, reducing residual cash flows and future lease cash flows. However, asset yield as the transaction seasons is still higher than in the LRF scenario.

Raptor Aircraft Finance I Ltd.

We calculate an LTV of 115% as of the date of the analysis, and cash flows are insufficient in any of our three scenarios to completely pay off the liabilities by the ARD or by legal final maturity. Note that in the charts below, LTV rises and remains beyond the scale of the y-axis later in our forecasts. Asset yield fluctuates later in the transaction's life and drops to zero as lease cash flows fail to offset depreciation.

Also note that the class B interest payment is subordinate to the class A principal payment after period 95, and that non-payment of B interest is not an event of default. Accrued B interest is senior in the waterfall to payment of principal on the B tranche. In the charts below, we treat the accrued interest on the B notes as capitalized principal.

There is sufficient cash flow to pay off the B tranche by legal final maturity under the no stress and LRF stress scenarios. In these scenarios after the B tranche is paid off, the C tranche receives some cash flow, $109 million in the no stress scenario and $34.6 million in the LRF scenario. However, the C tranche never receives cash flow in our depreciation stress scenario. The shortfalls incurred by the C tranche in each scenario are substantial due to the long periods during which interest on the C tranche is capitalized.

Sprite 2021-1 Ltd.

We forecast that the transaction can pay down the liabilities in all scenarios at both ARD and by legal final maturity. In the no stress case, the initial 84% LTV declines throughout our forecast. Asset yields are above the transaction WAC for most of the life of the transaction, but the two converge after year eight as the A and B tranches are paid down and the step-up interest accrues.

The asset yields in the LRF stress case are closer to the transaction WAC after step-up interest begins accruing and falls below the WAC as the A and B tranches pay down. Reduced lease cash flow relative to the no stress scenario also causes the transaction to take longer to fully amortize.

The depreciation stress case has lower lease and residual cash flows compared to the no stress case. The transaction takes longer to pay off and causes the asset yields to be lower than the no stress case, though higher than the LRF stress case.

START Ltd.

In the no stress case, we forecast an 85% combined LTV at ARD. Note that the C tranche does not incorporate a step-up feature. As such, the aggregate liability cost remains relatively steady as the A and B notes amortize and the C notes defer and capitalize the unpaid interest amounts. The asset yields remain above the aggregate liability cost for the life of our no stress forecast.

In the LRF stress case, lower re-lease rates and a flatter LRF curve result in slower amortization and a smaller spread between asset yield and transaction WAC. Similar to the no stress case, we forecast that the combined LTV at ARD is 85%. By contrast, the asset yield remains closer to the transaction WAC inclusive of step-up.

In the depreciation stress case, we forecast that the combined LTV rises to 89% as we assume a higher depreciation rate for each aircraft. Asset yield climbs over time, albeit at a slower pace compared to the no stress scenario since re-lease rates are also stressed by the application of higher depreciation rates.

Tailwind 2019-1 Ltd.

We forecast the transaction pays down the liabilities in the no stress scenario at both ARD and by legal final maturity. The initial 99% LTV declines throughout our forecast, and asset yields are above the transaction WAC for the life of the transaction, but the two converge as the A and B tranches are paid down and step-up interest accrues.

Under the LRF stress scenario, the transaction can pay down at both ARD and by legal final maturity. The asset yield in the LRF stress case falls below the transaction WAC after year seven, due to the accrual of step-up interest, paydown of the lower-interest A and B tranches, and reduced lease cash flow compared to the no stress case. Under the LRF stress scenario he transaction also takes longer to amortize than the no stress case.

We forecast the transaction pays down the liabilities by legal final maturity under the depreciation stress scenario, but does not pay down at ARD. However, subsequent lease cash flow allows the transaction to pay down by legal final maturity. Otherwise, the transaction exhibits behavior similar to that under the LRF stress case due to reduced lease and residual cash flow. Asset yield takes longer to fall below transaction WAC under the depreciation stress case than in the LRF stress case.

WAVE 2017-1 LLC

Under the no stress scenario, we forecast that the current combined LTV of 104% does not improve substantially enough for the outstanding notes to be paid off at ARD, but the asset yield improves with age as older assets are re-leased at higher LRFs. The increase in cash flows brings LTV below 100% by month 48. Transaction leverage is reduced while WAC increases due to the step-up rates and senior amortization, though asset yield stays above transaction WAC.

In the LRF scenario, lower lease cash flow results in a slower amortization. This, in turn, causes transaction LTV to remain above 100% for the first five years of our projection, and then decline slowly. Asset yield also remains close to transaction WAC for most of the remainder of the life of the transaction. Yield fluctuates later in the transaction's life, and drops to zero as lease cash flows fail to offset depreciation.

We forecast that the transaction is never fully paid down neither at ARD nor by legal final maturity under the depreciation scenario. Asset value decline puts a strain on both lease cash flows from forecasted re-leases and on asset disposition cash flows. Amortization of the senior notes also increases transaction WAC causing a further drain on cash flows. Asset yield later in the transaction's life exhibits a similar pattern as in the LRF stress case.

WAVE 2019-1 LLC

Under the no stress scenario, asset cash flows steadily reduce the transaction's LTV, allowing sufficient asset coverage by ARD. Leverage continues to steadily decrease thereafter, and asset yields remain above transaction WAC.

The projected LTV in the LRF stress case is below 87% at ARD. The asset yield falls below the transaction WAC inclusive of the step-up rate in the LRF stress case after year seven due to reduced lease cash flows.

The depreciation stress case is more stressful, but we still forecast a combined LTV of 94% at ARD, with leverage declining more slowly as the transaction amortizes. The spread between asset yield and transaction WAC is positive for the transaction's life but converges over time.

Zephyrus Capital Aviation Partners 2018-1 Ltd.

Under our no stress scenario, the transaction benefits from a low starting LTV that is further reduced as the notes amortize. The transaction does not have any subordinated notes; as such, transaction WAC remains constant after ARD. Initial leverage is lower than most other transactions we reviewed for this purpose given the single-tranche structure and it declines further over time. Asset yield also climbs steadily for most of the transaction's life and remains above note WAC.

The LRF stress scenario illustrates the impact of lower forecasted lease cash flows, exacerbated by the substantial number of lease transitions in the near term. Leverage declines more slowly, and asset yields are lower than the no stress case, though they remain above the transaction's WAC even after ARD.

In the depreciation stress scenario, we forecast a more gradual LTV decline than in the no stress scenario. Accelerated depreciation also depresses asset yields by reducing residual cash flows. Nevertheless, as in the no stress case, asset yield rises in later years, and leverage is reduced.

Appendix I--LRF Stress And Depreciation Stress Assumptions

LRF Stress Scenario

The start rate parameter for the LRF stress scenario is 1.25%. By contrast, the parameter in our latest Aircraft ABS SIVR is 1.82%.

A lease rate curve was constructed using the same methodology used to construct our standard lease rate factor curve while restricting the sample size to data from first-quarter 1999 to third-quarter 2001, a period where the curve was unusually flat.

The no stress and depreciation stress scenarios both used the LRF curve from our Aircraft ABS SIVR and the 1.82% start rate.

A comparison of the lease rate curve from our Aircraft ABS SIVR using a 1.82% start rate and the flat lease rate curve using the 1.25% start rate is shown below.

Depreciation Stress Scenario

Comparison of our standard depreciation assumption to historical data shows that some models' historical depreciation has been sharper than that predicted by our standard assumptions. The depreciation assumptions for each of the three scenarios is shown in the table below:

Appendix II--Results Description

Tranche balance and asset value

The first chart shows the following metrics for each transaction under each of the three scenarios analyzed.

Tranche balance:   Each tranche's balance as a percentage of the aggregate liability balance at the beginning of our forecast. Note that the axis label "original balance" refers to the beginning balance at the time of analysis, not the closing date balance. This data is shown in a stacked area chart. This shows how the proportional mix between senior and subordinate notes changes over time. Note that in some transactions the subordinate class can accrue interest. Because the data is shown as a stacked area chart it may appear as if the mezzanine or senior class balances are also increasing, when in reality the senior or mezzanine class balance are remaining constant or paying down.

Aggregate asset value:   The portfolio value as a percentage of the initial liability balance. Asset value in this context is the aggregate half-life value of the portfolio after applying S&P Global Ratings' aircraft-specific depreciation assumptions for each non-disposed aircraft.

LTV:   The dotted line shows the LTV, which is calculated as the aggregate liability balance, including any deferred interest on the class C notes, if applicable, divided by the asset value.

ARD:   The ARD is shown as a vertical line.

The aggregate asset value and the total tranche balance shows how proportional asset coverage changes over time; this relationship is illustrated by the LTV. The chart also illustrates the pace at which the liabilities amortize and the pace at which the portfolio value declines due to both depreciation and asset sales.

Transaction WAC and asset yield

The second chart illustrates components of the transaction costs compared to asset yield. As in the first chart, the ARD is shown as a vertical line.

Aggregate funding cost with step-up rate:   Each tranche's contribution to the transaction's aggregate funding cost and how it changes over time. The contribution is equal to the note coupon times the note's proportion of the total balance on each date. The sum of the contributions is the total funding cost of the transaction as a percentage of aggregate note balance on a given date, i.e., the transaction WAC. After the ARD, the aggregate cost of the step-up interest margin is also shown, using the same scale.

Aggregate asset yield:   The internal rate of return of future net cash flows versus depreciated asset value for a given date. This yield is calculated for each period and is the discount rate that, when applied to all net cash flows generated by the assets after that date, results in a value equal to the depreciated asset value as of that date. Net cash flows for a given date equal lease revenue plus residual values minus expenses. Expenses are calculated as the sum of the net maintenance outflow (assumed as 3% of monthly lease revenues) and the assumed repossession, refurbishment, and remarketing costs shown in Table 2.

The WAC is expressed as a percentage of the total transaction liability balance. The asset yield is the forecasted total return on transaction assets. Comparison of the two shows the spread between the liability cost and the asset return for each dollar of collateral financed by the ABS. Note that the chart does not show the impact of any change in leverage over time.