Overview

• We took various actions concerning 71 ratings from 30 aircraft and aircraft engine ABS transactions that were previously placed on CreditWatch with negative implications as a result of the anticipated impact of the COVID-19 outbreak.
• Of these ratings, 23 were lowered and eight were affirmed. Forty ratings remain on CreditWatch without a rating change. Twenty of the lowered ratings also remain on Watch.
• In our view, the credit quality of most of the transactions in this space has generally declined due to health and safety fears related to COVID-19. We believe that a negative impact on the cash flows available to these issuers is likely.

NEW YORK (S&P Global Ratings) June 17, 2020--S&P Global Ratings today took various actions concerning 71 ratings from 30 aircraft and aircraft engine ABS transactions that were placed on CreditWatch with negative implications on March 19, 2020 due to the anticipated impact of the COVID-19 outbreak and the restrictive policies put in place to slow its spread (one rating with a dependency on an underlying aircraft certificates rating was not placed on Watch until April). Of these ratings, 23 were lowered and eight were affirmed. The other 40 remain on CreditWatch without a rating change. Twenty of the lowered ratings also remain on Watch for potential further downgrade. (See list). For transaction-specific details regarding these rating actions, see "A Deal-By-Deal Look Behind Today's Aircraft And Aircraft Engine ABS Rating Actions," to be published on spglobal.com shortly after the release of this report.

The downgrades reflect the notes' insufficient credit enhancement at their previous respective rating levels, based on our assumptions and considerations, where applicable, of:

• A high overall loan-to-value (LTV) ratio for certain notes,
• The declining credit quality of the lessees,
• A higher exposure to wide-body or older aircraft in certain portfolios relative to peers,
• A significant portion of collateral coming off lease in certain pools in the next six to 12 months,
• uncertainty among lessors regarding near-term plans for the securitized fleet,
• For the aircraft engine ABS deals, a high portion of collateral either off lease or expiring in the next 12 months, and
• The ongoing uncertainties surrounding airline operations amid the coronavirus pandemic.

Our overall analysis considered sensitivity scenarios that we tested because of the COVID-19-related uncertainties in the sector. The sensitivity analysis incorporated additional stresses on aircraft values, time to re-lease, re-leasing rates, and retirement age, along with a possible second wave of deferral requests. We also acknowledge the uncertainties around airlines' future fleet size planning and aircraft maintenance projections, which are additional variables in our cash flow model.

We initially placed the 71 ratings from 30 transactions addressed in this report on CreditWatch with negative implications on March 19, 2020, when lockdowns and social distancing measures were introduced to combat the spread of COVID-19. Although these measures are easing up in some places, it will take time for domestic air travel to fully resume. With several countries shutting down their borders, international air travel will take a considerably longer time to fully recommence and for passenger confidence to be regained. As a result, we believe that wide-body aircraft have been more adversely affected than narrow-bodies given the limited long-haul flights we observe as of today.

S&P Global Ratings acknowledges a high degree of uncertainty about the rate of spread and peak of the coronavirus outbreak. Some government authorities estimate the pandemic will peak about midyear, and we are using this assumption in assessing the economic and credit implications. We believe the measures adopted to contain COVID-19 have pushed the global economy into recession (see our macroeconomic and credit updates here:

www.spglobal.com/ratings). As the situation evolves, we will update our assumptions and estimates accordingly.

Our Observations On The Sector

Since the CreditWatch placements, S&P Global Ratings has had periodic conversations with lessors of rated aircraft ABS transactions. A common theme among lessors has been an increasing number of requests for rent deferrals, which have taken different forms. The typical deferral requests have been for 50% of rent (in most cases not applicable to utilization rent) for three months, recovered with interest over the remaining term of the lease. Many lessors have indicated that it is too soon to assess the ultimate impact on aircraft values, lease rates, and time to re-lease, among other things.

According to MBA Aviation LLC, as of the week of May 25, 2020, average daily flight schedules have dropped by 26%-88% from January 2020 levels in different regions of the world. Although the majority of the planes are currently parked, there has been an increase in flight operations over the past few weeks, but, as expected, they remain well below January 2020 levels.

Many airlines are also reconsidering their fleet composition, and the general projection is that airlines will cut 20% of their fleet amid this pandemic. Wide-bodies have taken the biggest hit because long-haul flights have come to a standstill. We have observed that many airlines have either already retired or are contemplating retiring wide-bodies from their fleet (in some cases irrespective of their age). However, we believe that some types of wide-body aircraft will likely fare better than others and that a stronger-credit-quality lessee leasing the aircraft can also make a difference. Aircraft values and lease rates have also come under stress. According to Ishka Ltd., market values of 2015 vintage A320s and B737s declined 9%-14% from the beginning of the year, while lease rates have gone down by 5%-9% for the same vintage of aircraft. Market values of 2010 vintage A320s and B737s declined 9%-19%, with a 12%-29% lease rate decline over the same time period.

Assumptions Used For The Review

It is currently difficult to quantify the full impact of COVID-19 on U.S. aircraft ABS transactions because current servicer and issuer reports may not reflect the long-term effect of the pandemic, and the degree and speed of demand for air travel remains uncertain despite the easing of restrictions. Although it is too early to measure the long-term impact of COVID-19 on transaction cash flows, we have identified certain sensitivity scenarios in the sector that we believe could result from the pandemic. As we develop better clarity on the size and duration of reductions in transactions' cash flows, we will evaluate whether adjustments to our sensitivity assumptions and downside projections are appropriate. Changes in these projections could have an impact on our estimates, which, in turn, could affect ratings on the notes.

Two different scenarios were run for our review: (1) rating runs based on the criteria assumptions and (2) sensitivity runs to consider recent changes and challenges and ongoing uncertainties in the aviation sector. While the rating runs were the guiding runs for the rating actions noted in this report, we considered results from incremental sensitivity scenarios to test the transactions under additional stresses.

Default pattern

We applied defaults evenly over a four-year period during the first recession under our rating runs, but under our sensitivity, we also tested more front-loaded default patterns (e.g., 80%/20%), considering that we are already in a recessionary scenario, which is severely affecting airlines' liquidity and credit quality.

Rent deferrals

In our sensitivity analysis, we assumed a percentage of the nondefaulted lessees to be delinquent on their rent payments for the first few months of cash flow projections (e.g., 50% of lease collections deferred for six months without any recovery). This is intended to stress liquidity in line with current events.

Lease rate decline and magnitude

Our sensitivity further tested the transactions by applying steeper lease rate decline haircuts from the first recession to account for the fluctuations in the valuation and lease rates under current circumstances. We also assumed that 100% of the lease rate decline will be applied in the first year of the first recession versus 50% under our rating stresses.

Aircraft/engine on ground (AOG) times

Under our rating runs, we do not differentiate the time to re-lease between narrow-bodies and wide-bodies, which is typically six to 11 months depending upon the rating stress. However, given the uncertainties of the re-leasing markets in the current environment, we assumed longer AOG times in our sensitivity and also differentiated the downtime between narrow-bodies and wide-bodies (e.g., eight to 18 months for narrow-bodies and 12 to 30 months for wide-bodies).

Useful life

While there has been some news about airlines retiring aircraft older than 20 years, there still seems to be some uncertainty around how airlines will plan their future fleet. Therefore, under the sensitivity runs, we assumed a 22-year useful life for aircraft in the portfolio; we also assumed an early retirement (earlier than 22 years in some cases) for some of the older aircraft upon the end of their current lease.

These assumptions may vary or we may stress additional factors depending on transaction characteristics and the availability of more information on these key variables.

CreditWatch

We expect to resolve the CreditWatch placements as we learn more about the severity and duration of the COVID-19-induced impact on the sector as a whole, and on each of the respective issuers and pools more specifically. During this time, we will continue to review industry data and transaction-level performance reports, and continue to speak with the originators and servicers to inform our view of each transaction's future performance.

Environmental, social, and governance (ESG) factors relevant to the rating action:

• Health and safety

Related Criteria

• Criteria | Structured Finance | Legal: U.S. Structured Finance Asset Isolation And Special-Purpose Entity Criteria, May 15, 2019
• Criteria | Structured Finance | General: Counterparty Risk Framework: Methodology And Assumptions, March 8, 2019
• Criteria | Structured Finance | General: Incorporating Sovereign Risk In Rating Structured Finance Securities: Methodology And Assumptions, Jan. 30, 2019
• Legal Criteria: Structured Finance: Asset Isolation And Special-Purpose Entity Methodology, March 29, 2017
• Criteria | Structured Finance | General: Global Framework For Assessing Operational Risk In Structured Finance Transactions, Oct. 9, 2014
• General Criteria: Criteria For Assigning 'CCC+', 'CCC', 'CCC-', And 'CC' Ratings, Oct. 1, 2012
• Criteria | Structured Finance | General: Criteria Methodology Applied To Fees, Expenses, And Indemnifications, July 12, 2012
• General Criteria: Global Investment Criteria For Temporary Investments In Transaction Accounts, May 31, 2012
• Criteria | Structured Finance | ABS: Revised Cash Flow Assumptions And Stresses For Global Aircraft And Aircraft Engine Lease Securitizations, Aug. 26, 2010
• General Criteria: Methodology: Credit Stability Criteria, May 3, 2010
• General Criteria: Use Of CreditWatch And Outlooks, Sept. 14, 2009
• Criteria | Structured Finance | General: Methodology For Servicer Risk Assessment, May 28, 2009
• Criteria | Structured Finance | ABS: Aircraft Securitization Criteria: The Rating Process For Aircraft Portfolio Securitizations, Sept. 1, 2004
• Criteria | Structured Finance | ABS: Aircraft Securitization Criteria: Rating Considerations For Lease Pools, Sept. 1, 2004
• Criteria | Structured Finance | ABS: Aircraft Securitization Criteria: Maintenance And Related Issues, Sept. 1, 2004

Related Research

• A Deal-By-Deal Look Behind Today's Aircraft And Aircraft Engine ABS Rating Actions, June 17, 2019
• 77 Ratings On 32 Aircraft And Aircraft Engine ABS Deals Placed On Watch Negative Over Reduced Travel Due To Coronavirus, March 19,2020
• COVID-19 Macroeconomic Update: The Global Recession Is Here And Now, March 17, 2020
• A U.S. Recession Takes Hold As Fallout From The Coronavirus Spreads, March 17, 2020
• COVID-19 Credit Update: The Sudden Economic Stop Will Bring Intense Credit Pressure, March 17, 2020
• Coronavirus' Global Spread Poses More Serious Challenges For Airlines, March 12, 2020
• Global Structured Finance Scenario And Sensitivity Analysis 2016: The Effects Of The Top Five Macroeconomic Factors, Dec. 16, 2016

In addition to the criteria specific to this type of security (listed above), the following criteria articles, which are generally applicable to all ratings, may have affected this rating action: "Counterparty Risk Framework: Methodology And Assumptions," March 8, 2019; "Post-Default Ratings Methodology: When Does Standard & Poor's Raise A Rating From 'D' Or 'SD'?," March 23, 2015; "Global Framework For Assessing Operational Risk In Structured Finance Transactions," Oct. 9, 2014; "Methodology: Timeliness of Payments: Grace Periods, Guarantees, And Use of 'D' And 'SD' Ratings," Oct. 24, 2013; "Criteria For Assigning 'CCC+', 'CCC', 'CCC-', And 'CC' Ratings," Oct. 1, 2012; "Methodology: Credit Stability Criteria," May 3, 2010; and "Use of CreditWatch And Outlooks," Sept. 14, 2009.