On Oct. 4, 2022, S&P Global Ratings published a request for comment (RFC) on its proposed criteria, "Request For Comment: Global Aircraft ABS: Methodology And Assumptions."
Following feedback from market participants, we finalized and published our criteria, "Global Aircraft ABS: Methodology And Assumptions," on March 10, 2023. We also finalized and published the sector and industry variables report, "Sector And Industry Variables: Global Aircraft ABS: Methodology And Assumptions." A sector and industry variables report is a publicly available criteria-related publication that describes sector, industry, asset class, or regional variables that we expect to periodically update--mainly to reflect our views on changing macroeconomic and market conditions. The report is not criteria, but it is intended to be read in conjunction with the criteria. For further information, see "Evolution Of The Methodologies Framework: Introducing Sector And Industry Variables Reports."
We'd like to thank investors, issuers, and other intermediaries who provided feedback. This RFC Process Summary provides an overview of the external written comments and certain other feedback we received from the market on the proposed criteria, the significant analytical changes we made following the RFC period, and the rationale for those changes. In addition, this RFC Process Summary provides a summary of the significant changes we made to the sector and industry variables report following the RFC period.
External Written Comments Received From Market Participants That Led To Significant Analytical Changes To The Final Criteria
Aircraft maintenance condition
Feedback: While one market participant agreed with the proposed approach to adjust the aircraft value upon sale based on maintenance condition, there were some concerns that the projected value at the end of the aircraft's useful life could be negative or very close to zero after applying these maintenance-related value adjustments. As a result, it may not reflect the scrap value associated with aircraft and the value of the engines.
Response: We have updated the criteria to consider scrap value associated with aircraft and engines. As a result, the residual value may be subject to a floor, which generally would reflect scrap value informed by relevant historical industry or issuer data made available to us.
Assumption related to future maintenance reserve payer
Feedback: A market participant commented that the assumption related to the proportion of the future lessees paying maintenance reserves (MR) should be independent of the proportion of the initial lessees paying MR in the portfolio. The probability of lessees paying MR usually increases with aircraft age.
Response: The proportion of the future lessees paying MR under the RFC was assumed to be 50% of the number of the initial lessees paying MR. We updated this assumption based on the feedback and analysis of the additional data provided by a market participant. For further details, please see "Maintenance reserve on projected leases" in Appendix III of the criteria. The updated assumptions are detailed in "Sector And Industry Variables: Global Aircraft ABS: Methodology And Assumptions."
External Written Comments Received From Market Participants That Did Not Lead To Significant Analytical Changes To The Final Criteria
Feedback: One market participant inquired if further clarification is needed in the criteria regarding the minimum time between downturns. Another market participant commented that to determine the start of the second and the third downturns, the criteria could include considerations such as delaying aircraft and engine disposals to let the market become more active (observed during the COVID-19 period).
Response: The criteria state that "one industry downturn occurs every seven to 10 years from the start of the prior downturn." Given that each downturn lasts for four years, the minimum duration between downturns is at least three years.
The criteria framework is designed to capture future sales proceeds of an aircraft at the end of its economic life under broader macro stresses consistent with our rating scenarios. We assume that aircraft are sold at the end of their useful life regardless of whether this point in time coincides with an assumed industry downturn or not. We do not assume that an issuer waits until the end of the industry downturn, when the market value of an aircraft would likely increase, to sell.
Re-lease rate based on aircraft maintenance condition
Feedback: When determining the lease rate, an aircraft's maintenance condition should be considered.
Response: In our view, there is no conclusive relationship between the maintenance status of an aircraft and its associated re-lease rate. Hence, our lease rate factor (LRF) is based on half-life values.
Application of maintenance cash flows
Feedback: According to one comment: (1) At the time of assigning the initial rating, the criteria apply adjustments based on the maintenance condition at the end of the assumed useful life; however, the criteria give no benefit to the aircraft's maintenance condition (above half-life) before the end of the assumed useful life. (2) In addition, during surveillance, the methodology does not adjust for an aircraft's maintenance condition at the end of its assumed useful life, which introduces additional inconsistency.
Response: (1) Under the criteria, when the aircraft is assumed to be sold at the end of its useful life, we reduce the residual value to the extent the maintenance adjusted aircraft value is below half-life. Our analysis gives credit to the maintenance inflows and outflows throughout the transaction, thereby giving credit to the monetization of the aircraft's maintenance condition. Without this end-of-life adjustment, the transaction would benefit from the inflows due while the aircraft is being utilized without considering the resulting reduced value at the time the aircraft is assumed to be sold. (2) For surveillance purposes, since we do not receive updated maintenance projections, the methodology neither adjusts for an aircraft's maintenance condition at the end of its assumed useful life nor gives any credit to the maintenance inflows. Instead, we assume that the depreciated value at the end of the useful life to be a reasonable approximation of aircraft's half-life value.
Lease rate stress
Feedback: One market participant commented that the lease rate decline (LRD) stress on the lease revenues should not be applied to the first or the second downturn if those are the last downturns.
Response: For a mid-life portfolio (consisting of older aircraft), only one or two industry downturns can be applied. In this case, the contribution to the total cash flow from the last downturn's lease revenue typically represents a higher proportion of remaining cashflows than the contribution from the third downturn's lease revenues in the case of a young portfolio. In addition, in some cases, not all the aircraft will necessarily be sold in the last downturn (i.e., the pool is old enough not to have three full downturns but not old enough for all aircraft to be sold within the first two downturns). As a result, we apply LRD stresses to lease revenues in the first and second industry downturns even if they are the last.
Aircraft score calculation
Feedback: One market participant inquired if a detailed annual disclosure around the various components of the aircraft score calculation can be provided.
Response: We do not plan to disclose the details of the score calculation; however, the presale reports will contain the details of LRD assumptions, which are driven by the aircraft scores.
Aircraft current market value
Feedback: One market participant commented that there should be an adjustment to the future cash flow projection for an asset-backed securities (ABS) issued during an industry downturn, as the current market values are already stressed and significantly lower than the aircraft's intrinsic value, as represented by the base value.
Response: For an ABS issued during a significant downturn, our expected loss assumption related to our 'B' rating scenario increases, leading to higher loss assumptions associated with the higher rating scenarios. Therefore, incorporating a stressed market value in our analysis reflects a higher credit enhancement to achieve a given rating level and promotes credit stability.
Feedback: One market participant commented that it would be helpful to understand how the default rate will be calculated for the second and third downturns.
Response: We generally increase our default rates for the second and third industry downturns compared to the first industry downturn. The higher default rate reflects our expectation of the evolution of the pool over time. These assumptions are disclosed in the presale.
Repossession, refurbishment, and remarketing (RRR) cost
Feedback: One market participant suggested that the RRR cost assumption should be higher, especially for widebody aircraft.
Response: The criteria assume that an aircraft is leased to a different airline during each re-lease event. Therefore, we assume that RRR costs are incurred upon both lease expiration (contractual and projected) and upon a lessee default under our stress runs. However, in practice, significantly higher costs are unlikely to be incurred at each re-leasing event, and some of the current leases may also be extended with the same airline, which can avoid RRR costs altogether. As a result, we believe our overall framework for RRR costs is appropriate.
Flag carriers - RRR cost
Feedback: One market participant disagreed with our assumption to not apply RRR cost for the flag carriers. A flag carrier default may lead to aircraft repossession due to rejecting the leases on aircraft in bankruptcy, thereby incurring RRR costs.
Response: While we acknowledge that not all flag carriers accept leases in bankruptcy, historical information supports our assumption that such leases, in many instances, are accepted. In addition, we also considered that assuming no RRR cost for the flag carriers does not materially change the analytical outcome as it only applies to flag carriers in the initial pool that default under our stress runs and does not apply to projected leases.
Lease rate factor (LRF)
Feedback: One market participant commented that the LRFs seem high and, while observations show LRF does increase with age, this increase isn't as steep as the LRF table shows. In addition, the proposed LRF can result in a better modeled re-lease rate than the prior re-lease rate and not result in stress in the model.
Another market participant commented that, in the future, different LRFs could be developed for narrowbody, widebody, and regional jets.
Response: The LRF assumptions, including the LRF curve's shape (with age), are informed by a significant dataset (as outlined below in one of the responses). In addition, it is unlikely for the LRFs to result in a better-modeled lease rate during the modeled downturn as we apply significant additional stress to the lease rate when the aircraft is subsequently re-leased (see lease rate decline table in the criteria).
We expect the LRFs across narrowbody, widebody, and regional jets not to be materially different to warrant separate assumptions. However, for freighter aircraft, we did observe and expect the LRF curves to be different from the passenger aircraft. Hence, we have different LRF assumptions for passenger and freighter aircraft. Both of these assumptions are provided in "Sector And Industry Variables: Global Aircraft ABS Methodology And Assumptions," which may be periodically updated to reflect market trends. If warranted, we may add additional LRF curves in the future.
Projected lease cash flow post industry downturn
Feedback: One market participant commented that the modeled re-lease rate at non-stressed LRF outside the downturn is too optimistic.
Response: Since the LRF is applied to the value of the aircraft, after the assumed downturn of four years, the value of the aircraft will be haircut by a cumulative depreciation of four years. Therefore, the non-stressed LRF will reflect that haircut. While there may be specific instances where the future modeled lease rate could turn out to be higher than the actual, overall, we believe that our modeled projections, when taken at a portfolio level, reflect adjustments to lease payments consistent with our expectations. Also, during COVID-19, we have observed instances where the values have improved after a sharp decline.
Impact of inflation and interest rate on aircraft value depreciation
Feedback: One market participant commented on how changes in inflation impact depreciation and asked whether we could provide a more detailed annual disclosure around depreciation assumptions. In addition, it would be helpful to consider the impact of interest rates on aircraft valuation.
Response: We don't give credit to projected aircraft value based on inflation expectation, as there is significant uncertainty in predicting a long-term inflation rate and its impact on future aircraft values. We generally provide depreciation rate assumptions in the presale reports.
In addition, for purposes of projecting future lease rates, which are partly dependent on the aircraft value, we consider long-term average interest rates as input to determine the LRF. This is provided in "Sector And Industry Variables: Global Aircraft ABS: Methodology And Assumptions," which is updated periodically.
Description of the dataset used
Feedback: One market participant asked for an overview of the data used to develop LRD and LRF assumptions.
Response: We used industry data to inform the development of both LRF and LRD assumptions. For the LRF assumption, our analysis included approximately 15,000 observations for widebody and narrowbody passenger aircraft models and approximately 4,500 observations for freighter aircraft models, generally from 1997 to early 2022. For the LRD assumption, the dataset included about 105,000 half-life market value observations generally from 1990 to early 2022 for various aircraft models.
Significant Analytical Changes To The Final Criteria That Did Not Arise From Market Feedback
We finalized and published the final criteria without making any significant analytical changes to the criteria that were unrelated to the market feedback we received.
Significant Changes To The Sector And Industry Variables Report
We published a sector and industry variables report article separate from the final criteria, "Sector And Industry Variables: Global Aircraft ABS: Methodology And Assumptions." The report is not criteria, but it is intended to be read in conjunction with the criteria. For further information, see "Evolution Of The Methodologies Framework: Introducing Sector And Industry Variables Reports.
We have also added the SIVR variable for assumptions related to "Maintenance reserve on projected leases." For detailed feedback and response, please check the discussion above in the "External Written Comments Received From Market Participants That Led To Significant Analytical Changes To The Final Criteria" section. Other feedback that led to changes in the SIVR is provided below.
Determination of interest rate for LRF
Feedback: One market participant commented on whether we could provide additional transparency regarding determining the single-rate assumption, as well as whether moving from the current approach of applying an interest rate curve to a single rate may have a material impact on the stress scenarios.
Response: We have added a section in the SIVR that provides specific interest rate assumptions used in our analysis, which will be updated periodically. Each variable on its own may affect specific transactions differently; however, the overall impact of all the changes, including the interest rate, is provided in the "Impact On Outstanding Ratings" section of the criteria.
Time-on-ground (TOG) assumptions
Feedback: Can we provide specific TOG assumptions and update those annually?
Response: Yes, we have added a section in the SIVR to disclose specific TOG assumptions, which will be updated periodically.
This report does not constitute a rating action.
|Analytical Contacts:||Ildiko Szilank, New York + 1 (212) 438 2614;|
|Deborah L Newman, New York + 1 (212) 438 4451;|
|Rajesh Subramanian, Toronto + 1 (416) 507 3232;|
|Methodology Contacts:||Kapil Jain, CFA, New York + 1 (212) 438 2340;|
|Herve-Pierre P Flammier, Paris + 44 20 7176 7338;|
|Claire K Robert, Paris + 33 14 420 6681;|
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