The aviation ABS market ground to an almost total halt in 2022 and 2023. With pent-up demand, expectations for a resurgence in 2024 have been high. As a provider of trustee and agency services to ABS deals, we have seen several notable deals in the first three quarters of the year, along with our client discussions and sentiment at the Airline Economics Growth Frontiers in London, 9 – 10 September 2024, suggest signals of a mounting recovery.
This article explores the factors driving this resurgence, the challenges ahead, anticipated structural changes, and future trends shaping the aviation ABS market.
We see three main factors contributing to the lift in aviation ABS: improved profitability and credit quality within aviation, stronger asset values allowing lessors to realize the lease rates they need, and the initial wave of interest rate cuts in the U.S. (18 September 2024), the U.K (16 August 2024), and the EU (12 June and 12 September 2024).
Our conversations with many industry stakeholders attending Growth Frontiers also reflected a clear sense that deals are coming back to the market. In addition to single-tranche equity deals, people expect to see as many as ten total deals by the end of 2024, with additional deals in progress but not ready to close.
These factors on the supply side of deals align well with the potential for increased investor appetite. Conference participants also frequently mentioned the strong investor appetite for the deals that have come to market between January and September.
Global air traffic volumes have nearly rebounded to pre-pandemic levels, significantly improving the risk profile of aircraft assets. Airports Council International (ACI) World forecasts that traffic will exceed 2019 volume for the first time, reaching 9.7 billion passengers.2
The resurgence in travel demand has reduced the operational and financial risks associated with aviation ABS transactions. As more passengers take to the skies, airlines can better utilize their fleets, ensuring consistent cash flows and reducing default risks. This recovery in air travel is a critical factor driving the positive momentum in the aviation ABS market.
As a result, the sector has experienced stabilizing credit ratings in 2024, as anticipated in a February 2024 note from Morningstar DBRS.3 This financial stability has bolstered the credit quality of aviation ABS transactions, making them more attractive to investors. The stable outlook may provide a solid foundation for future issuances by encouraging investor confidence in the sector's long-term viability.
Stronger asset values have resulted from robust aircraft and aviation equipment demand, limited supply, and numerous fleet issues. This dynamic has resulted in higher lease rates, according to aviation analysts Ishka.4
This strength lays a solid foundation for the economics of aviation ABS transactions because the increasing value of aircraft assets enhances the collateral backing securities. We believe this phenomenon is strengthening favorable conditions for aviation ABS, supporting the market's revival and contributing to the willingness of issuers to close transactions again.
Limiting factors in the global economy
Given these reasons for optimism, the changing rate environment, and the closed transactions as of 15 September 2024, the aviation ABS market has a much clearer path to recovery than it did in 2023. Industry stakeholders are sharing fewer concerns with us about potential low loan-to-value (LTV) ratios and high transaction costs.
The prospects and impact of structural changes
As recovery unfolds, we see market participants making several adjustments to accommodate new realities and a fledgling return to deal activity.
Technology and operations on the forefront
From our perspective as a service provider for aviation ABS transactions, technological innovations and operational efficiency are poised to play significant roles in the future of aviation ABS. Digitization and data analytics can enhance transparency and efficiency, streamline processes, reduce operational costs, and increase investor confidence through greater visibility into asset performance and transaction details. These improvements promise to play a significant role in the future of aviation ABS.
The role of agents and trustees remains vital in ensuring the success and security of aviation ABS transactions. In complex deals, a single global provider can handle multiple aspects and enforce role segregation to prevent conflicts of interest and ensure smooth operation.
Role segregation is crucial for maintaining trust and confidence in any ABS transaction. It minimizes the risk of conflicts of interest and upholds the integrity of the process. The diligence and oversight provided by agents and trustees help keep transactions in safe hands by managing risks and maintaining investor trust, particularly in complex and innovative deal structures.
Conclusion
The aviation ABS market is on the runway of significant recovery but has not quite achieved takeoff. Despite economic and other headwinds, the market's resilience and adaptability highlight its growth potential. Innovative deal structures and technological advancements are also helping the market achieve new heights. Both issuer and investor sentiment are improving.
With effective risk management and the critical roles played by agents and trustees, the aviation ABS market is poised to take flight once again in the remainder of 2024 and beyond.
For further insights on aviation equipment leasing and other financing mechanisms, contact an Equipment and Transportation Finance specialist.
About the Authors:
Alan Geraghty, FCA, Senior Director, Global Capital Markets Product Management; Robert J. Perkins, CCTS, Senior Vice President and Equipment & Transportation Finance Product Leader; Caroline Magee, Managing Director & Senior Vice President and EMEA Sales Leader; and W. Chris Sponenberg, Senior Vice President and Equipment & Transportation Finance Sales Leader, are senior experts in a wide range of Corporate Trust and Agency services for securitization deals, owner trusts, Special Purpose Vehicles, and a wide range of structured finance, financing, and debt transactions. They collectively represent over a century of experience servicing clients in many areas, including aviation finance. They lead a team of experienced professionals who provide a “one-stop shop” for aviation deals and beyond.
[1] “Carlyle Aviation Tests Rekindled Aircraft ABS Market After Two-Year Pause,” Bloomberg News, June 18, 2024 (Bloomberg Data); Additional deals: BBAM, PK, DAE, SKY, BJETS.
[2] “Airports Council International Advisor Bulletin,” ACI World, February 13, 2024
[3] “Aviation Secured, ABS, EETC 2024 Outlook Stable—Asset Values, Lease Rates Strong; Event Risk, Financing Challenges Exist,” Morningstar DBRS, February 13, 2024
[4] “Aircraft ABS market ‘open’ but lessors question likely LTVs,” ishka, May 20, 2024
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