Industry Insights: Aircraft Lease Securitizations

By: Patrick Dolan and Ramy Ibrahim, Norton Rose Fulbright Us LLP

THE AIRCRAFT LEASE SECURITIZATION MARKET IS EVOLVING as evidenced by an increase in these transactions over the last few years. Indications are that 2017 may surpass 2016 in total number of aircraft lease securitizations. Three potentially significant issues for the aircraft lease securitization market during 2017 and in 2018 are (1) the applicability of the U.S. risk retention rule (Risk Retention Rule; see 79 FR 77602) to aircraft lease securitizations, (2) the U.S. Commodity Futures Trading Commission’s rules regarding margin requirements for uncleared swaps, and (3) compliance with the Volcker Rule.

This article explains the structure of aircraft lease securitizations and certain bankruptcy and rating agency issues that must be considered in structuring these transactions, the benefits of using the debt capital markets for aviation financing, and the issues for the aircraft lease securitization market during 2017 and in 2018.

Introduction

Aircraft lease securitizations generally come in two types: aircraft lease portfolio securitizations and enhanced equipment trust certificate (EETC) securitizations.

• Asset-backed aircraft lease securitizations. In the typical aircraft lease portfolio securitization, the issuing special purpose subsidiary of the sponsor, which is a newly formed bankruptcy-remote entity, owns the equity in various special purpose entities (SPEs), each of which owns an airplane that is leased to an airline. Normally, the lessees or airlines are located in the United States and around the world. Thus, unlike an EETC aircraft lease securitization (discussed below), the aircraft lease portfolio securitizations rely in part on diversification of credit risk. Similarly, remarketing or re-leasing of aircraft plays a bigger role in aircraft lease portfolio securitizations, so the quality of the servicer is more important.
• EETC aircraft lease securitizations. In the typical EETC aircraft lease securitization, the issuing entity (issuerlessor), which is a newly formed, bankruptcy-remote SPE and a subsidiary of the sponsor airline, owns a portfolio of aircraft and leases the aircraft to the sponsor airline. As a result, the transaction looks more like a corporate bond offering by the sponsor airline, but the sponsor airline is able to obtain a better rating on the EETCs than it could on its corporate bonds because of the securitization features.

To read the full practice note in Lexis Practice Advisor, follow this link.

Patrick D. Dolan is a partner with Norton Rose Fulbright. He focuses his practice on asset-backed and mortgage-backed securitizations, including those involving innovative structures. Patrick has more than 30 years of experience representing warehouse lenders, issuers, underwriters, investors, and multi-seller commercial paper conduits. Patrick has worked on financings and securitizations of various asset types. Patrick chairs the New York City Bar Association's Structured Finance Committee. Ramy Ibrahim is an associate in Norton Rose Fulbright's New York office. He focuses his practice on finance and M&A, helping clients in the financial institutions, technology, energy, transportation, and innovation industries. His background includes corporate finance, private and public mergers and acquisitions work, and equipment finance.

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1. See CFTC Letter No. 17-11, February 13, 2017.