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Element Financial ABS details

Early last week this news service revealed that Element Financial was preparing an aircraft asset backed securitisation. More details have emerged this week in two presale reports from Standard & Poor’s and Fitch Ratings.

The $1.210bn three tranched deal, ECAF I Ltd, secures a pool of 49 aircraft and their leases with BBAM as the servicer.

The A notes are split into two tranches – the $459.375 million A-1 notes and $590.625 million A-2 notes – which are both rated A by S&Ps and A by Fitch, and have a final maturity of May 2040. The $160 million B-1 notes also have a final maturity of May 2040 but are rated BBB by S&P and Fitch.

The class A-1 notes will follow a scheduled straight-line amortization to zero in seven years, the class A-2 notes will have no amortization in the first seven years but will become turbo at the end of year seven, and the class B-1 notes will follow a 16-year straight-line amortization to zero and becomes turbo after year seven.

There is a 70.41% loan-to-value ratio for the class A-1 and A-2 notes and 81.14% LTV on the class B-1 notes.

The transaction includes debt service coverage (DSC) ratios and utilization triggers, a failure of which will lead to the class A-1, A-2, and B-1 notes’ faster amortization.

S&P states that its preliminary ratings on the class A-1, A-2, and B-1 notes address the class A-1 and A-2 notes’ timely interest (excluding the step-up amount) on each payment date, the timely interest (excluding the step-up amount) on the class B-1 notes after the class A-1 and A-2 notes are paid off, and the ultimate interest and principal payments on or before the class A-1, A-2, and B-1 notes’ legal final maturity date, which is 25 years after the transaction’s closing date. The class A-1, A-2, and B-1 notes’ step-up amount is payable only after the class A-1, A-2, and B-1 notes are paid in full. According to the transaction documents, the failure to pay the step-up amount if there is insufficient available cash is not considered an event of default.

The transaction has a liquidity facility that will cover nine months of scheduled interest (excluding step-up amount) on the class A-1, A-2, and B-1 notes at closing.

The 49 aircraft include 44 narrowbody aircraft (19 A320-family and 25 737NGs [737-700 and -800]) and five widebodies (three A330-300s, one 777-200ER and one 777-300ER, with a 6.7-year weighted average age. At closing, 38 airlines worldwide will lease all of the aircraft with a 5.7-year weighted average remaining lease maturity. The aircraft sellers are entities or vehicles managed by affiliates of BBAM U.S. L.P. (BBAM U.S.), and BBAM Aviation Services Ltd. (BBAM Ireland), an affiliate of BBAM U.S., will be the transaction’s servicer.

Element Financial is acting as the structuring agent, while BNP Paribas, Citi and Deutsche Bank are joint bookrunners. BNP Paribas is the liquidity facility provider. Wilmington Trust is the trustee and cash manager.

This is the largest number of aircraft in any recent ABS transaction and it also has a more diverse portfolio in terms of aircraft and lessees. S&P notes that many lessees in the portfolio are domiciled in regions where the commercial aviation market has evolved rapidly during the past few years and have positive long-term growth prospects. The transaction also has a maintenance reserve top-up mechanism based on a third-party appraiser’s maintenance cash flow forecast, while the lease rate (0.98%), as measured by the portfolio’s weighted average lease rate factor based on aircraft half-life value, is comparable to other recently rated aircraft transactions.

If this deal goes ahead, analysts suggest that the sale of the aircraft would improve FLY Leasing’s (if the company is assumed to be one of the BBAM affiliates mentioned in the presale reports from S&P and Fitch, which Wells Fargo analysts Gary S. Liebowitz, believes is the case) book value/share and reduce its aircraft remarketing risk, says Liebowitz. He assumes the ECAF fleet may include around $0.7B of FLY aircraft and that the sale of that fleet could “generate a book gain of about $75M – i.e., adding around $1.50 to book value per share. Also, we believe that if a large portion of FLY’s fleet is sold at a premium to book value, the stock’s current P/B multiple (a group-low 0.82x) becomes even more difficult to justify”.

Date: May 20, 2015

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