Thomas Cook Airlines up for sale? Deucalion ABS portfolio sale closed.

Dino D'Amore
By Dino D'Amore February 23, 2015 14:41

Thomas Cook Airlines up for sale? Deucalion ABS portfolio sale closed.

Unconfirmed reports have revealed that British holiday company Thomas Cook Group may sell its airline business. UK newspaperthe Sunday Times reported that the move was motivated by the need to cut costs.

The newspaper reported that the group has spoken to a number of potential buyers including rival carriers and private equity investors but that no deal was reached nor currently under negotiation. Thomas Cook has only commented that considers the airline as a key part of its business but that it is open for opportunities.

Meanwhile, DVB’s aviation investment vehicle, Deucalion, closed its $667million aircraft asset-backed securitization (ABS) backed by 20 aircraft on Friday (Feb. 20).

The $667 million AIM Aviation Finance Ltd/AIM Aviation Finance USA Fixed-Rate Notes Series 2015 A-1, B-1, and C-1, consists of three tranches. The $545million A-1 notes, rated A by S&P and Kroll with a loan-to-value (LTV) of 66.9% and a weighted average life of (WAL) 5.3 years, were priced at 4.25%; the $84 million BBB-rated B-1 notes with an LTV of 77.2% and a WAL of 5.3 years have a yield of 5.125%; and the $38million C-1 notes rated BB with a LTV of 81.9% and 3.5 year WAL, yield 8.5%. All tranches mature on February 15, 2040.

The notes are backed by a portfolio of 20 commercial passenger aircraft currently on lease to 13 airlines. The 20 aircraft include 15 narrowbody aircraft (11 A320 family, three 737NGs, and one 737 Classic) and five widebodies (two A330-200s and three A330-300s). The widebody aircraft represent half of the value of the deal – this is the first time a post-financial crisis aviation ABS has had such a large amount of widebodies as collateral. The portfolio has a 5.7-year weighted average age. The aircraft have a 6.2-year weighted average remaining lease maturity.

The aircraft seller is Deucalion, while the Aviation Asset Management (AAM) section of DVB is the servicer of this transaction.

BNP Paribas acted as the sole structuring agent and BNP Paribas, Goldman Sachs and DVB Capital Markets were joint bookrunners. On the equity placement, BNP Paribas acted as sole structuring agent and placement agent. DVB Bank SE London Branch is liquidity facility provider to the bond holders.

Managing agent is Maples Fiduciary Services (Ireland), with Wells Fargo as the trustee and operating bank.

Clifford Chance acted as lead legal counsel to DVB with Pillsbury Winthrop
Shaw Pittman representing the joint bookrunners.

Stephan Sayre, Managing Director of DVB’s Aviation Investment Management
team said: “While the sale of assets is ‘normal course of business’ for our Investment Management business, the 144A placement of the debt and majority sale of the equity is a landmark transaction for DVB and testimony to the strength, depth and quality of the whole DVB Aviation platform which has been comprehensively endorsed by rating agencies and institutional investors alike. We expect to become a repeat issuer in this asset class.”

The 144A transaction has a rather unique waterfall structure. The series A-1 and B-1 notes follow a 14-year straight-line amortization to zero and after the expected maturity date (at the end of year seven), they will accelerate principal payments if they are not refinanced. The series C-1 notes (the junior-most rated deferrable interest class) follow a seven-year straight-line amortization to zero and both its interest and scheduled principal will be paid after the series A-1 and B-1 notes’ scheduled amortization before the expected maturity date.

The transaction has a step-up coupon after year seven of 200 basis points (bps) – in previous deals this was closer to 500bps. Up to 50% of the portfolio can be sold without any pre-payment penalty – compared to the 33% on most prior deals. All of the notes are DTC eligible – as they are deposited through DTC, the largest securities depository in the world, they are more tradable and so more attractive to investors, which also creates more liquidity.

The 144A note format with a time-tranched arrangement with notes that were also DTC eligible was first used in aviation ABS in Jetscape’s Eagle I Series 2014-1, which closed in December 2014. That transaction succeeded in bringing in over 20 investors into the deal. AIM was also widely distributed to over 30 investors that includes a number of first time aviation investors. Investor demand was high with all tranches being oversubscribed, some as much as three times.

The lead arranger and client reportedly spent a lot of time getting new investors comfortable with the credit and the asset. Although some investors had participated in other aviation ABS deals, the collateral varies enormously from deal to deal, from much older narrowbody aircraft to turboprops, and widebody aircraft in this deal.

The loan format ABS deals that have been issued over the past two years tend to have a limited distribution and as a result the pricing has been high. One source said: “When leading lessors, rated low investment grade are issuing unsecured corporate debt at 3.5%, it is not consistent that single A-rated secured ABS deals are pricing at 5%.”

The unique structuring in this deal succeeded in bringing pricing down from 5% to 4.25% for the A notes – so pricing is coming down, albeit slowly. Another aspect of the ABS market is that recent deals have been largely restricted to portfolio sales – AIM Aviation Finance Ltd is a portfolio sale and the equity has been placed with an unidentified private equity buyer, which closed on February 20. This is the private equity investor’s first deal in aviation that is very keen to do further work in this area, possibly with DVB that has indicated it would like to repeat the deal in the near future.

The unique structuring of AIM was developed by BNP Paribas based on its experience in other assets classes.  The bank closed the first ever ABS container portfolio sale in December 2014, evidencing its success as an E note placement agent.

Dino D'Amore
By Dino D'Amore February 23, 2015 14:41