Two all-Embraer ABS deals in the market

Dino D'Amore
By Dino D'Amore December 2, 2014 22:25

Two all-Embraer ABS deals in the market

Two asset backed securitisation transactions both backed by Embraer aircraft were launched into the market yesterday.

The $380.5 million Series 2014-1 notes issued by Eagle I Limited – Jetscape Aviation Group’s inaugural securitization and $540 million Non-Recourse Asset-Backed Secured Term Loan Facility, ATLAS Series 2014-1, from Aldus Aviation.

What makes the two deals unique in the ABS market is that they are both secured on all-Embraer aircraft assets.

The Eagle notes are supported by a portfolio of 21 Embraer aircraft – 75.8% are E190/95s, with the remainder E170/75s – initially leased to 10 commercial airlines located in 10 countries, which represent approximately 87.5% of Jetscape’s current owned portfolio (by number of aircraft). The Eagle I portfolio has an average age of 4.4 years, with an average remaining lease term of 4.8%.

The ATLAS loans are backed by a portfolio of 30 Embraer aircraft initially leased to 10 commercial airlines located in 10 countries. The E190 makes up the majority of the initial pool (54%), followed by the E195 (21%) and E170/175 (25%). The ATLAS portfolio has an average age of 4.7 years, with an average remaining lease term of 6.5%

The ATLAS deal is structured very differently, however. The three tranche loan structure comprises: a $436.164 million Class A tranche, rated A by Kroll Bond Ratings, with a loan-to-value of 63%; a $76.156 million BBB rated B loan tranche, with a LTV of 74%; and C loans, rated BB, with an LTV of 78%. All three classes of loans amortize on a straight-line basis over 16 years with a final maturity date of December 2039.

Goldman Sachs is the sole structuring agent and global coordinator on the deal, as well as joint lead arranger with Deutsche Bank, which is acting as trustee, facility agent and initial senior credit facility provider. The liquidity facility provided by is for nine months. Phoenix Financial Services is the managing agent. Aldus Aviation is the servicer, with Embraer’s leasing arm ECC Leasing as the expected standby servicer. It is unusual to name a standby servicer but the move have been greeted favourably by Kroll, which views the inclusion of ECC Leasing as “a strong credit positive unique to this transaction”.

The Maintenance Reserve Account will initially be funded with $7.1million in cash, with subsequent required amounts being equal to the greater of $1million and a portion of the12-month forecasted maintenance expense provided by the servicer, according to the pre-sale report. Although the pool of aircraft are relatively young, Kroll warns that the limited age diversity of the fleet “may result in the concentration of several maintenance events in specific periods, most notably during industry downturns.

The Eagle 1 notes are being offered in four tranches. The two A tranches: the $136.5 million four-year A-1 notes and the $132 million seven-year A-2 notes are both rated A+ and carry an LTV of 52.3%. The BBB+ rated $67.250 million B tranche, matures on December 15, 2021, and carries an LTV of 65.4%. The seven-year C notes, are rated BB with a LTV of 74.1%.

The Series A-1 and A-2 notes are pari passu in payment priority, but have different amortization profiles. The Series A-1 notes amortize on a straight-line basis over four years, while the Series A-2 notes amortize at a rate of 5% of the initial note balance for years1-4 and 9% of the initial balance in years thereafter. The Series B notes amortize on a straight-line basis over 16 years, while the Series C notes amortize on a straight –line basis over seven years. Seven years after the closing date, if the any of the notes are not refinanced, principal payments are accelerated, with no further payments to the Series E notes.

Bank of America Merrill Lynch is the sole structuring agent, lead left bookrunner and lead manager on the deal. Joint bookrunners are DVB and Guggenheim. Deutsche Bank is the trustee and operating bank. The 12 month liquidity facility is provided by DVB. Jetscape is the servicer and administrative agent.

The Maintenance Support Account will initially be funded with approximately $3 million in cash , with subsequent required amounts being equal to the greater of $3 million and a portion of the 12 -month forecasted maintenance expense provided by ICF International. After the Expected Final Payment Date, 100% of the 26-month forecasted maintenance amounts will be required, “providing a strong benefit to noteholders for upcoming maintenance events on an older fleet profile”, says Kroll.

Although both are very different structures, they both suffer from rating concerns due to the fact that Embraer aircraft are typically placed with regional airlines, which can be weaker credits. In both portfolios, Kroll notes some weakness in the credit quality of the initial 10 lessees and expresses concern over the predicted decline again in lessee credit quality as older aircraft migrate to lower quality lessees, often located in less desirable jurisdictions.

Dino D'Amore
By Dino D'Amore December 2, 2014 22:25