Fitch notes novation, tail concentration risks in pre-pandemic aircraft ABS

Aircraft operating lease ABS transactions issued prior to 2021 have two structural elements that expose senior investment-grade class A notes to elevated concentration risks, Fitch Ratings says. These risks arise when a material number of aircraft fail to novate into pools during a delivery period after closing, or if there is tail risk due to low asset count and limited pool diversification. In these situations, deal priority-of-payment (POP) waterfalls continue paying note principal pro-rata across senior/subordinate notes, not sequentially, limiting class A notes from benefitting from quicker amortization and building credit enhancement particularly later in the transaction life that could