New York, January 28, 2021 -- Moody's Investors Service (Moody's) has assigned definitive ratings to
the notes issued by Castlelake Aircraft Structured Trust 2021-1
(CLAS 2021-1), a Delaware statutory trust. The ultimate
assets backing the rated notes consist primarily of a portfolio of aircraft
and their related initial and future leases. Castlelake,
L.P. (Castlelake) is the sponsor of the transaction,
and Castlelake Aviation Holdings (Ireland) Ltd (Castlelake Aviation) is
the servicer of the underlying assets, with Castlelake as sub-servicer.
The aircraft lease asset backed securities (ABS) will be primarily repaid
by cash flows from payments on initial and subsequent leases attached
to the portfolio of securitized aircraft , and proceeds from aircraft
dispositions (aircraft sales). As of December 31, 2020,
the initial assets primarily consisted of 27 aircraft subject to initial
leases to 11 lessees domiciled in 10 countries.
The complete rating actions are as follows:
Issuer: Castlelake Aircraft Structured Trust 2021-1
Class A Notes, Definitive Rating Assigned A2 (sf)
Class B Notes, Definitive Rating Assigned Baa2 (sf)
CLAS 2021-1 is Castlelake's first aircraft lease ABS of the year
and its seventh transaction since 2014.
CLAS 2021-1 will use the proceeds from the issuance of the CLAS
2021-1 notes to acquire the series A and B AOE notes (the AOE notes)
issued by each of CLSec Holdings 20 DAC and CLSec Holdings 21 LLC,
the two underlying asset-owning entity (AOE) issuers, one
incorporated under Irish law and the other under Delaware law.
In turn, the AOE issuers will use the AOE note proceeds to acquire
the initial assets from funds affiliated with and managed by Castlelake
through the acquisition of contribution entities that either directly
or indirectly own, or will acquire, the 27 aircraft subject
to the initial leases. The AOE issuers expect to acquire the initial
assets during the 270-day contribution period after the transaction's
closing date.
RATINGS RATIONALE
The definitive ratings of the CLAS 2021-1 notes are based on (1)
the results of Moody's quantitative modeling analyses, including
sensitivity analyses with respect to certain assumptions, (2) Moody's
assessed cumulative loan-to-value (CLTV) ratios for each
class of notes, (3) the credit quality of the underlying aircraft
portfolio, their related leases and their expected performance,
including the leases' initial and assumed subsequent lease terms,
(4) the transaction structure and priority of payments, (5) the
ability, experience and expertise of Castlelake as the sub-servicer
of the securitized assets and (6) qualitative considerations for risks
related to legal, operational, country, data quality,
bankruptcy remoteness, and ESG (environmental, social and
governance) factors, among others. The rating actions also
consider the heightened risk and continued global economic disruption
caused by the COVID-19 pandemic.
The class A and class B notes have a Moody's CLTV ratio of approximately
73.7% and 92.0%, respectively.
Moody's assessed value reflects the minimum of several third-party
appraisers' initial maintenance-adjusted half-life market
values. Moody's CLTV ratio reflects the loan-to-value
ratio of the combined amounts of each class of notes and the classes that
are senior to it. These CLTV ratios do not reflect the sizeable
projected end of lease (EOL) payments due from certain airlines at lease
expiry based on contractual return conditions, maintenance costs
and escalators, that are available to repay the notes. Morten
beyer and agnew (mba) provided initial projections of the EOL payments
based primarily on forecasted aircraft utilization. The CLTV ratios
would be materially lower after reflecting the projected EOL payments.
Key credit strengths of the transaction include (1) mostly strong leasing
assets, (2) strong initial contractual cash flows from lessees of
relatively strong credit quality, (3) limited lease maturities through
2024, (4) large EOL payments and leases with full life aircraft
return conditions, (5) new debt paydown feature whereby unscheduled
note principal payments cause each note's balance to remain ahead of schedule,
and (6) new collection test and class A partial class sweep triggers supporting
the senior notes.
Key credit challenges include the following, (1) heightened asset
risks owing to the continuing negative effects of the global coronavirus
pandemic, (2) weakened airline credit quality, (3) exposure
to vintage or widebody assets, (4) technological and environmental
risk, (5) volatility in aircraft values and lease rates, (6)
potential credit migration risk, (7) potential large maintenance
expenses, (8) unrated sponsor/servicer, (9) leakage of cash
flows to the E-Certificates, and (10) novation risk.
In assessing the impact of the credit challenges, Moody's considered
the various mitigants to the risks and performed various sensitivity analyses
in the quantitative modeling.
As of the closing date, Castlelake funds will endeavor to contribute
the asset entities that own the aircraft to the AOE issuers in exchange
for the E-Certificates during a 270-day contribution period.
As a result, ownership of the aircraft will not change and lease
novation will be much less complex, compared with cases where aircraft
ownership is changing. Also, the novation process may protect
investors from reduced cash flows owing to airline defaults after deal
closing but prior to the asset entities being contributed to the transaction,
since aircraft with delinquent leases may not be contributed.
A creditor of Air Namibia has petitioned for an involuntary insolvency
of Air Namibia in local court, triggering a technical event of default
under the lease agreement that has not been waived by Castlelake.
Air Namibia remains current on all lease payments because the Government
of Namibia (Ba3 negative), the lease guarantor, continues
to fulfill the lease obligations. To protect investors, the
relavent contribution agreement prevents the contribution of the ultimate
interest in the A330-200 aircraft (7% of Moody's initial
assessed value) and the related lease until a resolution is achieved with
respect to the airline's involuntary insolvency petition. If the
aircraft is not contributed, noteholders will receive their pro-rata
share of the debt allocated to the aircraft.
In our quantitative analysis we assessed the impact of the aircraft not
being contributed on the rated notes.
CREDIT QUALITY OF UNDERLYING AIRCRAFT
Highly liquid, narrowbody aircraft that are less than five years
old comprise 20% (by Moody's initial assessed value) of the securitized
portfolio, while midlife and older, narrowbody aircraft make
up 42% of the portfolio. Across all ages, liquid narrowbody
aircraft, which make up 56% of the pool and include the A320ceo
(38%), A220 (8%) and B737NG (17%) models,
are considered strong leasing assets owing to their large diversified
operator bases. Compared with widebody aircraft, narrowbody
planes typically have lower expenses associated with maintenance,
reconfiguration and transition. The pool consists of 63%
mid-life or older aircraft (vintage aircraft). Risks typically
associated with vintage aircraft include diminished re-leasing
prospects, higher volatility in values, technological obsolescence
and higher costs related to ongoing maintenance. The weakest combination
of the pool consists of around 24% of leases with less liquid,
mid-life, widebody aircraft to weak airlines or with relatively
short maturity terms, increasing the transaction's exposure to re-leasing
risk. The aircraft include one A330 (7%) and two B777-300ERs
(16%). Widebody aircraft typically have higher expenses
associated with maintenance, reconfiguration and transition costs
compared with narrowbody aircraft. In its cash flow analysis,
Moody's assumed that most aircraft are scrapped when they are 21-24
years old. Moody's assumed that one 17-year old A320-200
and one 14-year old B777-300 ER had an economic useful life
of 19 years to address the risk of accelerated near-term retirements
stemming from the pandemic.
CREDIT QUALITY OF INITIAL LEASES AND LESSEES
The vast majority of the aircraft in the portfolio have leases that expire
at a time which is beyond Moody's current expectation for a recovery in
global air travel demand approaching 2019 levels by 2024. Leases
attached to only five aircraft comprising 15% of the pool expire
prior to 2025, with 7% expiring in 2023 and the remainder
in 2024. The weighted average remaining lease term of the initial
leases is 7.7 years, longer than the 4.0-4.5
years in prior Castlelake aircraft lease ABS deals. Therefore,
the transaction is generally well protected from the near-term
COVID-19-related asset risks such as potentially long periods
of aircraft downtime and the re-leasing of new aircraft to weakened
lessees at depressed lease rates.
Around 67% of the initial contractual cash flows come from lessees
or guarantors of relatively strong quality, likely providing a strong
and steady source of cashflow to the transaction.
Noteholders will benefit from EOL payments received from certain lessees
at the end of their leases. Based on projections from the appraisal
firm mba, the aggregate projected EOL payments from the lessees
total $253 million, or 43% of the aggregate note balance.
In our analysis, we reduce the estimated EOL payments to account
for (1) the projected costs required to ensure that the maintenance condition
of the plane is sufficient to attract a subsequent lessee at reasonable
terms, (2) the potential volatility in mba's projected EOL amounts
owing to uncertainty around utilization of the aircraft during the lease
terms, and (3) the probability of lessee defaults prior to lease
expiry.
STRENGTH OF TRANSACTION STRUCTURE
This transaction structure includes some new features to support performance.
Unlike prior aircraft lease ABS, note amortization schedules are
specific to each asset in the pool, providing additional protection
to noteholders for two reasons. First, prepayments of note
principal from aircraft disposition proceeds or EOL payments at lease
expiry will result in unscheduled note principal payments that will cause
each notes' principal balance to remain ahead of its targeted amortization
schedules. Second, each aircraft in the pool has its own
CLTV ratio at closing, with the strongest aircraft (young or narrowbody)
and/or lessees generally having a higher CLTV, and the weakest aircraft
(older or widebody) and/or lessees, a lower CLTV. Also,
the debt amortization schedules attached to weaker assets are faster protecting
noteholders from the risk that weaker credits default, exposing
the deal to re-leasing risk.
The transaction also includes new triggers that benefit the class A noteholders.
These triggers include a collections test that redirects the class B scheduled
principal amount to the class A notes if the amount of rent collected
falls below 75% of the amount contracted to be collected (including
full contractual lease rent from leases in deferral status as of the cut-off
date). Also, in addition to the typical class B partial cash
sweep, the transaction includes a class A partial cash sweep,
where a portion of available funds are used to repay the class A notes
in years four through seven. This repayment is in addition to the
class A scheduled principal payment. Moreover, if the number
of aircraft in the portfolio falls below eight, there is a full
cash sweep, mitigating tail risk in the transaction. Finally,
the DSCR triggers for cash trap and cash sweep have a three-month
look back period, compared with six months in prior transactions.
This shorter DSCR look-back period allows the transaction to respond
faster to performance deterioration.
Similar to other aircraft lease ABS transactions, the E-Certificates
receive a portion of the transaction cash flows assuming a senior rapid
amortization trigger has not been breached.
In contrast, deals in most ABS asset classes generally have stronger
structures that preclude the erosion of credit enhancement through maintaining
credit enhancement levels without trigger breaches, having sequential-pay
structures, or including other structural features such as non-declining
credit enhancement or reserves. As noted above, the structural
trigger resulting in a full cash sweep if the number of aircraft falls
below eight mitigates tail risk.
QUANTATIVE MODELING ASSUMPTIONS
Initial value: Moody's initial assumed maintenance-adjusted
value of the aircraft in the portfolio is $646.5 million.
Moody's initial maintenance-adjusted assumed value is equal to
the minimum of (i) three half-life market value appraisals provided
by the issuer (mba, IBA Group Ltd., and Aircraft Information
Services, Inc.), using mba's maintenance adjustment,
and (ii) half-life market values provided by two independent appraisal
firms that we traditionally use, using mba's maintenance adjustment.
Moody's initial assessed maintenance-adjusted half-life
market value is 19% lower than the average maintenance adjusted
half-life base values provided by the issuer. In commercial
aviation industry downturns, half-life market values are
typically lower than half-life base values because base values
look through the cycle.
Lessee defaults: In simulating lessee defaults, we use a Monte
Carlo simulation that accounts for each airline's default probability.
Lessee defaults are correlated using an approach similar to CDOROM.
For initial lessees, we inferred the probability of default of each
airline (or any guarantor) using either its (1) actual credit rating where
available (53% of the initial contracted lease rent, having
a weighted average (WA) rating of around Ba2), (2) credit estimate
where available (14% of the initial contracted lease rent,
with a WA credit estimate of around B3) after applying required notching
downward as per "Moody's Approach to Using Credit Estimates in Its Rating
Analysis," March 2020) or (3) a default probability equivalent to
a low speculative-grade rating for non-rated lessees ranging
from Caa2 to B3 (33% of the initial contracted lease rent,
with a WA default probability of Caa1). When an aircraft is re-leased
to a new lessee in our asset model, Moody's assumed that the new
lessee has a default risk equivalent to a low speculative-grade
rating of B3.
EOL payments: Moody's assumed a 40% haircut to all projected
EOL payments to account for volatility in mba's estimate and maintenance
required to attract a new lessee. Moody's also reduced the resulting
amounts by each lessee's default probability.
Payment deferrals: Leases on partial payment deferrals are attached
to around 30% of the aircraft in the pool (by Moody's initial value).
Moody's also deferred an additional 25% of lease rent until the
end of 2022, followed by a recovery of 75% of the deferred
rent in 2023, given the ongoing stressed operating environment resulting
from the COVID pandemic.
Recession timing: Moody's typically assumes a downturn occurs once
every 10 years and lasts for 3 years, roughly consistent with historical
experience. The timing of the first assumed recession is equally
weighted for each of the 10 years after closing. Consequently,
in our analysis, a typical aircraft lease securitization will experience
two or three downturns during its lifetime.
Remarketing and repossession periods: For a return of an aircraft
at lease expiry, Moody's assumes aircraft downtime of five months
outside of a recession and eight months during a recession. For
a lease default and aircraft repossession, we assume aircraft downtime
of eight months outside of a recession and 11 months during a recession.
These periods are at the high end of our indicative assumptions owing
to the pandemic.
Economic useful life: All aircraft in the portfolio follow our indicative
assumptions, except for one 17-year A320-200 and one
14-year B777-300 ER, which have an assumed economic
useful life of 19 years.
Please see our aircraft lease ABS methodology for our indicative model
assumptions that are not mentioned above.
ESG CONSIDERATIONS
Environmental risk
The environmental risk for this transaction is moderate. Current
and future carbon and air emission regulations for airplanes could make
older and fuel inefficient aircraft more expensive to operate, or
require retro-fits that may still make them less attractive to
airlines, reducing demand for these aircraft. The lower demand
could (1) negatively affect both the values and lease rates of aged aircraft,
and (2) relegate older aircraft to airlines with lower credit quality
or those operating in jurisdictions where regulations have not been implemented.
The transaction has a long legal final maturity and is therefore exposed
to regulatory changes. However, these risks are mitigated
by the sizable contractual cash flows of the initial leases, as
well as the transaction structure, which accelerates note amortization
with the receipt of EOL payments and disposition proceeds.
Social risk
The social risk for this transaction is moderate. The ongoing global
coronavirus pandemic, which we regard as a social risk under our
ESG framework, will continue to negatively affect global air travel,
resulting in (1) lower demand for aircraft and therefore depressed aircraft
lease rates and values, higher risk of extended remarketing periods
and accelerated retirements of older aircraft, and (2) weakened
credit quality of airline lessees, elevating the risk of bankruptcies,
additional lease payment deferrals and re-leasing risk.
We expect a full recovery in global air travel demand to 2019 levels until
2024. However, the vast majority of the aircraft in the portfolio
have leases that will not expire until after 2024 when the commercial
aviation industry recovers, protecting the transaction from near-term
COVID-19-related asset risks. In addition,
in its cash flow analysis, Moody's considered the depressed values
as the initial values and assumed elevated default risk for the initial
lessees to reflect pandemic-related risks.
The coronavirus outbreak, the government measures put in place to
contain it, and the weak global economic outlook continue to disrupt
economies and credit markets across sectors and regions. Our analysis
has considered the effect on the performance of corporate assets from
the current weak US economic activity and a gradual recovery for the coming
months. Although an economic recovery is underway, it is
tenuous, and its continuation will be closely tied to containment
of the virus. As a result, the degree of uncertainty around
our forecasts is unusually high.
We regard the coronavirus outbreak as a social risk under our ESG framework,
given the substantial implications for public health and safety.
Governance risk
This securitization's governance risk is moderate and typical of other
aircraft lease transactions in the market. As described in our
publication "Governance considerations are a key determinant of credit
quality for all issuers," September 2019, we examine five
governance considerations in our analysis as described below. Governance
risks are mitigated by this transaction's structure, documentation
and characteristics of the transaction parties.
1) Financial strategy and risk management -- this transaction
limits the ability of the issuers and their respective subsidiary asset
entities to engage in activities other than the ones related to the underlying
assets and this transaction.
2) Management credibility and track record -- While the
sponsor and servicer are not rated by Moody's, the legal structure
and documentation of the transaction mitigates the governance risk.
3) The organizational/transaction structure -- These transaction's
issuers are structured as bankruptcy-remove special purpose entities.
The transaction could have misalignment of interests among the transaction
parties, and specifically between the holder(s) of the Class E-Certificates
and the noteholders. For instance, the servicer may execute
aircraft sales upon direction from the E-certificate holders that
are disadvantageous to noteholders providing a portion of the sales proceeds
to the equity.
4) The board structure -- includes a board of directors
for the issuers, with one independent director, that makes
decisions to maximize the value of the collateral, such as disposing
of aircraft at favorable prices, restructuring leases to prevent
defaults, or finding a replacement servicer. The deal has
an independent trustee, managing agent, and paying agent.
The independent directors, however, are not from a nationally
recognized corporate services provider.
5) Compliance and reporting - this securitization's consistency
and quality of reporting in the form of servicing reports.
In addition, Moody's notes that this securitization has no objective
standard of care for the servicer. Furthermore, the servicer
may have potential conflicts of interest in servicing the securitization
aircraft because it also services its own aircraft portfolio. However,
the servicer covenants not to discriminate among the securitization assets
and its own assets, partially mitigating this governance risk.
PRINCIPAL METHODOLOGY
The principal methodology used in these ratings was "Moody's
Global Approach to Rating Securities Backed by Aircraft and Associated
Leases" published in July 2020 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBS_1232482.
Alternatively, please see the Rating Methodologies page on www.moodys.com
for a copy of this methodology.
Factors that would lead to an upgrade or downgrade of the ratings:
Up
Factors that could lead to an upgrade of the ratings on the notes are
(1) collateral cash flows that are significantly greater than our initial
expectations and (2) significant improvement in the credit quality of
the airlines leasing the aircraft. Moody's updated expectations
of collateral cash flows may be better than its original expectations
because of lower frequency of default by the underlying lessees,
recovery in aircraft values owing to stronger global air travel demand,
lower than expected depreciation in the value of the aircraft that secure
the obligor's promise of payment, and higher realization of EOL
payments that are used to prepay the notes. As the primary drivers
of performance, positive changes in the global commercial aviation
industry could also affect the ratings.
Down
Factors that could lead to a downgrade of the ratings on the notes are
(1) collateral cash flows that are materially below our initial expectations
and (2) a significant decline in the credit quality of the airlines leasing
the aircraft. Other reasons for worse-than-expected
transaction performance could include poor servicing of the assets,
for example sales disadvantageous to noteholders, or error on the
part of transaction parties. Moody's updated expectations of collateral
cash flows may be worse than its original expectations because of a higher
number of lessee defaults or greater than expected deterioration in the
value of the aircraft that secure the obligor's promise of payment owing
to weak global air travel demand, and lower than expected realization
of EOL payments. Transaction performance also depends greatly on
the strength of the global commercial aviation industry.
REGULATORY DISCLOSURES
For further specification of Moody's key rating assumptions and
sensitivity analysis, see the sections Methodology Assumptions and
Sensitivity to Assumptions in the disclosure form. Moody's
Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.
Further information on the representations and warranties and enforcement
mechanisms available to investors are available on http://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBS_1262536.
The analysis relies on a Monte Carlo simulation that generates a large
number of collateral loss or cash flow scenarios, which on average
meet key metrics Moody's determines based on its assessment of the
collateral characteristics. Moody's then evaluates each simulated
scenario using model that replicates the relevant structural features
and payment allocation rules of the transaction, to derive losses
or payments for each rated instrument. The average loss a rated
instrument incurs in all of the simulated collateral loss or cash flow
scenarios, which Moody's weights based on its assumptions
about the likelihood of events in such scenarios actually occurring,
results in the expected loss of the rated instrument.
Moody's quantitative analysis entails an evaluation of scenarios
that stress factors contributing to sensitivity of ratings and take into
account the likelihood of severe collateral losses or impaired cash flows.
For ratings issued on a program, series, category/class of
debt or security this announcement provides certain regulatory disclosures
in relation to each rating of a subsequently issued bond or note of the
same series, category/class of debt, security or pursuant
to a program for which the ratings are derived exclusively from existing
ratings in accordance with Moody's rating practices. For ratings
issued on a support provider, this announcement provides certain
regulatory disclosures in relation to the credit rating action on the
support provider and in relation to each particular credit rating action
for securities that derive their credit ratings from the support provider's
credit rating. For provisional ratings, this announcement
provides certain regulatory disclosures in relation to the provisional
rating assigned, and in relation to a definitive rating that may
be assigned subsequent to the final issuance of the debt, in each
case where the transaction structure and terms have not changed prior
to the assignment of the definitive rating in a manner that would have
affected the rating. For further information please see the ratings
tab on the issuer/entity page for the respective issuer on www.moodys.com.
For any affected securities or rated entities receiving direct credit
support from the primary entity(ies) of this credit rating action,
and whose ratings may change as a result of this credit rating action,
the associated regulatory disclosures will be those of the guarantor entity.
Exceptions to this approach exist for the following disclosures,
if applicable to jurisdiction: Ancillary Services, Disclosure
to rated entity, Disclosure from rated entity.
The ratings have been disclosed to the rated entity or its designated
agent(s) and issued with no amendment resulting from that disclosure.
These ratings are solicited. Please refer to Moody's Policy
for Designating and Assigning Unsolicited Credit Ratings available on
its website www.moodys.com.
Regulatory disclosures contained in this press release apply to the credit
rating and, if applicable, the related rating outlook or rating
review.
Moody's general principles for assessing environmental, social
and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1243406.
At least one ESG consideration was material to the credit rating action(s)
announced and described above.
The Global Scale Credit Rating on this Credit Rating Announcement was
issued by one of Moody's affiliates outside the EU and is endorsed
by Moody's Deutschland GmbH, An der Welle 5, Frankfurt
am Main 60322, Germany, in accordance with Art.4 paragraph
3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies.
Further information on the EU endorsement status and on the Moody's
office that issued the credit rating is available on www.moodys.com.
The Global Scale Credit Rating on this Credit Rating Announcement was
issued by one of Moody's affiliates outside the UK and is endorsed
by Moody's Investors Service Limited, One Canada Square,
Canary Wharf, London E14 5FA under the law applicable to credit
rating agencies in the UK. Further information on the UK endorsement
status and on the Moody's office that issued the credit rating is
available on www.moodys.com.
Please see www.moodys.com for any updates on changes to
the lead rating analyst and to the Moody's legal entity that has issued
the rating.
Please see the ratings tab on the issuer/entity page on www.moodys.com
for additional regulatory disclosures for each credit rating.
Gideon Lubin
Vice President - Senior Analyst
Structured Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653
Tracy Rice
VP - Senior Credit Officer
Structured Finance Group
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653
Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653
