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Rating Action:

Moody's assigns provisional ratings to SLAM 2021-1 Limited

20 May 2021

New York, May 20, 2021 -- Moody's Investors Service, ("Moody's") has assigned provisional ratings to the series A and series B notes (2021-1 notes) to be issued by SLAM 2021-1 Limited (SLAM Ireland) and SLAM 2021-1 LLC (SLAM US). The ultimate assets backing the rated notes will consist primarily of a portfolio of aircraft and their related initial and future leases. SKY Leasing, LLC, a partnership between SKY Leasing LLC and M&G Plc (A2/P-1 stable), will be the sponsor of the transaction. SKY Aero Management Limited and SKY Leasing LLC (together, SKY Leasing) will be the servicer of the underlying assets. 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 aircraft to be securitized, and proceeds from aircraft dispositions (aircraft sales). As of the cut-off date, the initial assets will primarily consist of 16 aircraft subject to initial leases to six lessees domiciled in four countries.

The complete rating actions are as follows:

Issuers: SLAM 2021-1 Limited / SLAM 2021-1 LLC

Series A Notes, Assigned (P)A1 (sf)

Series B Notes, Assigned (P)Baa1 (sf)

SLAM 2021-1 will be SKY's inaugural aircraft lease ABS under the current origination and servicing platform.

SLAM Ireland, a Cayman Islands exempt company and Irish tax resident, and SLAM USA, a Delaware limited liability company wholly owned by SLAM Ireland, will use the proceeds from the issuance, together with the proceeds from the issuance of the E notes to acquire the initial aircraft or the initial aircraft owning subsidiaries (AOS) during the 270-day purchase period.

RATINGS RATIONALE

The provisional ratings of the SLAM 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 series 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 SKY Leasing as the servicer of the securitized assets and (6) qualitative considerations for risks related to asset diversity, 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.

Unless otherwise noted, all percentages throughout the report represent a percentage of Moody's assumed value (MAV) of the portolio.

The series A and series B notes have a Moody's CLTV ratio of approximately 78.6% and 87.9%, respectively. Moody's assumed value reflects the minimum of several third-party appraisers' initial half-life market values, adjusted by a portion of the appraised maintenance adjustment. Moody's CLTV ratio reflects the loan-to-value ratio of the combined amounts of each series of notes and the series that are senior to it. These CLTV ratios do not reflect the projected end of lease (EOL) payments due from certain airlines. The CLTV ratios would be two to three percentage points lower after reflecting the credit that we ascribe to projected EOL payments.

Key credit strengths of the transaction include (1) strong leasing assets, (2) strong initial contractual cash flows from lessees of relatively strong credit quality, (3) no lease maturities through 2024 and only one prior to the anticipated repayment date (ARD) in 2028, and (4) end of lease (EOL) payments that will bolster cash flows.

Key credit challenges include (1) high Moody's initial CLTVs and leakage of cash flows to the E notes, (2) relatively low pool diversity with potential credit migration risk, (3) challenging, though improving, operating environment that heightens asset risks, (4) potential large maintenance expenses if lessees default, (5) unrated sponsor/servicer, (6) novation and acquisition risk, and (7) volatility in aircraft values and lease rates. In assessing the impact of the credit challenges, Moody's considered the various mitigants to the risks and performed sensitivity analyses in the quantitative modeling.

As of the closing date, SKY Fund I Irish, Ltd., will be the seller of the aircraft owning subsidiaries that own the aircraft. The seller will sell the AOSs to the issuer in exchange for the E notes, during the 270-day purchase 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.

CREDIT QUALITY OF UNDERLYING AIRCRAFT

The securitized pool is stronger than most aircraft lease ABS pools with limited risk layering. The pool includes a relatively homogeneous mix of mostly new technology (82%), mostly young (91%) aircraft to relatively strong lessees mostly domiciled in the US (70%), with a weighted average lease term that is longer than that in recent issuances (11 years). However, the pool also has low diversity given the relatively low number of aircraft (16), lessees (6), jurisdictions (4) and aircraft models (5), exposing the deal to idiosyncratic risks.

Highly liquid, narrowbody aircraft that are less than two years old comprise 78% (by Moody's initial assumed value) of the portfolio to be securitized, of which 69% is new technology A321neos and 9% is B737-900ERs. An additional 13% is attributable to a new technology, A330neo, widebody aircraft that is also less than two years old. Across all ages, liquid narrowbody aircraft, which make up 87% of the pool and include the A321neo, B737-900ER, A321-200 and B737-800 models, are considered strong leasing assets owing to their large diversified installed or expected operator bases. The high proportion of young aircraft in the pool, with a weighted average life of 1.7 years, will continue to service travelers for at least 19 years, providing cashflows to the notes that can weather temporary market disruptions.

The pool consists of 9% young-midlife aircraft. Risks typically associated with mid-life aircraft include diminished re-leasing prospects, higher volatility in values, technological obsolescence and higher costs related to ongoing maintenance. Additionally, widebody aircraft typically have higher expenses compared with narrowbody aircraft.

CREDIT QUALITY OF INITIAL LEASES AND LESSEES

All of the aircraft in the portfolio have leases that will expire after 2024, when Moody's expects a recovery in global air travel demand to pre-pandemic (2019) levels, protecting the transaction from COVID-19-related re-leasing risks, unless there is a lessee default.

Around 91% of the initial contractual cash flows come from lessees of relatively strong quality, providing a strong and steady source of cashflow to the transaction. Around 70% of the initial lessees are domiciled in the US and 76% are rated by Moodys with a WARF of Ba2. All lessees are current on their rental payments with one lessee, representing 6% of the pool, paying reduced cashflows as part of a COVID related deferral plan.

Noteholders will benefit from EOL payments received from certain lessees at the end of their leases. Based on projections from the appraisal firm Alton, the aggregate projected EOL payments from the lessees total $78 million, or 13% 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 Altons's projected EOL amounts owing to uncertainty around utilization of the aircraft during the lease terms, (3) the possibility that some aircraft may be sold prior to its lease expiry and scheduled EOL payment, and (4) the probability of lessee defaults prior to lease expiry.

STRENGTH OF TRANSACTION STRUCTURE

This transaction structure is typical of pre-COVID aircraft lease ABS transactions except that the structure includes (1) a minimum aircraft trigger where if the number of aircraft in the portfolio falls below five, there is a full cash sweep, mitigating novation and credit migration risk, (2) a limitation whereby no aircraft will be novated to the issuer until either all of the Delta (Baa3 negative) or all of the JetBlue (Ba2 negative) aircraft have been novated, also reducing novation and credit migration risks, and (3) the DSCR triggers for cash trap and cash sweep have a three- month look back period, a shorter look-back period that allows the transaction to respond faster to performance deterioration.

Similar to other aircraft lease ABS transactions, the E notes receive a portion of the transaction cash flows assuming a senior rapid amortization trigger has not been breached. Owing to the pro-rata structure, EOL payments and aircraft sales accelerate the debt amortization, but, with the exception of a 5% premium, does not result in any de-leveraging. Moreover, the immediate acceleration is partially offset by reduced future scheduled debt payments through ARD. The 5% premium does not alter future payments, and any proceeds from sales or EOL payments after ARD will be fully utilized to de-lever the notes. Nearly all EOL payments are tied to leases expiring after ARD.

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. As noted above, structural triggers resulting in a full cash sweep reduces the negative impact of the pro-rata structure.

QUANTATIVE MODELING ASSUMPTIONS

Initial value: Moody's initial assumed maintenance-adjusted value of the aircraft in the portfolio is $754.1 million. Moody's initial maintenance-adjusted assumed value is equal to the minimum of (i) the average of three half-life market value appraisals provided by the issuer (mba, IBA Group Ltd., and BK Associates, Inc.), and (ii) half-life market values provided by two independent appraisal firms that we traditionally use, plus a portion of the maintenance appraisal adjustment provided by Alton. Moody's initial assessed maintenance- adjusted half-life market value is 15% lower than the average maintenance adjusted half-life base values provided by the issuer.

Lessee defaults: For modeling, Moody's inferred the probability of default of each initial airline using either its (1) actual credit rating where available (82% of the initial contracted lease rent, having a weighted average (WA) rating of around Ba2),and (2) credit estimate for the remainder (18% of the initial contracted lease rent, with a WA credit estimate of around Caa1) after applying required notching downward as per "Moody's Approach to Using Credit Estimates in Its Rating Analysis," March 2020). Moody's assumed a subsequent lessee has a default risk equivalent to a low speculative-grade rating of B3.

EOL payments: Moody's assumed a 50% haircut to projected EOL payments from leases with full life return conditions (87% of Alton projected EOL payments) and gave no credit to EOL payments for the remaining leases with half-life or lower return conditions

Payment deferrals: Given the COVID resurgence in India, we considered the sensitivity to a two-year deferral for IndiGo Air, the country's largest domestic carrier. Additionally, the current reduced rent that one lessee is paying as part of its deferral plan is reflected in our modeling.

Recession timing: Moody's typically assumes a downturn occurs once every 10 years and lasts for three years, roughly consistent with historical experience. Consequently, in our analysis, a typical aircraft lease securitization will experience two or three downturns prior to legal maturity.

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.

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 young pool of new technology aircraft expected to be in production for at lease the next decade.

Social risk

The social risk for this transaction is moderate. Aircraft lease ABS are exposed to social risks that could decrease demand for aircraft, reducing the revenue available to repay the notes. Demographic shifts can affect air travel demand, and in turn aircraft values and lease rates. Health pandemics, such as the current COVID-19 pandemic, could result in a sharp decline in air travel demand growth, which could reduce demand for aircraft or weaken the credit profiles of the airlines that are lessees in the securitization.

The coronavirus pandemic has had a significant impact on economic activity. Although global economies have shown a remarkable degree of resilience to date and are returning to growth, the uneven effects on individual businesses, sectors and regions will continue throughout 2021 and will endure as a challenge to the world's economies well beyond the end of the year. While persistent virus fears remain the main risk for a recovery in demand, the economy will recover faster if vaccines and further fiscal and monetary policy responses bring forward a normalization of activity. As a result, there is a heightened degree of uncertainty around our forecasts. Our analysis has considered the effect on the performance of corporate assets from a gradual and unbalanced recovery in U.S. economic activity.

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.

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, we examine five governance considerations in our analysis: 1) financial strategy and risk management; 2) management credibility and track record; 3) organizational structure; 4) compliance and reporting; and 5) board structure, policies, and procedures. 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 SLAM 2021-1 and their respective subsidiary asset entities to engage in activities other than the ones related to the underlying assets and this transaction, including in respect of the issuance of additional notes and other actions.

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 -- this transaction's trust and issuer groups are structured as bankruptcy remote special purpose entities that could have misalignment of interests among the transaction parties, and specifically between the holder(s) of the E notes and the noteholders. For instance, the issuers' board of directors of which the majority is appointed by the E note holders could approve aircraft sales that are disadvantageous to noteholders in order to unlock the equity.

4) The board structure -- includes a board of directors for the issuers, with one independent director, that makes decisions that will maximize the value of the collateral, such as engaging a successor servicer upon termination of the servicer and selling aircraft, and an independent trustee, managing agent, and paying agent. However, the requirement for independent director is somewhat weaker than those of most other ABS transactions we rate, unless the SLAM US takes ownership of any assets in the pool, at which time an independent director from a nationally recognized corporate services provider will need to be hired and who's vote will be required for insolvency related decisions.

5) Compliance and reporting -- Moody's will consider the sufficiency and frequency of this securitization's reporting in the form of servicing reports.

In addition, we note that this securitization has no objective servicer standard of care for the servicer. Furthermore, the servicer may have potential conflicts interests in servicing the securitizaton aircraft because it also services its own aircraft portfolio. However, the servicer covenants to not discriminate among the securitization assets and its own assets, partially mitigates this governance risk. Additionally, at close the securitized pool will represent substantially all of the servicers portfolio.

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_1283848.

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 http://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1263068.

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

Karen Ramallo
Senior Vice President/Manager
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

No Related Data.
© 2021 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.

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Additional terms for Australia only: Any publication into Australia of this document is pursuant to the Australian Financial Services License of MOODY’S affiliate, Moody’s Investors Service Pty Limited ABN 61 003 399 657AFSL 336969 and/or Moody’s Analytics Australia Pty Ltd ABN 94 105 136 972 AFSL 383569 (as applicable). This document is intended to be provided only to “wholesale clients” within the meaning of section 761G of the Corporations Act 2001. By continuing to access this document from within Australia, you represent to MOODY’S that you are, or are accessing the document as a representative of, a “wholesale client” and that neither you nor the entity you represent will directly or indirectly disseminate this document or its contents to “retail clients” within the meaning of section 761G of the Corporations Act 2001. MOODY’S credit rating is an opinion as to the creditworthiness of a debt obligation of the issuer, not on the equity securities of the issuer or any form of security that is available to retail investors.

Additional terms for Japan only: Moody's Japan K.K. (“MJKK”) is a wholly-owned credit rating agency subsidiary of Moody's Group Japan G.K., which is wholly-owned by Moody’s Overseas Holdings Inc., a wholly-owned subsidiary of MCO. Moody’s SF Japan K.K. (“MSFJ”) is a wholly-owned credit rating agency subsidiary of MJKK. MSFJ is not a Nationally Recognized Statistical Rating Organization (“NRSRO”). Therefore, credit ratings assigned by MSFJ are Non-NRSRO Credit Ratings. Non-NRSRO Credit Ratings are assigned by an entity that is not a NRSRO and, consequently, the rated obligation will not qualify for certain types of treatment under U.S. laws. MJKK and MSFJ are credit rating agencies registered with the Japan Financial Services Agency and their registration numbers are FSA Commissioner (Ratings) No. 2 and 3 respectively.

MJKK or MSFJ (as applicable) hereby disclose that most issuers of debt securities (including corporate and municipal bonds, debentures, notes and commercial paper) and preferred stock rated by MJKK or MSFJ (as applicable) have, prior to assignment of any credit rating, agreed to pay to MJKK or MSFJ (as applicable) for credit ratings opinions and services rendered by it fees ranging from JPY125,000 to approximately JPY550,000,000.

MJKK and MSFJ also maintain policies and procedures to address Japanese regulatory requirements.

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