Approximately $589 million of asset backed securities affected
New York, December 17, 2010 -- Moody's Investors Service has downgraded the Class G-1, Class
G-2, and Class B-1 Notes issued by Aviation Capital
Group Trust II. The complete rating action is as follows:
Issuer: Aviation Capital Group Trust II (ACG II)
Class G-1 Notes maturing in September 20, 2033, Downgraded
to Baa1 (sf); previously on Nov 16, 2008 Upgraded to Aa2 (sf)
and Placed Under Review for Possible Downgrade;
Class G-2 Notes maturing in September 20, 2033, Downgraded
to Baa1 (sf); previously on Nov 16, 2008 Upgraded to Aa2 (sf)
and Placed Under Review for Possible Downgrade;
Class B-1 Notes maturing in September 20, 2033, Downgraded
to Ba1 (sf); previously on Nov 13, 2008 A3 (sf) Placed Under
Review for Possible Downgrade;
RATINGS RATIONALE
As of October 2010, the portfolio had 35 aircraft, down from
37 at closing in 2003. The average adjusted appraised base value
at October 2010 was approximately $631 million, roughly 17%
lower than the appraised value projected for October 2010 at closing.
The downgrade of the notes stems from significant declines in lease revenue
and aircraft values resulting in much longer prospective pay-down
periods for the notes. Due to lower lease rates, in the past
two years the Class G Notes have fallen further behind the expected repayment
schedule while the Class B-1 Notes have been paid only according
to minimum repayment schedule. Furthermore, the portfolio
include a large number of old-vintage and/or old generation (i.e.
"classic") aircraft; which have experienced accelerated
declines in demand and lease rates as a result of the global recession.
We think that the prospects for lease revenue recovery for such classic
aircraft is limited.
As part of the review Moody's used a Monte Carlo analysis to simulate
different scenarios of leasing and re-leasing for the aircraft
pool, and from these scenarios monthly cash-flows were obtained.
These cashflows were then used to pay down the notes. The IRR of
the simulated Notes cash flows was calculated for each iteration,
and the average IRR was compared to the promised IRR (coupon) to measure
the reduction in IRR. After completing a large number of iterations,
an average reduction in IRR was calculated and from these results model-indicated
ratings were determined using the appropriate Moody's idealized reference
tables.
The simulation relies on identifying key variables including lease rates,
interest rate, portfolio base value, lessee defaults,
economy and remarketing time and costs. Once the variables are
specified, we assign a continuous triangular distribution to each
variable in order to define the boundaries of possible outcomes.
Specific modeling assumptions include the following: (A) Lease rate
factors: initial lease rate factors reflect the actual leases in
place. After a lease expired or if the lessee is assumed to default
during the initial lease, the new lease contracts are assumed to
have lease rate factors that range between approximately 1.0%
and 1.65% depend on the age of the aircraft; the latter
based on historical pool performance and market data. (B) Interest
rates: at closing, as described in our pre-sale report,
we expected that a swap with a fixed pay rate of 3.42% would
be in place for the life of the deal. The transaction is currently
only partly hedged, with swaps having a range of pay rates higher
and lower than 3.42%. At this time we tested the
performance of the transaction under different interest rate scenarios
ranging from 3.5% to 6%. (C) Aircraft portfolio
value: we used the most recent base appraised aircraft value,
and haircut those values by 10%. (D) Airline (lessee) rating
assumptions: average lessee ratings were assumed to be B3.
(E) Macro-economic conditions: assumed down cycle probability
was 50%; down-cycles last for three years, during
which lease rate factors (whether existing or stressed) are haircut by
10%. And, (F) Remarketing of aircraft coming off-lease:
remarketing time varied from two to seven months, with average remarketing
costs of approximately $0.45 million.
In determining the ratings we also considered the following factors:
(i) the quality and marketability of the collateral underlying the transaction
which is comprised of 35 aircraft with an approximate weighted average
age of 13 years, of which approximately 90% by recent appraised
base value are passenger configured narrowbody aircraft; (ii) the
capabilities of Aviation Capital Group in its capacity as remarketing
servicer and its continued ability to lease and re-lease the aircraft;
(iii) the absence of firm interest rate hedging requirement and current
swaps in place; (iv) the availability of a cash liquidity reserve
in the amount of $60 million, of which a large amount can
be used to make minimum principal payment on the notes, if needed;
(v) the Loan-to-Value (LTV) ratios of the Class G and the
Class B-1 of approximately 71% and 93%, respectively
(Class B-1 LTV ratio drops to 87% if the liquidity reserve
account is included in the assumed value); and (vi) the payment structure
that generally applies all collections not needed for interest or expenses
to retire principal.
Finally, Moody's notes that this transaction is wrapped by MBIA
(B3) and the current rating reflects Moody's policy of rating to the higher
of the financial guarantor rating and the underlying rating.
The principal methodology used in this rating was "Moody's Approach
to Pooled Aircraft-Backed Securitization" published in March
1999.
Moody's Investors Service received and took into account third party
due diligence reports on the underlying assets or financial instruments
in this transaction and the due diligence reports had a negative impact
on the rating.
In addition, Moody's publishes a weekly summary of structured finance
credit, ratings, and methodologies available to all registered
users of our website at www.moodys.com/SFQuickCheck.
REGULATORY DISCLOSURES
Information sources used to prepare the credit rating are the following:
parties involved in the ratings, parties not involved in the ratings,
public information, and confidential and proprietary Moody's
Investors Service information.
Moody's Investors Service considers the quality of information available
on the issuer or obligation satisfactory for the purpose of maintaining
a credit rating.
Moody's adopts all necessary measures so that the information it uses
in assigning a credit rating is of sufficient quality and from sources
Moody's considers to be reliable including, when appropriate,
independent third-party sources. However, Moody's
is not an auditor and cannot in every instance independently verify or
validate information received in the rating process.
Please see ratings tab on the issuer/entity page on Moodys.com
for the last rating action and the rating history.
The date on which some Credit Ratings were first released goes back to
a time before Moody's Investors Service's Credit Ratings were fully digitized
and accurate data may not be available. Consequently, Moody's
Investors Service provides a date that it believes is the most reliable
and accurate based on the information that is available to it.
Please see the ratings disclosure page on our website www.moodys.com
for further information.
Please see the Credit Policy page on Moodys.com for the methodologies
used in determining ratings, further information on the meaning
of each rating category and the definition of default and recovery.
New York
Michael McDermitt
VP - Senior Credit Officer
Structured Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
New York
Giyora Eiger
Vice President - Senior Analyst
Structured Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
Moody's Investors Service
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
Moody's downgrades aircraft leased-backed notes issued by Aviation Capital Group Trust II
