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Rating Action:

Moody's takes rating actions on select aircraft lease backed ABS notes

05 Dec 2011

Approximately $1.5 billion of asset backed securities affected.

New York, December 05, 2011 -- Moody's has taken rating actions on certain aircraft lease backed ABS notes from three transactions from three different sponsors. The rating actions cover notes issued by Aviation Capital Group Trust II (ACG II), sponsored by Aviation Capital Group; ACS 2006-1 Pass Through Trust (ACS 2006-1), sponsored by Aircastle Limited; and Aircraft Lease Securitization Limited, Series 2007-1 (ALS 2007-1), sponsored by AerCap.

RATINGS RATIONALE

Today's rating actions result from a varying combination of model error correction and transaction-specific performance.

With respect to model error correction, Moody's corrected the cash flow model used in the quantitative analysis of the transactions. Specifically, certain errors were corrected in the portions of the model that simulate lessee defaults and aircraft down time between leases, and that allocate cash flow in the priority of payments. The varying impact of correction for these errors relative to the impact of performance is noted below for each transaction. It should be noted that model generated output is one among several important factors considered by Moody's in rating these transactions.

In addition to model output, we also considered, among other factors, the loan-to-value (LTV) of each class of rated notes, the number, type and age of the aircraft in the portfolio, the current lessee diversity and lease terms, and the outlook for lease revenue given these factors. The Principal Methodology section contains additional information on the assumptions made regarding aircraft portfolio value and the calculation of LTV.

ACG II: The downgrade of the ACG II notes was primarily due to model error correction. The new ratings now accurately reflect the impact of several issues, particularly LTV and aircraft age. The calculated LTV (based on adjusted average appraised values) of the class G-1 and G-2 senior notes and the class B-1 junior notes were approximately 75% and 98%, respectively, as of October 2011. The LTV for the senior classes is relatively low for their rating. However the paydown of the senior notes is negatively impacted by the large size of the junior class and related waterfall priorities, as measured by corrected model output. Specifically, junior interest and minimum principal is paid behind senior interest and minimum principal but ahead of senior scheduled principal. Conversely, the LTV for the junior class is relatively high for the rating, reflecting the benefits, as indicated by corrected model output, of a large class size, and the relatively favorable waterfall priority for junior minimum principal. We note that senior notes are paying ahead of minimum target payments but behind their respective scheduled principal target balances, while the junior class is only paying to minimum schedule.

The weighted average age of the aircraft underlying the transaction is approximately thirteen years and the lease revenue generated by the pool is declining. With approximately half of the original notes' balance still outstanding, we expect the paydown of the notes to take longer than our previous expectations. The longer paydown terms along with the aging of the underlying pool increases the uncertainty surrounding the future lease income.

ACS 2006-1: The downgrade of the ACS 2006-1 notes was primarily due to weakened performance, specifically the steeper than expected decline in aircraft value in the context of an aged pool. The calculated LTV is approximately 66%, as of October 2011, and the notes have recently begun to pay principal full turbo -- both credit strengths. However, per the structure, until recently, the scheduled principal paydown on the notes was very limited, leaving them increasingly exposed to declining aircraft value and lease revenue over time. Corrected model results indicate that the recent inception of the full turbo payment mode is insufficient to offset these weaknesses. Corrected model output indicates complete principal paydown will take approximately ten years in the expected case and fourteen years in certain of our stress scenarios. As the required time to fully pay the bonds increases, the uncertainty of future lease income and the remaining useful life of the aircraft become larger concerns. Currently, the weighted average age of the aircraft is approximately thirteen years. This implies the asset portfolio has twelve years of useful life remaining. With the note paydown expected to take ten years, the very modest two year gap between the remaining lives of the asset and bond is viewed as a credit weakness.

ALS 2007-1: The ALS 2007-1 notes were upgraded because of the notes' accelerated paydown. Paydown of the notes has benefited from the full turbo of principal payments since closing, the positive effects of which have been compounded by the use of interest rate caps. The calculated LTV is approximately 62%, as of October 2011. The transaction benefits from a conservative full turbo structure whereby all cash flow available after payment of expenses, interest and policy premium to the Policy Provider is available to pay Class G-1 principal. Furthermore, unlike interest rate swaps, interest rate caps give the benefit of falling interest rates to the party receiving protection from floating interest rates. Thus the transaction has benefitted from the long duration of low floating interest rates. These two positive factors have resulted in the ALS 2007-1 notes deleveraging faster than expected. Moody's expects principal to be fully paid in approximately six years; nine years in certain stressed scenarios. The current weighted average age of the aircraft portfolio is approximately eleven years, indicating approximately fourteen years of remaining useful life of the assets. The positive eight year gap between the expected asset useful life and the expected time to retire the bonds is viewed as a credit strength.

PRINCIPAL METHODOLOGY

The principal methodology used in this rating was "Moody's Approach to Pooled Aircraft-Backed Securitization" published in March 1999. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

Aircraft values are an important consideration in the methodology. In particular, aircraft values are a factor in the revenue equation in aircraft leasing. Additionally, aircraft values are used to calculate LTV ratios, which are a convenient measure of transaction leverage. Valuations are always provided at deal inception, often from multiple firms. However, thereafter, aircraft are not valued on a frequent basis, and the requirements to provide valuations to Moody's vary by deal. Moody's necessarily uses the base value, or estimates thereof, as opposed to the market value in its analysis. Base value is the estimate of underlying value of the aircraft that adjusts for expected temporary market value fluctuations.

When aircraft valuations are available as of the approximate date of the analysis, we use those values. For modeling purposes, for deals with multiple valuations, we use the lower of mean or median of the appraising firms' valuations. If such valuations precede the analysis date by several months, we adjust such valuations by a factor derived by comparing the market values of similar aircraft available from other sources (the "market values") as of the approximate period of the valuations and the market values as of the analysis date.

For deals without reasonably current valuations, other methods to estimate current aircraft values may be used. In one method, Moody's may rely on adjusting portfolio appraisals from the initial rating. By comparing market values from time of closing and current market values, a factor is calculated and applied to the initial portfolio base value. In a second method, a small upward adjustment is applied to the current market values since market values do not take into account additional factors unique to the aircraft such as the engine type and interior configuration.

For all transactions, Moody's performs sensitivity to the base value and incorporates the results into the ratings.

For presentation purposes, LTV shown is calculated using the note remaining balances and the aggregate aircraft values as determined as described above. We exclude the impact of the reserve and liquidity facilities to provide a comparable metric across the sector. The deals vary on the form and uses of credit enhancement. In some deals, liquidity is a cash deposit, and in others it is a credit line; some deals only allow the liquidity to be used for interest and expenses, and others allow interest, expenses, and certain principal payments. For further information on the credit enhancement for ACG II, ACS 2006-1, and ALS 2007-1, please see the Pre-Sale reports available on moodys.com.

The complete rating actions are as follows:

Issuer: Aviation Capital Group Trust II

Class G-1 Notes, Downgraded to Baa3 (sf); previously, on December 17, 2010, downgraded to Baa1 (sf);

Class G-2 Notes, Downgraded to Baa3 (sf); previously, on December 17, 2010, downgraded to Baa1 (sf);

Class B Notes, Downgraded to Ba3 (sf); previously, on December 17, 2010, downgraded to Ba1 (sf);

Issuer: ACS 2006-1 Pass Through Trust

Class G-1 Notes, Downgraded to Baa1 (sf); previously, on December 14, 2010, A2 (sf), placed on review for possible downgrade

Issuer: Aircraft Lease Securitization Limited, Series 2007-1

Class G-3 Notes, Upgraded to A1 (sf); previously, on December 10, 2010, Baa1 (sf), placed on review for possible upgrade

REGULATORY DISCLOSURES

Although these credit ratings have been issued in a non-EU country which has not been recognized as endorsable at this date, the credit ratings are deemed "EU qualified by extension" and may still be used by financial institutions for regulatory purposes until 31 January 2012. ESMA may extend the use of credit ratings for regulatory purposes in the European Community for three additional months, until 30 April 2012, if ESMA decides that exceptional circumstances arise that may imply potential market disruption or financial instability. Further information on the EU endorsement status and on the Moody's office that has issued a particular Credit Rating is available on www.moodys.com

Issuer: Aviation Capital Group Trust II

Issuer: ACS 2006-1 Pass Through Trust

Issuer: Aircraft Lease Securitization Limited, Series 2007-1

For ratings issued on a program, series or category/class of debt, this announcement provides relevant regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt 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 relevant regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides relevant 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.

Information sources used to prepare the rating are the following: parties involved in the ratings, and parties not involved in the ratings, and public information, and confidential and proprietary Moody's Investors Service information.

Moody's received and took into account one or more third-party assessments on the due diligence performed regarding the underlying assets or financial instruments in this transaction and the assessment had a neutral impact on the rating.

Moody's considers the quality of information available on the rated entity, obligation or credit satisfactory for the purposes of issuing a rating.

Moody's adopts all necessary measures so that the information it uses in assigning a 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 the ratings disclosure page on www.moodys.com for general disclosure on potential conflicts of interests.

Please see the ratings disclosure page on www.moodys.com for information on (A) MCO's major shareholders (above 5%) and for (B) further information regarding certain affiliations that may exist between directors of MCO and rated entities as well as (C) the names of entities that hold ratings from MIS that have also publicly reported to the SEC an ownership interest in MCO of more than 5%. A member of the board of directors of this rated entity may also be a member of the board of directors of a shareholder of Moody's Corporation; however, Moody's has not independently verified this matter.

Please see Moody's Rating Symbols and Definitions on the Rating Process page on www.moodys.com for further information on the meaning of each rating category and the definition of default and recovery.

Please see ratings tab on the issuer/entity page on www.moodys.com for the last rating action and the rating history.

The date on which some ratings were first released goes back to a time before Moody's ratings were fully digitized and accurate data may not be available. Consequently, Moody's 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 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.

Giyora Eiger
Vice President - Senior Analyst
Structured Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Michael McDermitt
VP - Senior Credit Officer
Structured Finance Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's takes rating actions on select aircraft lease backed ABS notes
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