Ready for take-off
The first securitisation of aircraft engine receivables by an Asia-headquartered lessor introduced a new asset class to the region’s developing structured finance market.
Total Engine Asset Management, a joint venture between Singapore’s ST Engineering and Japan’s Marubeni Corp, in February sold US$256.98m of asset-backed notes, at the same time as placing an equity tranche to external investors.
The deal allowed TEAM to free up capital for future investments and introduced a new name to the global structured finance arena, helping expand interest in the securitisation product in Asia.
The Sunbird 2020-1 Engine Lease ABS transaction was backed by 30 aircraft engines leased to 13 airlines in 11 jurisdictions, giving the asset pool diversification, and the engine models were also used in a range of different aircraft.
Following a five-day roadshow covering the US and more than 10 cities in Asia, the leads announced guidance for a three-tranche offering with ratings from Kroll of A, BBB and BB.
The Series A and B tranches had weighted average lives of 5.7 years and the C tranche 3.5 years, compared with an initial weighted average remaining lease term of approximately 5.9 years. The underlying portfolio had a value of US$305.9m, and the engines were near the beginning of their lifecycle, giving them good prospects for re-leasing.
US carrier Frontier Airlines accounted for more than a quarter of the leasing portfolio, resulting in a higher concentration than other recent aircraft and engine leasing ABS deals, but TEAM compensated for that risk. It added a utilisation trigger which uses excess cash to pay down the Series A notes and then the Series B notes if five or more engines are idle.
Many investors needed an introduction to the asset class and to learn about the importance of spare engines to airlines, but the intensive marketing meant that all tranches were oversubscribed, even as airlines began to feel the impact of the coronavirus pandemic.
The turmoil in the industry led to a rush of downgrades in the summer of 2020, but the A and B notes were lowered by just one notch, to A– and BBB–.
A US$214.15m Series A tranche priced with a coupon of 3.671% to yield 3.700%, or mid-swaps plus 229bp; a US$30.59m Series B tranche priced with a coupon of 4.703% to yield 4.75%, or mid-swaps plus 334bp; and a US$12.24m Series C tranche priced with a coupon of 6.778% to yield 6.875%, or mid-swaps plus 548bp.
The respective tranches priced 30bp, 25bp and 12.5bp inside the wide end of guidance, and were well oversubscribed, with the Series A notes closing three times covered.
TEAM retained 10% of the equity tranche, while the rest went to other investors including an affiliate of Marubeni.
Citigroup was sole structuring adviser and joint bookrunner with Credit Agricole.
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