Investors say they are backing away from aircraft ABS as heightened competition and one-off deals with weak collateral shine a light on late-cycle behavior in the asset class, reported Global Capital today.
According to Senior Portfolio Manager Jake Remley, of Income Research + Management, investors’ search for yield has allowed the sector to price a high number of deals from new entrants and a variety of collateral types, even if the collateral is weak or untested.
“You are starting to see more widebodied collateral get placed in deals,” said Remley. “Widebodied aircrafts are reasonably valuable, but have more volatility. Airlines tend to back up that type of airframe in terms of purchasing it when the economic cycle turns down.”
In October 2017, Fitch Ratings stated that while corporate jet aircraft ABS transactions backed by a pool of fixed contracts is rate-able, niche deals such as the Business Jets Securities series from Global Jet Aircraft do not meet the rating agency’s investment grade standards.
“We looked at it very carefully, but we were not comfortable with the degree of volatility of private jets,” said Remley. “You are seeing those deals get priced and that’s a sign of late cycle behavior, a sign of investors looking for yield. Anything that approaches around 200bp on spreads that is investment grade is looking attractive to a lot of investors.”