Since 2013, the demand for aircraft ABS (asset-backed securitisation) transactions has gone from strength to strength. Last year saw a record number (14) of ABS deals close and 2018 is on course to at least match that number.
For many aircraft lessors, access to the capital markets is a crucial component of their capital structure.
The model of raising equity capital, using a warehouse facility to acquire a portfolio of aircraft, refinancing the expensive warehouse debt through an ABS takeout (and repeat) has proven to be very successful and has allowed mid-sized lessors especially to grow rapidly.
The ABS product has shown incredible versatility in recent years in terms of the age and the types of assets in the pools, as well as the willingness of the market to allow for high concentrations of emerging market exposure. Also, in terms of how the vehicle has been structured in order to maximise tax efficiencies and to meet the specific needs of the equity investors and/ or potential future equity investors.
The CLAST 2014-1 (Castlelake) deal was ground-breaking for a number of reasons. The number of aircraft in the pool (79) and their weighted average age (17.5 years) were some distance beyond what the market had seen at that point. The transaction repurposed the ABS product as not just a means of moving aircraft off-balance sheet, but as a new and inexpensive financing source for mid-life and end-of-life aircraft.
The deal was also ground-breaking from a structuring perspective. The nature of the sponsor as a fund manager, rather than a more traditional aircraft lessor, meant that the equity in the ABS vehicle needed to be held by multiple different funds, each with its own tax and structuring considerations.
The challenge was to create a truly diverse, amalgamated collateral pool without disturbing the tax structuring of the equity in the portfolio. In particular, ensuring that US-sourced income in the structure was not used to pay dividends to non US persons, for which a 30% withholding would apply.
Borrowing heavily from enhanced equipment trust certificate technology, the dual-level issuer structure was created. The assets would be held in separate silos depending on their lessee locations and expected flight patterns. Each silo would sit beneath a sub-issuer, which would issue cross-collateralised and cross-guaranteed notes to a single master issuer, a passthrough trust, which would amalgamate the debt cash flows and issue master notes to the debt investors.
The individual sub-issuers had separate equity investors, so there was no cross contamination from a tax perspective of the residual cash flows from the portfolio. The structure has been replicated a number of times since – CLAST 2015-1, CLAST 2016-1, CLAST 2017-1, CLAST 2018- 1 (all Castlelake), AASET 2014-1, AASET 2015-1, AASET 2016-1, AASET 2016-2, AASET 2017-1 and AASET 2018-1 (all Apollo Aviation).
Initial preferences for Luxembourg based holding structures for non-US assets have largely been replaced by Irish based sub-issuers, particularly since the Luxembourg transfer pricing rules came into effect.
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