More on aviation revenues securitization
[This page is a series of focused write-ups on applications in securitisation. For other applications, see the Securitisation Applications section on the Securitisation home page.]
More on aircraft lease securitisation
Aircraft lease securitisation market:
Aircraft leases are viewed with a variety of opinions. Some regard aircraft as "dangerous assets". They are expensive to buy and operate, they are rarely in one place for very long, they become subject to a wide variety of laws and jurisdictions, they cause enormous damage when they crash, etc.
Inspite of this, aircraft leasing is a growing business World-over. Aircraft financing industry is huge and is constantly growing. On estimate, there are about 12500 commercial aircraft in the world with about 270 airlines. With most countries following open skies policy, the number of aircraft is slated to increase substantially, with an annual funding requirement of approximately USD 50 billion.
Aircraft leasing formed a substantial chunk of the total aircraft acquisition world-over. Financial leasing of aircraft was traditionally enhanced by tax benefits leading to a substantially reduced funding cost to the airlines, but most countries have, over the years, plugged tax provisions to make straight forward financial leases difficult.
Currently, therefore, aircraft leasing is mostly done on operating lease basis. Of the 12500 aircrafts mentioned above, about 2500 are funded on operating lease basis. This has obviously resulted into substantial use of securitisation to provide funding to the lessors.
Not only this, aircraft operators have made direct use of the securitisation technique by issuing Equipment Trust certificates.
Aircraft lease securitisations can take two forms – either securitisation of receivables out of leases with the aircrafting remaining the legal property of the originator, or those where the aircraft itself is sold to the SPV. The latter follows the device of Equipment Trust certificates (ETCs). While the aircraft lease receivable securitisation (aircraft lease portfolio securitisation – ALPS) is similar to any other securitisation, the ETC method is a unique technology applied mostly to the aircraft segment only.
Equipment trust certificates:
The equipment trust certificate is a pass through trust issuing certificates, often stratified into senior and subordinated, to the investors. The ETC gives the aircraft on financial lease to the aircraft. If the structure involves senior-junior tranches, the subordinated segment is subscribed to by the airline itself, forming its equity in the transaction. This leads to an enhancement in the credit of the senior securities, which are then known as Enhanced Equipment Trust Certificates (EETC).
The first EETC transaction was done in 1994 by Northwest Airlines. Outside of the US, the first transaction was the 1998 issue of Ansett Australia. Since then, many such issues have hit the market.
One of the key issues in aircraft lease securitisations, whether under the EETC method or ALPS method, is to identify the legal and tax considerations applying in the several jurisdictions where the aircraft might be operational.