Rating action

Scope Ratings has today placed its A- rating on the notes issued by PR Aircraft Finance S.A. – Compartment 1 (PR Aircraft) under review for downgrade. PR Aircraft is exposed to a large number of Boeing aircraft that may potentially be affected by a drop in market value after The New York Times questioned the safety and quality controls at certain Boeing plants.

After two B737Max aircraft crashes, The New York Times reviewed internal emails, corporate documents and federal records related to Boeing’s manufacturing plants, questioning the safety and quality controls at Boeing’s 787 plant in North Charleston.

Following these events, Scope reviewed its rating on the notes issued by PR Aircraft and agreed to alert investors that the rating could be downgraded if market valuations of Boeing aircraft were lower over the coming months. The rating has been maintained for the time being as there is no evidence of any market value correction yet.

Scope aims to resolve the review for downgrade within the next six months, once further analysis has been completed. Further analysis will include the results of potential investigations and price developments in the market in order to establish the impact of updated market values on the rating agency’s expected loss calculations for PR Aircraft. Transactions completed in the market over the next months should illustrate potential market value corrections.

The review for downgrade status follows the uncertainty about which aircraft models will be affected by the recent events and about the materiality of value corrections, if any.

The facility will be under review for downgrade until Scope has completed an analysis of Boeing aircraft market value developments. Scope expects market value developments to change the relative value of aircraft, which may result in higher-than-expected values for certain aircraft models made by other manufacturers, but also made by Boeing.

All loans in the portfolio are directly or indirectly secured by one or more aircraft and, in certain instances, direct recourse to a lessor.

Scope continuously monitors PR Aircraft Finance S.A. – Compartment 1.

Rating drivers

Alignment of incentives (positive). The portfolio’s performance is closely aligned with the incentives of Investec, which retains sufficient interest in the transaction.

Excess spread (positive). The portfolio generates excess spread above the coupon promised on the notes, which can buffer losses from loan defaults and, when trapped, will build hard credit enhancement.

Market value risk for Boeing aircraft (negative). The portfolio is highly sensitive to market value drops across aircraft models from Boeing. The high exposure to Boeing aircraft will increase credit risk if certain aircraft models decrease in value due to recent events. This risk is partially mitigated by a well-diversified portfolio made up of aircraft from several different aircraft manufacturers and Boeing models.

Single-industry exposure (negative). The portfolio is solely exposed to the airline industry, which is inherently cyclical and highly sensitive to macroeconomic shocks. Scope reflects this in its analysis.

Asset replenishment (negative). The revolving nature of the vehicle exposes investors to a long risk horizon, increasing the risk of the portfolio’s credit characteristics changing over time. This is partly mitigated by Investec’s experience in sourcing adequate investments and incentives to do so.

Rating-change drivers

The rating could be positively affected if newly purchased assets have a better credit quality than the current average in the pool.

The rating could be negatively affected if Boeing aircraft values drop across the board, without compensating increases for competitor aircraft.

The rating could be negatively affected if the aviation industry undergoes a cycle of unexpected downturn volatility that is abnormal for the sector. Such volatility could be attributed to a global economic depression linked to unusually high oil prices, a change in state trade rules and regulations, or higher interest rates.

The rating could be negatively affected if newly purchased assets have a worse credit quality than the current average in the pool.

Stress testing & cash flow analysis
No stress testing or cash flow analysis was performed in the context of the review.

Methodology
The methodologies used for this rating, the Aviation Finance Rating Methodology and the General Structured Finance Methodology, are available on www.scoperatings.com.
Historical default rates of the entities rated by Scope Ratings can be viewed in the rating performance report on https://www.scoperatings.com/#governance-and-policies/regulatory-ESMA. Please also refer to the central platform (CEREP) of the European Securities and Markets Authority (ESMA): http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml. A comprehensive clarification of Scope’s definition of default as well as definitions of rating notations can be found in Scope’s public credit rating methodologies on www.scoperatings.com.
The rating outlook indicates the most likely direction of the rating if the rating were to change within the next 12 to 18 months.

Solicitation, key sources and quality of information
The rated entity and/or its agents participated in the rating process.
The following substantially material sources of information were used to prepare the credit rating: public domain, the rated entities’ agents, third parties and Scope internal sources.
Scope considers the quality of information available to Scope on the rated entity or instrument to be satisfactory. The information and data supporting Scope’s ratings originate from sources Scope considers to be reliable and accurate. Scope does not, however, independently verify the reliability and accuracy of the information and data.
Scope Ratings GmbH has relied on a third-party asset due diligence/asset audit.
Prior to the issuance of the rating or outlook action, the rated entity was given the opportunity to review the rating and/or outlook and the principal grounds on which the credit rating and/or outlook is based. Following that review, the rating was not amended before being issued.

Regulatory disclosures
This credit rating and/or rating outlook is issued by Scope Ratings GmbH.
Lead analyst Helene Spro, Associate Director
Person responsible for approval of the rating: Carlos Terré, Managing Director
The ratings/outlooks were first released by Scope on 27.01.2017. The ratings/outlooks were last updated on 07.12.2018.

Potential conflicts
Please see www.scoperatings.com for a list of potential conflicts of interest related to the issuance of credit ratings. Scope provided the following ancillary services to the rated entity and/or its agents within two years preceding this credit rating action: Rating Assessment Service.

Conditions of use / exclusion of liability
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