Rating action

Scope Ratings has today lifted its review on downgrade on the A- (A minus) rating on the notes issued by PR Aircraft Finance S.A. – Compartment 1 (PR Aircraft). Scope has found no evidence that Boeing aircraft values have been affected by the B737Max issues, after monitoring aircraft values since the review for downgrade was assigned.

With this rating action PR Aircraft’s rating is no longer under review for downgrade.

Scope reviewed the rating on the notes issued by PR Aircraft following market developments that justified placing the rating under review for downgrade on 2 May 2019 (see previous Rating Action Release notice on www.scoperatings.com). Scope has found no evidence of any significant market value correction. Aircraft market values and the number of transactions completed in the market since May 2019 have not reflected value corrections that can be related to the incidents affecting
the B737Max.

The review for downgrade coincided with the New York Times questioning Boeing’s safety and quality controls which would affect Boeing’s 787 plant in North Charleston, in a journalistic investigation that reviewed internal emails, corporate documents and federal records related to Boeing manufacturing plants after the two B737Max aircraft crashes in 2018 and 2019.

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.

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 and incentives in sourcing adequate investments.

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 aircraft values drop across the board.

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.

Rating sensitivity

Scope tested the sensitivity of the rating against deviations from main modelling assumptions, including the credit quality of obligors and market-value-decline assumptions on aircraft. This analysis has the sole purpose of illustrating the sensitivity of the rating and is not indicative of expected or likely scenarios.

• The rating would decrease by one notch if the average obligor quality (airline, lessee or guarantor) decreased by one notch to B from B+.
• The rating would decrease by one notch if downside volatility increased by 10 percentage points.

Stress testing & cash flow analysis
No stress testing was performed. No cash flow analysis was performed.

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/cerepweb/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: the rated entity, 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. The external due diligence/ asset audit has no negative impact on the credit rating.
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 January 2017. The ratings/outlooks were last updated on 2 May 2019.

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
© 2019 Scope SE & Co. KGaA and all its subsidiaries including Scope Ratings GmbH, Scope Analysis GmbH, Scope Investor Services GmbH and Scope Risk Solutions GmbH (collectively, Scope). All rights reserved. The information and data supporting Scope’s ratings, rating reports, rating opinions and related research and credit opinions 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’s ratings, rating reports, rating opinions, or related research and credit opinions are provided ‘as is’ without any representation or warranty of any kind. In no circumstance shall Scope or its directors, officers, employees and other representatives be liable to any party for any direct, indirect, incidental or other damages, expenses of any kind, or losses arising from any use of Scope’s ratings, rating reports, rating opinions, related research or credit opinions. Ratings and other related credit opinions issued by Scope are, and have to be viewed by any party as, opinions on relative credit risk and not a statement of fact or recommendation to purchase, hold or sell securities. Past performance does not necessarily predict future results. Any report issued by Scope is not a prospectus or similar document related to a debt security or issuing entity. Scope issues credit ratings and related research and opinions with the understanding and expectation that parties using them will assess independently the suitability of each security for investment or transaction purposes. Scope’s credit ratings address relative credit risk, they do not address other risks such as market, liquidity, legal, or volatility. The information and data included herein is protected by copyright and other laws. To reproduce, transmit, transfer, disseminate, translate, resell, or store for subsequent use for any such purpose the information and data contained herein, contact Scope Ratings GmbH at Lennéstraße 5 D-10785 Berlin.

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