Rating action

Scope Ratings has today placed under review for downgrade its A- rating on the notes issued by PR Aircraft Finance S.A. – Compartment 1 (PR Aircraft). PR Aircraft is exposed to a large number of airlines worldwide that may be affected by the slowdown in passenger numbers and the grounding of their fleets due to Covid-19.

The review for downgrade follows the current uncertainty as to whether governments and/or the European Union will take measures to ensure the continued operation of airlines most affected by Covid-19. So far, no airline has defaulted as a direct effect of the pandemic. However, several airlines have stated that government support is needed to continue operations in the short to medium term, with several already forced to ground large parts of their fleets and place employees on unpaid leave. Additionally, it is currently unknown how long current flight restrictions will last nor their eventual impacts on the airline industry.

Scope expects more clarity in the coming weeks regarding the severity of the impact on airlines and the support that will be available in the different regions. The notes will be under review for downgrade until the total impact on the industry can be determined, which will depend on the level of government support, how long traffic restrictions will continue and how fast the traffic numbers can recover once the pandemic is over.

Scope has agreed to alert investors of a potential rating downgrade if market conditions worsened, airlines do not receive government support, or both.

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

Market value risk from Covid-19 (negative). Aircraft market values would decrease if several airlines defaulted, as this would increase the supply of aircraft in the open market. The risk is partially mitigated through PR Aircraft’s well-diversified portfolio of aircraft from several different manufacturers.

Airline probability of default (negative). The portfolio is highly sensitive to an increased probability of default of airlines in the portfolio. An increased credit risk of airline counterparties would increase the credit risk of PR Aircraft. The risk is partially mitigated through the well-diversified portfolio of a large number of airlines from several regions.

Rating-change drivers

The rating could be negatively affected if Covid-19 led to airline defaults, or if the aviation industry were to undergo a cycle of abnormal and unexpected downturn volatility, for example, due to a global economic depression linked to unusually high oil prices, a change in state trade rules and regulations, or higher interest rates.

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

Methodology
The primary methodology for the analysis of the aviation finance rating is the Aviation Finance Rating Methodology. The secondary methodology used is our General Structured Finance Rating Methodology for the analysis of the credit enchantments from the portfolio. The third methodology used is the Counterparty Risk in Structured Finance for analysis of counterparties in the transaction. All methodologies 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. The external due diligence assessment/asset audit has no 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, 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 5 December 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
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