Scope Ratings reviews its ratings either yearly, or every six months in the case of sovereigns, sub-sovereigns and supranational organisations. Monitoring reviews are unrelated to the calendar that outlines public finance rating actions.

Scope performs monitoring reviews to determine whether outstanding ratings remains proportionate. Monitoring reviews are conducted either by performing a portfolio review in terms of the applicable methodology/ies, latest developments, and the rated entity’s financial and operational aspects relative to similarly rated peers; or through targeted reviews on an individual credit. Scope publicly announces the completion of each monitoring review on its website.

Scope completed the monitoring review for PR Aircraft Finance S.A. – Compartment 1 BB under review developing on 26 April 2021. This monitoring note does not constitute a rating action nor does it indicate the likelihood of a credit rating action in the short term. The latest information on the credit ratings in this monitoring note along with the associated rating history can be found on www.scoperatings.com.

Scope Ratings has reviewed the notes issued by PR Aircraft Finance S.A. – Compartment 1 (PR Aircraft). No action was taken as there were no significant changes to the notes since the last monitoring in October 2020. The rating’s review status is a result of the evolving nature of the current crisis and the ongoing uncertainties around how it will continue to impact the aviation industry in the short to medium term.

Scope has reviewed the rating on the notes issued by PR Aircraft in the context of the Covid-19 crisis and changes to the underlying portfolio. The impact of the crisis on air traffic and aircraft values is developing and could further affect Scope’s assessment of expected losses for investors, in either direction. The full impact of the crisis on aircraft values is uncertain. A recovery of aircraft values would be a credit-positive for investors. The full extent of the value impact will become more visible when aircraft trading picks up and potential value losses can be assessed.

PR Aircraft has redeemed around 18% of the outstanding notes ahead of schedule since the last monitoring, following the end of the transaction’s investment period. There was no reduction in liquidity reserves, which is credit positive because the liquidity reserves now support a lower number of outstanding notes. This support may become more material if and when further notes are redeemed in the future.

The notes continue to be undercollateralised (i.e. USD 570,000 less than the total balance of the notes). Scope believes this undercollateralisation is temporary and a result of timing issues. This is however a credit-negative that could result in a loss to investors if the notes were to be redeemed today.

Scope has seen positive developments of the underlying portfolio since the last monitoring. The exposure to certain airlines with weak credit quality has decreased. Some of the largest exposures contribute less to total expected loss than at the time of the previous monitoring due to the improvement in the airlines’ credit quality and/or the reduction of exposure to airlines with weak credit quality.

The improvements in the notes are not large enough to warrant a rating change today, and no action is taken. Scope continuously monitors PR Aircraft Finance S.A. – Compartment 1.

Key rating factors

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

Asset quality (positive). The loans benefit from a solid security package with high-quality collateral. The underlying aircraft are generally liquid models, characterised by strong demand and short remarketing times. In addition, the relevance of higher-quality aircraft for fleets of certain obligors (fleet relevance) reduces the contracts’ probability of default (i.e. the affirmation of those contracts, rather than their rejection, benefits lenders upon restructuring in certain jurisdictions).

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.

Airline direct lending (negative). Certain facilities in the portfolio do not feature the active involvement of a lessor or a bankruptcy-remote vehicle. An experienced lessor generally supports the efficient remarketing of aircraft upon a lessee’s default. A bankruptcy-remote vehicle could reduce repossession times in the event of default. This risk is partly mitigated by Investec’s solid ability and good track record in aviation finance.

Undercollateralisation (negative). The undercollateralisation of the portfolio is a credit negative as it would result in losses to the investors if the notes were to be redeemed today. This risk is partly mitigated by the long remaining risk horizon of the notes.

Rating-change drivers

The rating could be positively affected if the exposure to credit-weak facilities is reduced. The risk is partially mitigated through the well-diversified portfolio.

The rating could be negatively affected as a result of the aircraft value risk prompted by the Covid-19 crisis. Aircraft market values would decrease if several airlines were to default, as this would increase the supply of aircraft in the open market. This would create the risk of lower recoveries. The risk is partially mitigated through PR Aircraft’s well-diversified portfolio of aircraft from several different manufacturers.

The rating could be negatively affected if the airlines’ probability of default increased, an aspect to which the portfolio is particularly sensitive. An increased credit risk of airline counterparties would also increase PR Aircraft’s credit risk. The risk is partially mitigated through the well-diversified portfolio of many airlines from several regions.

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

The methodologies applicable for the reviewed rating and/or rating Outlook, Aviation Finance Rating Methodology, 30 June 2020 and General Structured Finance Rating Methodology, 14 December 2020 are available on https://www.scoperatings.com/#!methodology/list.
This monitoring note is issued by Scope Ratings GmbH, Lennéstraße 5, D-10785 Berlin, Tel +49 30 27891-0.
Lead analyst Helene Spro, Director
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