Rating action

Scope Ratings GmbH (Scope) has today downgraded the notes issued by PR Aircraft Finance S.A. – Compartment 1 (PR Aircraft) to BB- from BB.

Rating rationale

The one-notch downgrade to BB- from BB primarily results from the early repayment of a large facility and the significant deterioration of the credit quality of another large facility without being offset by significantly positive developments had a negative impact on the expected loss of the portfolio. Scope has modelled the portfolio consisting of 15 transactions and 17 loans and calculated an expected loss commensurate with a B+ rating.

Scope has granted a one-notch uplift over the quantitative outcome based on Investec’s strong alignment of incentives, capabilities and asset management experience which are reflected in the robust portfolio performance in the context of the most severe crisis in the history of aviation.

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 15% of the outstanding notes ahead of schedule since the last monitoring, due to early repayments and asset sales. There was no reduction in liquidity reserves, which is credit positive because the liquidity reserves now support a lower number of outstanding notes.

The notes continue to be undercollateralised (i.e. USD 776,000 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.

Excess spread and overcollateralisation currently do not represent material elements of support to uplift the credit profile of the underlying portfolio of loans.

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

Key rating drivers

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.

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. An experienced lessor generally supports the efficient remarketing of aircraft upon a lessee’s 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 facilities with weaker credit quality is reduced. The risk is partially mitigated through the well-diversified portfolio.

The rating could be positively affected if the credit quality of the airlines or the underlying aircraft values were to improve.

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.

Quantitative analysis and assumptions

Scope analysed the contributions to total expected loss from each of the underlying assets.

Scope’s loan-by-loan analysis is based on information from October 2021 and suggests that the portfolio’s assets are below investment grade quality on average.

Scope assessed the portfolio’s credit quality by producing private ratings or credit estimates on loans with a significant concentration (i.e. more than 10% or 5% of the total exposure, respectively). Scope calculated the total expected loss on each loan by adding the probability-weighted loss-given-default for every period in the life of the loan. Total expected loss was benchmarked against Scope’s idealised expected loss curves, at a risk horizon equal to the expected weighted average life of the loan portfolio.

A loan’s probability of default relates to the credit quality of the underlying airline, the pool of airlines or guarantors. Scope also accounts for the underlying aircraft’s relevance in the airline fleet. If an aircraft is relevant and operating under certain jurisdictions, Scope expects a lower probability of default for a contract than the one implied by the airline’s credit quality. These contracts are likely to survive if an obligor can file for obligor protection.

A loan benefits from full recovery on any given period if the underlying aircraft’s stressed value can cover the outstanding loan exposure on that period. The recovery rate is driven by the leverage or loan-to-value at the time of the aircraft’s remarketing. This analysis considers the seniority of the defaulted loan and the corresponding market value of the aircraft at remarketing, net of costs.

Scope estimated the day-one value of the aircraft under market-value-decline assumptions specific to each aircraft type. Scope’s assumptions reflect worse-than-agreed return conditions for aircraft upon an obligor’s bankruptcy unless maintenance reserves are payable and pledged to the lender. Scope assumes that recoveries can reach day-one values after incorporating maintenance reserve payments (when available and sufficient). Scope also considered shorter remarketing times for lessors with above-average quality.

Sensitivity analysis

Scope tested the sensitivity of the rating against deviations from main modelling assumptions, including the credit quality of obligors. 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.

Stress testing
Stress testing was performed by applying Credit-Rating-adjusted recovery rate assumptions.

Cash flow analysis
No cash flow analysis was performed

Methodology
The methodologies used for this Credit Rating, (Aviation Finance Rating Methodology, 5 July 2021; General Structured Finance Rating Methodology, 14 December 2020) are available on https://www.scoperatings.com/#!methodology/list.
To establish the Credit Rating an input was used which could not be established in line with the corresponding rating methodology (methodology deviation). Instead, a conservative assumption on the sub-pools credit quality was used and additional sensitivity tests performed. The exposure for which the assumption was established is neither a key rating driver nor does the transaction exhibit sensitivities against this assumption.
The model used for this Credit Rating is (Aviation Finance Expected Loss Model v1.1) available in Scope Ratings’ list of models, published under https://www.scoperatings.com/#!methodology/list.
Scope Ratings GmbH and Scope Ratings UK Limited apply the same methodologies/models and key rating assumptions for their credit rating services, while Scope Hamburg GmbH’s methodologies/models and key rating assumptions are different from those of Scope Ratings GmbH and Scope Ratings UK Limited.
Information on the meaning of each Credit Rating category, including definitions of default, recoveries, Outlooks and Under Review, can be viewed in ‘Rating Definitions – Credit Ratings, Ancillary and Other Services’, published on https://www.scoperatings.com/#!governance-and-policies/rating-scale. Historical default rates of the entities rated by Scope Ratings can be viewed in the Credit Rating performance report at https://www.scoperatings.com/#governance-and-policies/regulatory-ESMA. 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 Ratings’ definitions of default and Credit Rating notations can be found at https://www.scoperatings.com/#governance-and-policies/rating-scale. Guidance and information on how environmental, social or governance factors (ESG factors) are incorporated into the Credit Rating can be found in the respective sections of the methodologies or guidance documents provided on https://www.scoperatings.com/#!methodology/list.

Solicitation, key sources and quality of information
The Rated Entity and/or its Related Third Parties participated in the Credit Rating process.
The following substantially material sources of information were used to prepare the Credit Rating: public domain,the Rated Entities’ Related Third Parties, third parties and Scope Ratings’ internal sources.
Scope Ratings considers the quality of information available to Scope Ratings on the Rated Entity or instrument to be satisfactory. The information and data supporting the/these Credit Rating originate from sources Scope Ratings considers to be reliable and accurate. Scope Ratings does not, however, independently verify the reliability and accuracy of the information and data.
Scope Ratings has performed its own analysis of the data quality, based on information received from the Rated Entity or Related Third Parties, which is not and should be not deemed equivalent to the performance of due diligence or an audit. The external due diligence assessment/asset audit/internal analysis was considered when preparing the rating and it has no impact on the credit rating. Prior to the issuance of the Credit Rating action, the Rated Entity was given the opportunity to review the Credit Rating and the principal grounds on which the Credit Rating is based. Following that review, the Credit Rating was not amended before being issued.

Regulatory disclosures
The Credit Rating is issued by Scope Ratings GmbH, Lennéstraße 5, D-10785 Berlin, Tel +49 30 27891-0. The Credit Rating is UK-endorsed.
Lead analyst: Christian Vogel, Associate Director
Person responsible for approval of the Credit Rating: Aaron Konrad, Executive Director
The Credit Rating was first released by Scope Ratings on 27 January 2017. The Credit Rating was last updated on 27 October 2020.

Potential conflicts
See www.scoperatings.com under Governance & Policies/EU Regulation/Disclosures for a list of potential conflicts of interest related to the issuance of Credit Ratings.

Conditions of use / exclusion of liability
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