Fitch Ratings has downgraded the class A-1, A-2 and B-1 asset-backed notes issued by ECAF I. (ECAF I). The Rating Outlooks remain Negative on the class A-1 and A-2 notes (since class B-1 no longer has an outlook).
Fitch states that the rating actions reflect ongoing stress and pressure on airline lessee credits backing the leases in the ECAF I pool; downward pressure on aircraft values; 53.5% of the pool (now 14 aircraft) are currently off-lease and grounded resulting in a notable decline in lease collections in the past six months; and Fitch's updated assumptions and stresses, and resulting impairments to modeled cash flows and coverage levels. Further, the notes remain well behind schedule principal and accumulation of unpaid scheduled principal has risen, while the liquidity facility was drawn on for the first time to pay class A and B notes interest in the December reporting period. The prior review for each transaction was in February 2021.
The Outlook remains Negative on all series of notes, reflecting Fitch's base case expectation for the structure to withstand immediate and near-term stresses at the updated assumptions, and stressed scenarios commensurate with their respective ratings. Continued global travel restrictions driven by the pandemic and the subsequent airlines recovery, including ongoing regional flareups and potential for and occurrence of new virus variants, resulted in continued delays in recovery of the airline industry.
This remains a credit negative for these aircraft ABS transactions and airlines globally remain under pressure despite the recent opening up of borders regionally and pick-up in air travel globally. This could lead to additional near-term lease deferrals, airline defaults and bankruptcies, along with lower aircraft demand and value impairments, which can be more impactful on this pool since it comprises a large percent of wide-body (WB) aircraft (five aircraft totaling 40.1%). These negative factors could manifest in the transaction, resulting in lower cash flows and pressure on ratings in the near-term.
Fitch updated rating assumptions for both rated and non-rated airlines and also aircraft values, which were key drivers of these rating actions along with modeled cash flows. Recessionary timing was assumed to start immediately, consistent with the prior review. This scenario stresses airline credits, asset values and lease rates while incurring remarketing and repossession costs and downtime at each relevant rating stress level.
Entities managed by affiliates of BBAM Limited Partnership acted as initial sellers to ECAF I. BBAM Aviation Services Limited (BBAM; not rated by Fitch) is the servicer, and Seraph Aviation Group is the administrator for ECAF I following its rebranding from Stellwagen Capital in October 2020.
The credit profiles of airline lessees in the pool remain pressured due to the continued coronavirus-related impact on all global airlines, but for ECAF I have improved versus the prior 2021 review for the assigned 'CCC' and below rating bucket. The percent of the ECAF I pool airline lessees assumed at 'CCC' Issuer Default Rating or lower declined down to 32.4% versus 68.3% in the 2021 review. Despite this, the material jump in off-lease aircraft in 2021, early-2022 offsets this positive credit trend, and heighten pressure exists with now 53.5% (percent of MABV) or 14 aircraft in the pool is off-lease (aircraft on ground), versus 15.7% in the prior review.
The remaining 27 aircraft are on lease to 12 airline lessees in 11 countries. The current pool includes 40.1% widebodies with three A330-300s (27.7%), one B777-200ER (2.3%) and one B777-300ER (12.2%), consistent with the prior review. Of these five widebodies, four are now off-lease. There remains uncertainty around aircraft market values and how the current environment will impact values in the near term. Narrow-body aircraft total 59.9% virtually unchanged versus the prior review, and include B737-800 (34.5%), A321-200 (10.0%) and A320-200 (7.5%). The top jurisdictions are Chile (11.6%), Russia 7.6%) and China (5.2%).
Only $2.7 million, $3.9 million and $2.2 million in lease collections came in during the past three months, while the average 6-month collection rate was $2.87 million down 30.4% from the prior 6-month period. Further, the past 12-month collections averaged $3.5 million, down 46% versus the prior 12-month period of collections (averaged $6.4 million).
As a result, A and B scheduled principal remains significantly behind schedule, and collections was so low in January 2022 that the liquidity facility was tapped for the first time, totaling $709,438, to pay interest on the A ($297,476) and B ($411,962) notes. Interest continues to be paid to the A and B notes, but principal (paid pro rata) has not been paid now in the prior three months given low collections from November 2021-January 2022 collection period. Principal has been paid to the A notes sporadically in the past six months prior to November last year, while B principal has not been paid since May 2020 collection period.
The anticipated repayment date (ARD) occurs in June 2022, and at that time all available collections will be distributed pro-rata between the class A-1 and A-2 notes, and the class B notes will then by subordinated to the A notes. Utilization is well below the 75% trigger level being at just 47.2%, down from 92.8% a year earlier when the trigger was not tripped.