With the global spread of COVID-19 is leading to negative ramifications on worldwide air travel KBRA’s Aviation ABS Group anticipates that continued increases in documented cases of the virus could have an adverse impact on the short-term demand for air travel, with a knock-on impact on aviation ABS transactions.
In a report issued yesterday KBRS sad that while it was too early to predict the full impact of Covid 19 it would possibly reduce the amount of cash available for aviation ABS transactions.
KBRA said it was is actively monitoring the situation including the potential ramifications on its aviation ABS portfolio, which encompasses 48 transactions outstanding with an initial issuance size of more than $26 billion from 2013 to 2020.
The majority of COVID-19 cases are located within Asia-Pacific (APAC) and China, where the virus appears to have originated, said KBRA.
“As such, airlines in the region may be the first to experience reduced demand for air travel. Further, it is anticipated that some airlines with significant footprints in the region may request rent abatements due to the coronavirus. Possible forbearance on rent payments to lessees would cause a potential temporary reduction in cash flow to transactions during this time period,” said KBRA.
The ratings agency said that ABS transactions with large exposures to airlines in China and APAC have the potential to experience near-term impacts from the virus sooner relative to others. Almost one-third of KBRA-rated transactions (30%) consist of aircraft leased to Asia-Pacific airlines, based on aircraft count, it said.
KBRA used the severe acute respiratory syndrome (SARS) outbreak in 2002-03 as comparison. During this period APAC airlines traffic was down 35% after three months but returned to normal levels within seven months, according to the International Air Transport Association (IATA).
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“The degree of COVID-19’s impact will ultimately depend on how long and far-reaching its spread. KBRA’s stress analysis considers the negative ramifications on airline bankruptcies, aircraft values, and lease rates due to pandemics such as SARS and COVID-19. While the industry has proven resilient to shocks in the past, including pandemics, the nature of COVID-19 and its related impacts on travel demand is shaping up to be meaningfully different to prior global outbreaks, even as containment efforts continue,” said KBRA.
KBRA said that is the in the medium to long term, if the global contagion is prolonged, it could adversely affect the economies and financial markets in many countries, resulting in an economic downturn that could continue to negatively impact demand for air travel.