Morningstar DBRS: Lessor consolidation to continue in 2024

With a high interest rate environment and fleet financing remaining a challenge for 2024, smaller 'zombie' lessors will need to navigate the fiercely competitive leasing sector as lessor fleets continue to grow, highlights a Morningstar DBRS Commentary report. It added that the year ahead could see a continuation of merger & acquisition (M&A) deals, following an active second half of 2023 for the agreement. The report said: “Smaller lessor platforms are at risk given these competitive forces and challenges managing the aforementioned imbalance between asset yields and borrowing costs, as well as the overall ability to obtain cost-effective financing.” The report noted that ABS issuance was very limited with only two deals issued in 2023. These totalled $734.3 million, which is the lowest value since 2013’s levels of $1.1 billion. However, ABS deal cash flows could improve in 2024: boosted by more new leases being potentially underwritten, existing ones being extended, and aircraft sold at elevated prices. “Challenges such as high debt service and operating costs, capacity constraints and travel system issues, and softer consumer health still warrant caution across lessee credit,” said the report. However, airline credit is stable and defaults are expected to be low in 2024, with airlines experiencing increased volumes with “solid capacity levels, elevated revenue and stable margins with strong pricing levels.” Morningstar DBRS added: “ABS transaction LTVs were fairly stable in 2023, except for pools that lost aircraft confiscated by Russia. Some of those pools continue to see high LTVs, though certain deals have seen LTVs coming down, which is a positive.” Banks are expected to remain active in funding lessor aircraft acquisition for 2024. Private credit companies financing and acquiring asset/lessor fleets and platforms will also remain active in 2024. “Private structured/secured issuance, including secured loan/lease issuance and potentially lessor EETCs, will remain popular in 2024 and may pick up versus 2023 if the market and interest rates are stable.” Large lessors are likely to continue “leaning on the unsecured corporate debt market as well as bank facilities” to finance new aircraft deliveries and refinance maturing debt with the ABS market being quiet. The report further expects large, investment-grade lessors to continue accessing capital markets to fund deliveries and refinance near-term maturities in 2024.