Fitch to Rate Orbit Aircraft Leasing Ltd.; Presale Issued
--$561,355,000 class A-1 notes 'A-sf'; Outlook Stable;
--$85,054,000 class B-1 notes 'BBBsf'; Outlook Stable;
--$25,516,000 class C-1 notes 'BBsf'; Outlook Stable.
KEY RATING DRIVERS
Strong Portfolio Quality: A majority of the pool comprises young tier 1 aircraft with generally long expected remaining useful lives. The rest of the aircraft are already tier 2, or will be in the near term. The weighted average age of 7.2 years is slightly higher than other recent transactions rated by Fitch Ratings.
Technological Risk: Despite their current popularity, the pool is predominantly composed of aircraft that face replacement programs in the latter half of this decade. Fitch expects the large operator bases and long lead time to replace these assets will partially mitigate this risk.
Weak Lessees Credits: Many of the leases in the pool are extended to unrated or speculative-grade lessees. Fitch assumed unrated lessees would perform consistent with a 'B' Issuer Default Rating (IDR) to reflect increased default risk. The ratings were assumed to be one notch to one category lower during assumed recessionary periods. This risk is partially mitigated by the strong lessee diversification in this pool.
Cyclicality of Aviation Industry: Commercial aviation has historically been subject to significant cyclicality stemming from macroeconomic downturns. These periods are typically marked by reduced asset utilization, values, and lease rates. Fitch's analysis assumes multiple periods of significant volatility in asset values and lease rates over the life of the transaction.
Sufficient Credit Enhancement/Structural Features: Credit enhancement (CE) is primarily composed of overcollateralization (OC) and a liquidity facility. The transaction also benefits from DSCR and utilization rate performance triggers, which could accelerate amortization. Fitch created multiple cash flow scenarios to evaluate the structure, as detailed in this report.
Heavy Servicer Reliance: Orbit will depend on SMBC AC's ability to collect lease payments and maintenance reserves, remarket and potentially repossess the aircraft following lessee default, and procure maintenance, among other functions. All of these are crucial to the assets' values and transaction performance. Fitch believes SMBC AC ('BBB'), a leading aircraft lessor, to be capable of performing these functions on behalf of Orbit.
Due to the correlation between global economic conditions and the airline industry, the ratings may be impacted by the strength of global macro-economic factors over the remaining term of the transaction. As such, in its review of Orbit, Fitch evaluated several scenarios that simulated various timing and severity of future recessions that would affect the transaction through reduced aircraft values, lease rates and utilization levels.
Changes in the airline industry can have a significant impact on the ratings of these transactions. If the timing of or degree of technological advancement in the commercial aviation space differs materially from Fitch's expectations, Orbit's performance could be affected. Similarly, factors influencing the supply of and demand for the certain aircraft types present in the Orbit pool could affect Fitch's view of the transaction's ability to avoid a default on the notes and, thus, could result in negative rating actions. In a review of sensitivities designed to represent significant drops in aircraft demand and shorter asset useful lives owing to these factors, the notes showed little rating sensitivity, retaining investment-grade ratings in all cases.
Fitch's stress and rating sensitivity analysis are discussed in the presale report titled 'Orbit Aircraft Leasing Ltd.', dated Oct. 23, 2015, which is available on Fitch's web site, or by clicking on the link.
DUE DILIGENCE USAGE
No third party due diligence was provided or reviewed in relation to this rating action.
Fitch's analysis of the Representations and Warranties (R&W) of this transaction can be found in the reports titled 'Orbit Aircraft Leasing Ltd. -- Appendix'. These R&W are compared to those typical R&W for the asset class as detailed in the special report 'Representations, Warranties, and Enforcement Mechanisms in Global Structured Finance Transactions' dated June 12, 2015.