NEW YORK—(BUSINESS WIRE)—Fitch Ratings today published an updated asset-backed sector specific criteria report. There have been no material changes from the previous version, and therefore Fitch expects no impact on outstanding ratings.

This report updates and replaces the prior criteria report ‘Global Rating Criteria for Aircraft Operating Lease ABS,’ dated May 19, 2015.

The report presents Fitch’s analytical approach to rating global aircraft lease ABS and outlines the unique features of these transactions. Additionally, the report details key rating drivers associated with aircraft operating lease ABS as detailed below.

KEY RATING DRIVERS

Aviation Market Cyclicality: The commercial aviation industry has exhibited significant cyclicality tied to the health of the overall global economy. This cyclicality can produce increased lessee defaults, lower demand for off-lease aircraft, and deterioration in lease rates and asset values. Fitch stresses asset values, utilization levels, lease rates, and default probability during assumed market down cycles to account for this risk.

Asset Value and Lease Rate Volatility: During economic downturns, airline capacity tends to be reduced, leading to an increase in aircraft available for sale or lease. At the same time, the general demand for aircraft decreases, pushing down aircraft values irrespective of age. In its analysis, Fitch employs aircraft value stresses that take into account age and marketability; these stresses simulate the decline in lease rates that are expected to occur in the course of an aviation market downturn and decrease potential residual sales proceeds.

Releasing Risk and Servicer Reliance: Operating lease transactions are reliant on the transaction servicer to remarket aircraft after lease termination and lessee defaults. Transactions also heavily rely on the servicer to adequately manage and monitor the technical upkeep of the aircraft and legally protect trust assets in multiple foreign jurisdictions. Fitch reviews the operational practices of the servicers of aircraft operating lease transactions. Additionally, Fitch requests historical data related to the servicing activities of the lessor to determine base and stress case cash flow assumptions.

Lessee Credit Risk: Lessee defaults can lead to repossession and remarketing costs and aircraft downtime. In its quantitative analysis of a transaction, Fitch utilizes actual historical default probabilities based on the airlines’ corporate ratings to determine the likelihood that each lessee will default. Airlines that do not have a public rating or internal credit opinion from Fitch are assumed to carry a rating in the range of ‘CCC’ to ‘B’. Additionally, as aircraft age, they are assumed to migrate to carriers with worse ratings than that of the initial airline, as it is typical for older, out-of-production aircraft to be leased to start-up airlines or those in lower-tier markets.

Rating Cap of ‘Asf’: Due to the factors discussed above in concert with the potential performance volatility they produce, Fitch limits aircraft operating lease ratings to a maximum cap of ‘Asf’.

For more information please refer to the grey box on page 2 of the criteria report and Fitch’s “Criteria for Rating Caps and Limitations in Global Structured Finance Transactions,” available at www.fitchratings.com

Additional information is available at ‘www.fitchratings.com’.

Global Rating Criteria for Aircraft Operating Lease ABS

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=879831