Turmoil at Italian flag carrier Alitalia is not a headache confined to its shareholders. A number of lessors and capital-markets investors also find themselves exposed to the airline's uncertain future.
The beleaguered SkyTeam carrier has more than half of its fleet on lease. Lessors will be anxious to find out if their Alitalia-exposed assets have to be remarketed.
However, asset-backed securitisation (ABS) investors and issuers will also be watching Alitalia's situation closely.
Currently, of the over 60 aircraft on lease, 22 Alitalia aircraft are funded by asset-backed securities, Flight Fleets Analyzer indicates.
The collateral types and vintages vary within each deal.
Castlelake has the most exposure to the airline, with 14 narrowbodies and one widebody on lease to the troubled airline via two live ABS deals – the $713 million CLAST 2015-1 and the $916 million CLAST 2016-1.
In comparison, DVB Bank has limited exposure to the airline, via two 2012-vintage A330s in its DCAL 2015-1 ABS.
Apollo Aviation has one 1999-vintage A330 via AASET 2016-2, while Air Lease has an Embraer 175 via BBIRD 2016-1.
Jetscape has three 2012-built Embraer 175s via EAGLE 2014-1.
The natural question to ask is what happens to those deals if Alitalia has a rough bankruptcy, and what aftershocks that could have on the wider ABS market, which has lately attracted a wide range of issuers and investors.
WORST CASE BEST CASE?
Given a worst-case scenario of Alitalia completely restructuring and returning a swathe of aircraft, what repercussions would these ABS deals face?
One finance source thinks any returns may actually be a boon for the ABS market.
"If I had to bet, it will be a net positive: if any of the aircraft are returned, the overall market will probably be able to absorb them relatively quickly.
"This will be a test of the structures in an environment where there is not too much stress – yet. It may be a bit more stressful if the aircraft returned are widebodies," the source adds.
Concerns over widebody values are shared by JP Morgan.
"With a total of 25 widebodies currently under lease, renegotiation/rejection risk has risen... and may exert further downward pressure on 777-200ER and A330-200 values," says JP Morgan in market note published on 3 May.
However, a leasing source sees the narrowbody fleet as the most likely to be returned by any administrator. This is because Alitalia is being beaten in this market by the likes of Ryanair and EasyJet, the source argues.
"The ABS and leasing guys must be worried," he adds.
However, the Alitalia situation's full impact on ABS deals will be hard to gauge any time soon.
So far, effects are limited. Despite having the largest exposure of any ABS deal, Castlelake's CLAST 2015-1 is trading above par today, Bloomberg data indicates.
Fundamentally, ABS deals have credit and asset diversity in order to avoid serious disruption with a single credit.
For example, while CLAST 2016-1 has eight aircraft with Alitalia, only one asset in that pool poses remarketing risk: a 17-year-old A330, which in all likelihood wouldn't have been due to be leased again after the conclusion of its term with Alitalia. The remaining seven Airbus A320-family narrowbodies, between four and seven years old, are all viable secondary-market aircraft.
However, finance sources agree it will test the market.
"I think it will be interesting to see how it all plays out. Presumably the phoenix that will undoubtedly rise from the ashes will want to keep the newer kit, keep a good chunk of the mid-life kit – but at cheaper rents – and return the old rubbish. The test will be what rates get squeezed down to and, if kit gets returned, then what will happen to it," says another banking source.
Additional reporting by Sophie Segal
Source: Cirium Dashboard
