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Russia Roils Plane-Backed Bonds by Keeping $10 Billion of Jets

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March 8, 2022
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(Bloomberg) — Russia’s decision to block foreign owners from seizing hundreds of planes worth about $10 billion is roiling a market where aircraft leases are bundled into bonds and sold to investors.

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European Union sanctions imposed on Russia because of its Ukraine invasion give plane owners until March 28 to retrieve the vehicles. But only a handful have been extracted, and hopes for more are dim.

And so some asset-backed securities in the aviation space are coming under duress as a result. Although these types of transactions are designed to survive cash flow problems at the airlines leasing the planes, fully losing access to planes under these circumstances almost guarantees that lease payments that feed these ABS deals will soon dry up, with recourse uncertain.

“It will be interesting to watch, as potentially the bottom capital structure could start to see losses,” said Jennifer Thomas, portfolio manager at Loomis, Sayles & Co.

The situation has already had a chilling effect on over two dozen aircraft ABS deals that are exposed to the region, with investors fearing some tranches within those deals might take losses. Among the ones most exposed are two from Carlyle Aviation — one with 44% and another with 37% of lease payments tied to Russia or Ukraine — and two others from Castlelake Aviation.

Kroll Bond Ratings is evaluating whether to downgrade nine deals, worth roughly $2.9 billion in total, including the Carlyle and Castlelake ones.

Moody’s Investors Service has done the same to one Castlelake ABS. According to a March 7 note from the credit rater, the deal will see reduced cash flow due to “foregone lease income tied to early lease terminations and increased transaction costs stemming from potentially prolonged repossession and remarketing timelines associated with the aircraft on lease to Russian airlines.”

Read more: Nine Aircraft ABS on Watch Due to Russia’s War in Ukraine: KBRA

Some deals have already moved frantically in the secondary market. A refinancing of a Castlelake aircraft-lease asset-backed bond originally issued in 2017 plunged in value in early March after the Russian invasion, losing 17 cents on the dollar in a single day, according to Empirasign.

The bond, known as CLAST 2017-1R, tranche B, was marked as high as 99.8 cents on Dec. 31 and plummeted to about 82 cents on March 1, Empirasign said. It’s currently at 83.25 cents. The ABS has about a 20% exposure to Russia, according to S&P.

Read more: Russia-Exposed Castlelake Aircraft ABS Fell in Trading

Investors are trying to get insurers to pay for losses, but that could be an uphill battle. By Feb. 26, EU-based insurers and reinsurers were required to stop providing coverage of planes to Russia-based airlines, while in Ukraine, some insurers have already withdrawn their coverage for aircraft leased and located in the country despite a lack of sanctions.

Although lessors have their own insurance policies, insurers may find a way to not pay them back, Moody’s said. “Insurers may take steps to unilaterally cancel some policies, subject to required notice periods, before lessors incur losses, which could limit lessors’ recoveries and add to potential future loss in the transactions.”

Elsewhere in credit markets:

Americas

At least five of the eight companies looking to issue new U.S. investment-grade debt opted to stand down Tuesday ahead of the U.S. decision to ban Russian energy imports.

Three utility companies including Southern California Gas Co. opted to move forward with deals despite market volatility

Investor calls are set to wrap up Tuesday for AT&T Inc.’s potential deal, which could total around $30 billion and be announced this week, according to a person familiar with the matter

The Credit Derivatives Determinations Committee will meet on Wednesday to consider whether an alternative payment option in some of Russia’s sovereign bonds would result in a failure to satisfy the currency rules for credit-default swaps

Tegna Inc., a television broadcaster, is planning to borrow around $6.8 billion in the junk bond and leveraged loan markets to help fund its buyout by Standard General LP, according to sources with knowledge of the matter

For deal updates, click here for the New Issue Monitor

For more, click here for the Credit Daybook Americas

EMEA

Commodities trading houses are being forced to seek additional financing as Russia’s invasion of Ukraine sends prices soaring, stretching credit limits at the companies that buy and sell the world’s resources.

Norway-based DNB Asset Management SA held off from executing sale orders in a high-yield bond fund last week after investor demand for withdrawals exceeded agreed limits

Bank of America cut its CLO refi/reset forecast for 2022 to 19 billion euros, down from 35 billion euros, citing the war in Ukraine, increases in both core and headline Eurozone inflation, concerns over economic growth, rates volatility and the ECB’s more hawkish tone

Asia

Only two Chinese borrowers sought to price offerings on Tuesday, with borrowers on the sidelines of Asia’s primary dollar bond market amid record gains in commodity prices.

Chinese industrial companies’ dollar bonds fell Tuesday

Yuzhou Group Holdings Co.’s dollar bonds fell to fresh record lows following a missed interest payment, as credit stress for Chinese developers remains high

China Evergrande Group’s main onshore unit has had its shareholding in a Chengdu subsidiary frozen for three years by a local court

Logan Group Co. proposed to delay repaying the principal of a domestic bond by 18 months, according to a paper

Prime Minister Narendra Modi’s plan for India to build 25,000 kilometers of highway in the fiscal year starting next month is making the local currency bond market busy

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©2022 Bloomberg L.P.

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