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How a surge in airline defaults is driving restructuring activity in securitisations

How a surge in airline defaults is driving restructuring activity in securitisations

With a number of high profile airlines defaulting on loans and falling into liquidation, restructuring activity in securitisations is continuing to increase across the aviation financing industry.

As aircraft fuel prices converge with overcapacity and saturated route competition, smaller, more niche airlines (such as Monarch, Air Berlin and Primera Air) are but a few of the casualties that have had to cease operations and enter restructuring measures.

Trouble in the skies

As kerosene prices continued to swell towards the close of 2018 - prices were 35% higher in December than the same time in 2017 - many airlines (but most detrimentally those airlines with smaller margins) had to reduce operational costs by limiting the number of flights and consequently, raise consumer fares: further damaging their viability as attractive economical airlines.

The fiscal tightening caused by rising fuel prices is compounded by the overcapacity many airlines are experiencing: a direct result of adding seats to accommodate summer flight schedules as airlines attempt to consolidate their market positions. The struggle of the market's smaller players has been further exacerbated by their lack of route diversification, with larger airlines squeezing them out of the market as they compete for the same routes.

Arriving at the wrong terminal

Air Berlin's insolvency is of particular interest following its partnership with Abu Dhabi's state-owned Etihad Airways. The Abu Dhabi government is now looking at restructuring $1.2 billion of troubled bonds that were issued by Etihad through a SPV called Equity Alliance Partners (EAP). This follows the insolvencies of not only Air Berlin, but also Alitalia, both of whom were partially owned by Etihad.

The insolvencies resulted in a reduction in the cash flow to Etihad and, as a direct consequence caused devaluation in the EAP bonds, raising concerns over the structure of the deal - without any credit enhancement to protect against defaults, noteholders lost significant value in their holding. Air Berlin’s insolvency administrator also announced in December that it was suing Etihad for damages of up to 2 billion euros following the withdrawal of its financial support for Air Berlin.

The rise in insolvencies has also resulted in calls for greater clarity from credit rating agencies and a clearer view as to the capital and cash flows of airlines. With Air Berlin, Alitalia and very nearly FlyBe, serving as painful examples, the insolvencies should alert noteholders to consider their positions based on the underlying asset and the ultimate holder of the asset, namely, the airline. However, given the typical 20 to 30 year lifespan of aircraft and the high cash flows generated from ticket sales, an airline can experience a long period of economic decay before it becomes terminal.

Restructuring the flight path

Naturally, as a result of the rise in airline bankruptcies and defaults, the need for restructuring has dramatically increased. As part of this process, successor trustees are required on securitisations to represent the interests of the noteholders. They should also ensure that they have the necessary capabilities to administer the defaulted transaction on behalf of all noteholders, better still they should have aviation experience and the relevant expertise to adequately represent the interests of the noteholders.

With aviation expertise in DublinLondon and Singapore, Ocorian is a responsive administrator on leasing and financing vehicles and our corporate trust team can act as successor trustee in a default scenario. We work closely with lessors and financial institutions to ensure a quick and smooth transfer to a new airline, whilst our security agent will act quickly to ensure the aircraft is re-housed. Find out more about Ocorian's aviation finance and restructuring services here.

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