The value of bonds backed by embattled Russia has tumbled this month, as leasing companies struggle to take back planes leased to Russian airlines.
United States and Europe Penalties Imposed in the wake of the Russian invasion of Ukraine prohibits the leasing of aircraft to Russian airlines and existing contracts must be terminated by the end of the march.
The sanctions posed a logistical challenge to recovering planes still in Russia, as Moscow has so far indicated its unwillingness to allow the planes to leave the country.
Before the sanctions were imposed, non-Russian lessors had 515 aircraft in Russia with a combined market value of close to $10 billion, according to data from air consultancy Cirium. That number has since fallen to about 450-460 after counting about 50 planes that have already been returned and some others that appear to have been returned recently.
Rating agencies have warned that income lost from leases, along with uncertainty over whether the aircraft can be recovered, have increased risk for bondholders in aircraft-backed deals.
A number of aircraft lessors have used asset-backed securitization — the sale of packaged bonds backed by aircraft leases to various airlines — to raise money for their businesses. When the airlines pay their lease, money flows through it to pay the interest and principal on the bonds, with the higher-rated debt tranches paid first.
One deal from private equity firm Carlyle’s aircraft leasing business issued in 2019 includes five aircraft leased to Russian and Ukrainian airlines, making up more than 30 percent of the collateral backing the bonds, according to data from credit rating agency Fitch. The top-rated slide this week traded at 62 cents on the dollar, down from more than 90 cents at the end of last year.
Another deal from the Castlelake hedge fund issued in 2017, which includes seven leases to Russian airlines that make up more than 20 percent of the portfolio, according to S&P Global Ratings, has also fallen in value. The first stake in the deal fell to nearly 87 cents on the dollar, down from more than 100 cents last year.
“There are a lot of unknowns now,” said Jamshed Engineer, partner at Axonic Capital. “If someone has to sell, there are a limited number of buyers due to the uncertainty and that has pushed prices down.”
The impact of the sanctions came shortly after the epidemic had already spread aircraft lessor By restricting travel and keeping aircraft on the ground. However, rating agencies largely expect major aircraft lessors to go through the current crisis, even if some bond deals are affected.
“Only when things were supposed to get better from being so horrible do you have these new issues,” said Craig Bergstrom, chief investment officer at Corbin Capital. “It’s a painful period, but I don’t see it as a huge structural transformation.”
Fitch has placed 27 of 14 tranches of deals under review for a rating downgrade, due to its exposure to aircraft leased to Russian airlines. Moody’s has put four tranches of two deals on review for downgrades, and KBRA, another rating agency, has put 26 tranches of nine deals on probation.
S&P Global has not placed any ratings downgrades for review yet. It ranks 12 deals with a total exposure of 29 aircraft leased to Russian airlines.
Standard & Poor’s analysts noted that “termination of lease contracts and repossession of aircraft in this challenging environment may increase the pressure on revenue collection for affected securitized transactions, which are still on a slow path to recovery from the Covid-19 pandemic.”
The lessor most exposed to Russia is AerCap, the largest rental group in the world after Acquisition of GE Aviation Capital last year. According to IBA, the aviation consultancy, AerCap had 152 aircraft in Russia before the sanctions were imposed.
Additional reporting by Sylvia Pfeiffer in London
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