Increased volumes, improving fundamentals boost aircraft ABS

A handful of US aircraft ABS worth US$2.87bn have priced so far this month, taking the total number of deals printed this year to eight. With improving fundamentals post-pandemic, the sector stands out when compared to railcar and container ABS.

Indeed, aircraft ABS currently offers the highest yield among the three asset classes, driving analysts’ preference towards this sector. “With respect to the three sectors, if we look at aircraft, it's going to have the most spread and the most yield. That would be the driving factor as to why we prefer aircraft over container and railcar ABS,” says Theresa O’Neill, head of ABS research at BofA Securities.

PK AirFinance’s US$633m PK ALIFT Loan Funding 2024-2, which priced yesterday (18 September), marks the fifth aircraft ABS to print this month. The preceding deals comprise Global Jet Capital’s US$617m Business Jet Securities 2024-2, BBAM Aviation Services’ US$556m Horizon Aircraft Finance IV, PIMCO’s US$497m Navigator 2024-1 and SKY Leasing’s US$570m SLAM 2024-1.

Before that, AASET 2024-1 and PK ALIFT Loan Funding 2024-1 priced in June (for a total of US$1.24bn), while the US$575m Business Jet Securities 2024-1 printed in April. In comparison, two aircraft ABS worth US$734m closed during the whole of 2023.

The increased volume in aircraft ABS issuances compared to previous years is helping price discovery and boosting investor confidence, according to O’Neill. “The fundamentals are stronger in aircraft now than during the height of the pandemic and that has certainly helped demand for this particular product,” she adds.

Nevertheless, there is some uncertainty about whether this momentum will continue into 2025. Factors including a supply-demand imbalance in the aircraft sector, interest rates, Fed policy and the “aggressiveness” of alternative funding sources could potentially affect future volumes.

“Aircraft financing was happening before; it just wasn't happening in the ABS market. That's certainly indicative of alternative funding sources that folks have available to them. Whether that continues remains to be seen,” says O’Neill.

With five-year single-A rated aircraft ABS paper offering about 190bp, compared to 155bp for railcar and 140bp for container bonds, BofA nonetheless expects the sector to continue to offer attractive relative value. “We foresee spreads staying range-bound, with a bias towards tightening as economic clarity improves,” concludes O’Neill.

Marta Canini