The value of bonds backed by planes stranded in Russia has tumbled this month as leasing companies struggle to reclaim planes leased by Russian airlines.
U.S. and European sanctions imposed following Russia’s invasion of Ukraine prohibit aircraft from being leased to Russian airlines, and existing contracts must be terminated by the end of March.
The sanctions have created a logistical challenge for the return of planes still in Russia as Moscow has so far signaled its reluctance to let the planes leave the country.
Prior to the imposition of sanctions, non-Russian lessors in Russia had 515 aircraft with a total market value of about $10 billion, according to aviation consulting company Cirium. This figure has since dropped to around 450-460 after counting the approximately 50 aircraft that have already been returned and some others that appear to have been returned recently.
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Ratings agencies warned that forgone rental income, along with uncertainty about whether the planes could be returned, increased the risks for bondholders in deals backed by the planes.
A number of aircraft lessors have used asset-backed securitization—the sale of bonds backed by aircraft lease packages to various airlines—to raise funds for their business. As airlines pay their lease payments, money flows in to pay interest and principal on the bonds, with higher-rated tranches of debt being paid out first.
According to Fitch Ratings, one 2019 aircraft leasing deal by private equity firm Carlyle includes five aircraft leased to Russian and Ukrainian airlines, representing more than 30% of the bond’s collateral. The top-rated tranche traded at 62 cents on the dollar this week, up from more than 90 cents at the end of last year.
Another Castlelake hedge fund deal, concluded in 2017, which included seven leases with Russian airlines, which, according to S&P Global Ratings, make up more than 20% of the portfolio, also fell in price. The senior tranche of the deal fell to about 87 cents on the dollar, compared to more than 100 cents last year.
“There are a lot of unknowns right now,” said Jamshed Engineer, partner at Axonic Capital. “If someone has to sell, the number of buyers is limited, given the uncertainty, and this has driven prices down.”
The impact of the sanctions came shortly after the pandemic had already affected aircraft lessors, restricting travel and forcing planes to stay on the ground. However, ratings agencies generally expect major aircraft lessors to weather the current crisis, even if some bond deals are affected.
“Just when things should have gotten better after being pretty terrible, you have these new problems,” said Craig Bergstrom, chief investment officer at Corbin Capital. “It’s a painful period, but I don’t see it as a huge structural shift.”
Fitch has placed 27 tranches out of 14 transactions under review for rating downgrades due to their exposure to aircraft leased by Russian airlines. Moody’s has placed four tranches out of two transactions under review for a downgrade, while KBRA, another rating agency, has placed 26 tranches out of nine transactions under review.
S&P Global has not yet placed any trades on review for a downgrade. He evaluates 12 transactions involving 29 aircraft leased to Russian airlines.
Terminating leases and repossessing aircraft under such challenging conditions could exacerbate revenue generation challenges for affected securitized transactions, which are still on a slow recovery path from the Covid-19 pandemic, analysts at S&P said in a note.
The lessor with the greatest risk to Russia is AerCap, the world’s largest leasing group since its takeover by GE Aviation Capital last year. Prior to the imposition of sanctions, AerCap had 152 aircraft in Russia, according to the aviation consulting company IBA.
Additional reporting by Sylvia Pfeiffer in London