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COVID-19 is Worst Crisis on Record for Travel/Aviation Sectors with 37% of Aviation ABS Notes Downgraded - Fitch

October 09, 2020, 09:10 AM
Filed Under: Travel and Leisure

Fitch Ratings says the coronavirus pandemic is the worst crisis to date impacting the travel/airline sector, including aviation (aircraft and engine) asset-backed securities (ABS). The pandemic continues to negatively impact ABS asset performance and ratings in 2020, as exhibited by Fitch's rating actions during April-August and discussed in the new report "Aviation ABS: Coronavirus Puts Unprecedented Pressure on Ratings."

Fitch expects heightened pressure on ratings over the next 12 months depending on the pace of coronavirus recovery across the sector and ongoing credit trends and ABS cash flow implications. The travel sector hit a low in the spring/early summer of 2020, but the coming slower winter period will heighten challenges facing ABS airline lessees and may lead to further downgrades.

Fitch is closely monitoring updated aircraft value appraisal data and declines (particularly widebodies, which are experiencing negative value trends along with other variants) and ongoing airline credit deterioration. Both may be key drivers of additional downside ratings pressure in the coming months.

Fitch currently rates 31 outstanding transactions (27 aircraft, four engine) totaling $12.6 billion, comprising 86 tranches issued from 13 lessor ABS platforms. In Fitch's first portfolio review undertaken from April-August, the coronavirus credit factors driving negative ratings were: 1) deteriorating airline credit; 2) declining aircraft values (and Fitch value assumptions) and loan-to-value ratio impacts; and 3) updated transaction asset assumptions/stresses.

Out of the 86 tranches in its portfolio, Fitch downgraded 32 across 13 deals to date in 2020 and affirmed 54 in 21 deals. Twelve tranches from seven transactions remain on Rating Watch Negative, and 67 have Negative Outlooks. The majority of the 32 downgrades in 2020 YTD were by one category (75%). Only eight tranches from four deals were downgraded by two categories.

Fitch's baseline airline sector recovery forecast is now in 2023-2024. Air travel is still very low at an approximately 75% decline through August (source: IATA) amid continued global travel restrictions and the global start/stop recovery. IATA predicts traffic to decline approximately 66% year-over-year (YOY) in 2020, and thus ABS asset performance/ratings pressure will be elevated in 2H20-1H21.

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