The CAF III notes are backed by payments pursuant to operating leases and disposition proceeds on a portfolio of 21 narrowbody, four widebody and three regional commercial aircraft manufactured by Airbus (A), Boeing (B) and Embraer (E).
Key Rating Drivers
Quality of the Portfolio: The pool is of high quality, of a majority of which comprises young tier 1 aircraft with generally long expected remaining useful lives. However, the pool also has material concentrations of older aircraft and tier 2 assets, which Fitch perceives to be less liquid and were stressed accordingly. The transaction benefits from a long average remaining lease term.
Technological Risk Related to the Assets: Despite their current popularity, the pool is predominantly composed of aircraft that face replacement programs in the latter half of this decade. Fitch expects that the large operator bases and long lead time to replace these assets will partially mitigate this risk.
Concentrations in Poor Credit Quality Lessees: CAF III carries significant lessee concentrations, and all leases are extended to unrated or speculative grade lessees. Fitch assumed unrated lessees would perform consistent with a 'B' Issuer Default Rating (IDR) to reflect increased default risk. The rating was assumed to be one notch to one category lower during assumed recessionary periods.
Cyclicality of the Commercial Aviation Industry: Commercial aviation has historically been subject to significant cyclicality stemming from macroeconomic downturns. These periods are typically marked by reduced asset utilization, values and lease rates. Fitch's analysis assumes multiple periods of significant volatility in asset values and lease rates over the life of the transaction.
Structure, Credit Enhancement and Cash Flow Stress Results: Credit enhancement (CE) is primarily composed of overcollateralization (OC) and a liquidity facility. The transaction also benefits from DSCR and utilization rate performance triggers, which could accelerate amortization. Fitch created multiple cash flow scenarios to evaluate the structure, as detailed in this report.
Heavy Servicer Reliance: CAF III will depend on CITAI's ability to collect lease payments and maintenance reserves, remarket and potentially repossess the aircraft following lessee default and procure maintenance, among other functions, which are all crucial to the assets' values and transaction performance. Fitch believes CITAI, a leading aircraft lessor, to be capable of performing these functions on behalf of CAF III.
The proceeds of the offering by CAF III will be paid primarily to affiliates (or associated trusts) of CITAI selling the aircraft to CAF III. CITAI is a wholly owned subsidiary of CIT Group Inc. (Not rated publicly by Fitch).
Due to the correlation between the global economic conditions and the airline industry, the ratings may be impacted by the strength of the macro environment over the remaining term of these transactions. A such, in its review of CAF III Fitch evaluated scenarios that simulated various timing and severity of future recessions that would impact the transaction through reduced aircraft values, lease rates and utilization levels. Under these scenarios, the class A-1 notes showed little rating sensitivity.
Additionally, changes in the airline industry can have significant impact on the ratings of these transactions. If the timing of or degree of technological advancement commercial aviation space differed materially from Fitch's expectations, performance could be affected. Similarly, factors influencing the supply of and demand for the certain aircraft types present in the trust portfolios could impact Fitch's view of the transactions' ability to avoid a default on the notes and, thus, could result in negative rating actions. In a review of sensitivities designed to mimic significant drops in aircraft demand and shorter asset useful lives owing to these factors, the class A-1 notes were shown to have only minor rating sensitivity, retaining investment grade ratings in all cases.
Fitch's stress and rating sensitivity analysis are discussed in the presale report titled 'CIT Aviation Finance III Ltd.', dated
Additional information is available at 'www.fitchratings.com'.
--'Global Rating Criteria for Aircraft Operating Lease ABS', dated
--'Global Structured Finance Rating Criteria' dated
--'CIT Aviation Finance III Ltd.' dated
--'Counterparty Criteria for Structured Finance and Covered Bonds' dated
Global Rating Criteria for Aircraft Operating Lease ABS
Global Structured Finance Rating Criteria
Counterparty Criteria for Structured Finance and Covered Bonds
Source: Fitch Ratings
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