What is ABS in Aviation?-Understanding Aircraft Asset-Backed Security

Understanding Aircraft Asset-Backed Securities: A Key Component of Aviation Financing"�

In the aviation industry, ABS is most often used as the abbreviation of Aircraft Asset-Backed Securities, a complex financial product that is extremely significant in the aircraft leasing and financing sector across the world. Although the term ABS may be used in the context of an Anti-lock Braking System in cars or of certain types of safety nets used in airplanes, in aviation finance it applies most commonly to aircraft-based asset-backed securities. ?�

What Are Aircraft Asset-Backed Securities (ABS)?�

Aircraft Asset-Backed Securities are investment products that are developed when a financial institution or aircraft lessor assembles an aircraft or engine portfolio of cash-generating assets, and sells interests in that portfolio to investors in a process called securitization. In particular, the operating lessor sells a bunch of leased aircraft to a Special Purpose Vehicle (SPV). The SPV then proceeds to issue bonds rated investment grade to raise funds which they use as collateral to repay bondholders with the security of the future lease payments of those aircraft. ?�

ABS Transaction Structure�

There are several important participants and processes in a typical aircraft ABS structure:�

Issuer/SPV: The issuer of the bonds is the entity that retains an ownership of the aircrafts and offers the legal distinction between the parent lessor and the issuer.
Servicer: the original lessor, which typically deals with the leases and manages the planes and remarkets the planes once the lease is over.
Investors: Investors purchase ABS bonds, and as such, they are subjected to a regular payment of coupon and principal.
Tranches: The tranches are usually issued as the senior tranches can be paid higher priority and less risky and the junior tranches tend to have more returns to make and be less risky.?�

The Role of ABS in Aviation�

ABS products assist the aviation industry in the following ways:�

Liquidity Provisions: They allow lessors to enter into giant capital markets, finance the purchase of new aircraft or refinance the current fleet.
Spreading Risk: Lessors can pass the ownership risk on to investors and thus concentrate on business operations as opposed to carrying large balance sheets exposures.
Supporting Market Growth: When there is strong demand in the air travel business or following a shock to the industry such as the COVID-19 pandemic, ABS transactions have provided the necessary funds to drive a recovery and a growth.?�

Risks and Considerations�

The ABS investments are prone to the following risks:�

Lease Income Volatility: In case of airlines default, or a decrease in demand, lease cash flows can be lower and will have an impact on the ABS investor returns.
Residual Value: The values of underlying aircraft may vary over the life time of an ABS. The achievement of full potential returns can be based on the sale of aircraft at good prices after lease.?
Interest Rate and Market Risks: The wider economic developments may affect the lease rates as well as the prices of the secondary aircraft.�

Conclusion�

ABS (Aircraft Asset-Backed Securities) play a crucial role in the contemporary aircraft finance by allowing the lessors to access capital, risk management, and portfolio optimization of commercial jets. To the investors, ABS provide an opportunity to participate in the development of aviation in a structured return, albeit with risks associated with cyclical nature of the industry and asset values. Essentially, ABS are an effective financial instrument in the world aircraft leasing, investment which makes fleet growth and industry stability.

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