Bermuda has been home to some of the most significant aircraft asset-backed securities (ABS) transactions of the past decade, including highprofile deals such as Elix Aviation Capital’s Prop 2017 1 Ltd in 2017, and Start Ltd in 2018, the first aircraft portfolio purchase vehicle structure to include a dedicated asset manager for equity investors.
Until 2018, ABS transactions in the aviation sector followed a largely similar structure. The market has been busy since 2011, with 2017 seeing a record 14 ABS deals close and 2018 seeing a similar number. However, investors have continued to seek value, which has resulted in some of the most significant structural changes to the traditional ABS model for some time.
These changes include: (i) the use of tradable E-notes in order to increase liquidity; (ii) deploying a dual-issuer structure to avoid the risk of the US withholding tax for non-US investors; (iii) appointing dedicated asset managers for equity investors in order to improve the sale outcome for the equity portion of the securitisation; and (iv) listing on the Bermuda Stock Exchange (BSX).
In terms of liquidity, the sale of equity notes/E-notes in aviation ABS transactions historically involved large investments that trade under strict confidentiality agreements. In traditional structures, the ABS E-note has been a large-denomination, relatively illiquid note that requires active management. This tended to attract private equity investors, but was less appealing to institutional investor finance.
This article was first published in The Lawyer.