WILLIS LEASE FINANCE CORPORATION Fitch Ratings has assigned expected ratings to Willis Engine Structured Trust VII (WEST VII).
RATING ACTIONS
Entity / Debt
Rating
Willis Engine Structured Trust VII
A
LT
A(EXP)sf
Expected Rating
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VIEW ADDITIONAL RATING DETAILS
Transaction Summary
Fitch expects to rate the ABS notes issued by Willis Engine Structured Trust VII (WEST VII), as listed. The notes issued from WEST VII will be secured by lease payments and disposition proceeds on a pool of 51 aircraft engines and four airframes to be acquired by WEST VII from
WLFC, as sponsor, servicer and administrative agent, will be responsible for ongoing leasing activities related to the engines, including the underwriting and servicing of leases, ongoing maintenance and engine dispositions. Note proceeds will finance WEST VII's purchase of the engines from WLFC and its affiliates. Fitch does not rate WLFC.
WEST VII is the seventh aircraft engine operating lease ABS trust sponsored by WLFC. Fitch has rated all series issued from the prior trusts with the exception of the immediately prior series. WLFC will retain WEST VII's equity, consistent with the prior trusts, which Fitch views positively.
WEST VII will only be issuing a single series of notes (A notes) at close. However, it may issue an additional series (B notes) or refinancing notes, subsequently, which would involve the issuance of an amendment, indenture supplement, or a Trustee Resolution. The issuance of such notes would require prior notice to the rating agencies involved in the initial rating of WEST VII (including Fitch) and Fitch would determine the rating impact, if any, on the A notes.
KEY RATING DRIVERS
Asset Values: Approximately 60% of the pool, based on Maintenance Adjusted Base Value (MABV) comprises engines supporting in-production aircraft from the A320 NEO, 737MAX, A220, and E2 families; 30% are engines supporting last generation aircraft from the A320 ceo and 737NG families that continue to have large in-service fleets; the remaining 10% consists of turbo-prop engines, one widebody engine and four airframes.
Tiered Collateral Quality: Although Fitch only assigns tiers to aircraft and not the engines themselves, the engines in the WEST IV pool support Tier I and Tier II aircraft that are in high demand with large in-service fleets. This is reflected in the long, modeled remaining useful lives of these engines and the cash flows they generate. Fitch utilizes 3 tiers when assessing the quality and corresponding liquidity of aircraft collateral: tier 1 which is the most liquid and tier 3 which is the least liquid.
Pool Concentration: Fitch considers the initial pool to be well diversified with an initial asset count of 55. As the pool ages and we model the engines and airframes being sold at the end of their leasable lives, pool concentration will increase. Pursuant to Fitch's criteria, we further stress cash flows based on the effective aircraft and engine count. Concentration haircuts vary by rating level and are applied at stresses higher than 'CCCsf'. Nevertheless, due to the high starting count and modeled count over the leasable lives of the assets, no haircut has been applied, even at the 'Asf' stress.
Lessee Credit Risk: There are 18 lessees in WEST VII, with the top three representing 30% of MABV, which is less than WEST VI (63%) but similar to WEST V (30%). There are a mix of credits in the pool, including several publicly-rated investment grade lessees. The 'CCC' assumed lessee concentration is 34%. A number of lessees are either unrated or speculative-grade credits, typical of aircraft ABS transactions. Fitch assumed unrated lessees would perform consistent with either a 'B' or 'CCC' Issuer Default Rating (IDR) to reflect pool default risk.
Operational and Servicing Risk: Fitch believes WLFC has the ability to remarket engines, underwrite new leases, procure maintenance and sell engines, among other responsibilities. Fitch views WLFC to be a capable servicer, supported by the company's operating results and historical performance of both its owned and managed portfolio as well as prior securitizations.
Under the Trust Agreement and Servicing Agreement, under certain circumstances, the Servicer may be removed and replaced. Despite WLFC's specialization and long operating history leasing engines, Fitch expects that a suitable replacement servicer could be brought on.
Transaction Structure: Unlike previous WEST transactions, WEST VII has only an A-note. Previous WEST transactions had A, B and sometimes A, B and C notes. Similar to WEST VI and V, WEST VII incorporates structural features such as turbo for excess proceeds and debt service coverage ratio (DSCR) triggers. Credit enhancement (CE) comprises overcollateralization (OC), various reserve accounts and a liquidity facility, consistent with prior series. Initial loan-to-value (LTV), based on the average of the pool's mean MABV from three appraisers is 72.2% for the series A note. The LTV is similar to the A note LTV in prior WEST transactions. However, the A note interest rate is considerably higher than in prior transactions.
Rating Cap of 'Asf': The aviation market is highly cyclical. While the commercial aviation market has recovered significantly over the past 12 months, it will continue to face certain unknowns and potential headwinds including workforce shortages, inflationary pressures particularly related to labor and fuel costs, supply chain issues, geopolitical risks, and recessionary concerns which would impact passenger demand.
Fitch limits aircraft and engine operating lease ratings to a maximum cap of 'Asf' due to the factors discussed above and the potential volatility they produce. For more details, refer to Fitch's 'Global Structured Finance Rating Criteria' (
RATING SENSITIVITIES
Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade
The performance of engine operating lease securitizations can be affected by various factors, which, in turn, could have an impact on the assigned ratings. Fitch conducted multiple rating sensitivity analyses to evaluate the impact of changes to a number of the variables in the analysis. As stated, these sensitivity scenarios were also considered in determining Fitch's expected ratings.
Technological Cliff Stress Scenario
Asset cash flows are partially informed by the demand for the airframes on which the assets can be applied. As engines age, this pool shrinks. This effect is incorporated into our asset model by increasing the depreciation rate and market value decline applied to each engine as they move through the three phases. The portfolio's earlier or later obsolescence is thus reflected in shorter (earlier obsolescence) or longer (later obsolescence) phase lengths. Fitch tested the rating's sensitivity to earlier and later engine obsolescence, by extending and shortening the length of phase 2 by one year.
When adding one year to the Phase 2 length, the model implied rating of the A notes is not impacted.
When subtracting one year from the Phase 2 length, the model implied rating of the A notes declines by one notch.
Asset Value Decline Scenario
Lease cashflow is principally driven by the asset value over time. As we rely upon the lowest of mean and median of three appraisers our cash flow projections and thus ratings are materially influenced by the values we are provided with. Fitch tested the rating's sensitivity to appraised values being inaccurate by increasing and decreasing the value input by 10%.
When decreasing the starting Fitch value by 10%, the model implied rating of the A notes fell by two notches.
When increasing the starting Fitch value by 10%, the model implied rating of the A notes remained at the cap of 'Asf'.
Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade
Due to the rating cap of 'Asf', Fitch would not consider an upgrade to the A notes.
USE OF THIRD PARTY DUE DILIGENCE PURSUANT TO SEC RULE 17G -10
Form ABS Due Diligence-15E was not provided to, or reviewed by, Fitch in relation to this rating action.
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
REPRESENTATIONS, WARRANTIES AND ENFORCEMENT MECHANISMS
A description of the transaction's representations, warranties and enforcement mechanisms (RW&Es) that are disclosed in the offering document and which relate to the underlying asset pool is available by clicking the link to the Appendix. The appendix also contains a comparison of these RW&Es to those Fitch considers typical for the asset class as detailed in the Special Report titled 'Representations, Warranties and Enforcement Mechanisms in Global Structured Finance Transactions'.
ESG Considerations
The highest level of ESG credit relevance is a score of '3', unless otherwise disclosed in this section. A score of '3' means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. Fitch's ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. For more information on Fitch's ESG Relevance Scores, visit https://www.fitchratings.com/topics/esg/products#esg-relevance-scores.
Additional information is available on www.fitchratings.com
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