As an independent trustee, we observed a sharp dip in the issuance of Equipment Asset-Backed Securities (ABS), and more specifically, ABS for aviation, shipping (vessels and containers), and rail. Based on our observations, only three ABS issuances in aircraft have gone to market since Russia invaded Ukraine. These include Business Jet Securities, Apollo Aviation Securitization Equity Trust, and Marathon Asset Management.1,2,3 Shipping and rail have been similarly quiet, with only one major deal in shipping containers (SeaCube Container Leasing) and one in rail (GBX Leasing).4,5
While the numbers tell a complicated story, digging deeper into geopolitical and macroeconomic factors is essential to understanding this space. Transportation sectors respond to these factors in ways that differ from other areas like real estate, corporates, and public sector. Operators also typically have longer-term planning horizons than other, more cyclical industries.
Geo and Macro Conditions
National and international situations have played a large part in 2022’s Equipment ABS market. For example, the invasion of Ukraine and China’s zero-COVID policies curtailed global air passenger traffic significantly. Similarly, supply chain bottlenecks (aircraft engines, semiconductors) and a tight labor market have constrained international trade and passenger traffic alike, with shortages at major shipping ports and airports.
Among macroeconomic factors, higher lease rates, increased borrowing and financing costs, inflation, and recessionary precautions have also chilled Equipment ABS.
Some of these issues have eased, but much uncertainty remains. Still, in conversations with lenders, lessors, and industry stakeholders, we hear hopeful notes for demand recovery if conditions do not deteriorate.
Association of American Railroads Senior Vice President John T. Gray said, “As has been the case for months, some sectors continue to show strength while others face headwinds.” Global import/export Twenty-foot Equivalent Unit (TEU) shipping container volumes recovered quickly after the Ukraine invasion but have moved mostly downward since May 2022.6 Globally, passenger air travel increased to 74% of pre-crisis levels.7 Shipper and aircraft operator concerns about sustainability may also begin to drive recovery across many transportation asset classes, although with potential continued declines in business air travel.
Keeping Recessionary Concerns in Check
We believe recessions, especially short and shallow recessions, play less of a role than it might immediately seem. When considering large-scale purchases or leasing agreements, companies financing transportation equipment look three, five, or even ten years out. Tony Roth, Chief Investment Officer, Wilmington Trust, says, “we are likely to see a shallow recession in 2023 followed by a tepid recovery.”8
In this scenario, long-term outlooks provide a rationale for resumed activity in purchasing, leasing, and securitization of equipment finance.
- “A moderate U.S. recession in 2023 would temper aircraft production and result in a more prolonged, but relatively steady, mid-single digit increase toward 2018 delivery levels. (Fitch Ratings)9
- A 3.2% increase in containerized trade volume in 2023, with the segment’s global compound annual growth rate (CAGR) reaching an estimated 3.1% in the medium term (2022-2025) and 3.0% in the long term (2022-2030), approaching 200M TEU by mid-decade. (S&P)10
- Freight rail activity is expected to surpass 20 trillion tonne-kilometers by 2050. (International Energy Agency)11
While none of these outlooks is set in stone, they counterbalance what might otherwise create heightened concern.
Differences Across Financing Mechanisms: Aviation
The ABS financing market helps allow lessors to lease large blocks of aircraft, commonly 25 to 40 at one time. It lowers financing costs and diversifies sources of funding. Nevertheless, since 2000, it has typically represented between 1% and 2%.12
Yet, in today’s market, lessees have multiple options, including purchase versus lease if they have cash on hand or investment-grade credit that allows them to issue a bond or pursue loans. Cheap credit and healthy debt capital markets made these options more attractive.
For larger operators and larger orders, Enhanced Equipment Trust Certificates (EETC) remain a strong alternative for issuers and investors. In 2021, the EETC market was six times larger than ABS, despite ABS having returned to pre-crisis levels.13 Additionally, while private lenders (private equity and hedge funds) can take riskier bets on stakes in the financing of aircraft, issuer interest in ABS equity notes (or e-notes) has essentially evaporated. E-notes’ higher interest rates and higher risk make them unattractive in a market where many are fleeing to safety.
However, as debt capital markets adapt to an uncertain and changing environment, these structural alternatives will see shifting competitive dynamics with Equipment ABS in the broader equipment financing landscape. Structural evolution of equipment ABS, too, may come into play, just as they did in so-called ABS 3.0 transactions after the global financial crisis eased. If these shifts occur, we may find new and unexpected pockets of deal activity emerge.
We believe equipment financing and new securitizations should prepare for some degree of resumed activity. Equipment ABS in its many forms will remain a strong option for operators to finance equipment in the long term.
But the exact timing of a restart remains unclear. To stay prepared, we recommend that lessors and lenders take two critical actions. First, carefully track operators, manufacturers, and suppliers to spot industry shifts as early as possible. Second, maintain relationships with key service providers to execute transactions quickly as the ice melts.