ISTAT Jetrader - Summer 2021 - 25

With so many aircraft having had their lease contracts renegotiated in 2020 and
2021, many with creative stepped-rent structures, some interesting LEV scenarios are
likely to be encountered in the next few years.
aircraft is likely to be lower than the original market rental
rate of a new aircraft six years prior. In essence, the buyer
is acquiring an asset with above-market rental (relative to
the current market at the time of purchase), and also without
the worry of finding a new customer for it, but ultimately will
assume the residual risk at lease termination.
When Can LEV Be Lower Than CMV?
There are situations when the Lease-Encumbered Value can
be equal to or below the Current Market Value. This could be
due to one or more of these factors:
* The lease was signed recently, and market lease rates
at the time of sale are similar or higher than they were
at the time the lease was signed.
* The lease was signed at or near the bottom of an
industry downturn, and market lease rates improved
since then, even in absolute dollar terms, despite the
aircraft aging.
* The lease was signed in a very competitive market.
* Lessor economics were more favourable at
lease inception.
* The lease has material terms that favor the lessee,
e.g., " as-is, where-is " return conditions, less than
desirable security package, or weak provisions for
end-of-lease compensation.
* The lessee is considered a high credit risk, which
may result in near-term default. As such, the discount
rate may be at such a level that more than offsets an
above market lease rate, favorable return conditions,
etc. (Aircraft in such situations generally do not trade
until there is more clarity about their future, unless
the existing owner is in distress and being forced
to sell.)
An aircraft sold under the above circumstances may trade
below CMV, as the buyer would be contractually bound to
honor the remainder of the lease rather than find a potentially
more profitable use (or, in the last circumstance, potentially
have the aircraft returned and likely re-lease at a lower rate).
This contrasts with buying a naked aircraft where the buyer
might be able to sign a new lease at a better rate or change
the aircraft's usage to something more in-demand, such as
cargo conversion.
Nonetheless, such instances are rare and, in the majority
of cases, LEV is above CMV. The occasional cases where the
reverse holds true are usually encountered in the two to four
years of market recovery after an industry downturn. With so
many aircraft having had their lease contracts renegotiated in
2020 and 2021, many with creative stepped-rent structures,
some interesting LEV scenarios are likely to be encountered
in the next few years. Large variations in LEVs between those
aircraft still honouring pre-COVID-19 leases and those with
new or restructured leases are also to be expected.
How Are LEVs Used?
LEVs are often used in company valuations of lessors when
assessing book value - unless, of course, the company
valuation already accounts for the leases separately. They can
also be used when trading portfolios between investors as a
benchmark for what that portfolio is worth, and they can be
used when communicating with shareholders to help them
better understand the total value of the leased fleet.
LEVs are also helpful in decision-making. On one
occasion, an airline was being offered the option of
purchasing an aircraft off lease early, at Market Value, and
they requested an encumbered valuation. The airline had a
lease signed in 2003, when the industry was still scarred by
9/11, at a very attractive rate. It emerged that the LEV was
lower than the CMV at the time, so it made more sense for the
airline to carry on leasing the aircraft at the contractual rate
than to buy it off lease.
Banks typically do not use LEVs, however, and insist on
using naked aircraft CMVs and BVs in determining loan-tovalue
because they are concerned about recovery should a
loan default. If a loan has defaulted, the lessee is typically
no longer meeting their obligations under the lease, and
the bank's expected recovery is based on the aircraft likely
being naked.
This critical valuation analysis has also been more
prominent as of recent as lessors work through the
impairment analysis of their assets and the calculation of
" Value in Use, " which typically involves an intrinsic view
of the revenue potential of an asset going forward for the
near term.
Whatever the application may be, it is crucial for industry
stakeholders to understand the difference in value between
an encumbered and an unencumbered aircraft, and to use a
value that is fit for the purpose and accurately reflects the
appropriate value of the asset given the circumstances.
Jetrader * SUMMER 2021 * 2 5

ISTAT Jetrader - Summer 2021

Table of Contents for the Digital Edition of ISTAT Jetrader - Summer 2021

ISTAT Jetrader - Summer 2021
From the President
ISTAT News & Events
Perspectives: Q&A With Dean Gerber
Reunited in the Magic City
Understanding Lease-Encumbered Values
ISTAT Foundation: Supporting UN Humanitarian Air Service Efforts
Appraisal: 737 MAX 8 and DHC-8-400
At a Glance: Dezhi Zhu
From the Vault: ISTAT Latin America Forum 2017-2019
Advertiser Index
ISTAT Jetrader - Summer 2021 - Intro
ISTAT Jetrader - Summer 2021 - ISTAT Jetrader - Summer 2021
ISTAT Jetrader - Summer 2021 - Cover2
ISTAT Jetrader - Summer 2021 - 1
ISTAT Jetrader - Summer 2021 - From the President
ISTAT Jetrader - Summer 2021 - 3
ISTAT Jetrader - Summer 2021 - 4
ISTAT Jetrader - Summer 2021 - 5
ISTAT Jetrader - Summer 2021 - 6
ISTAT Jetrader - Summer 2021 - 7
ISTAT Jetrader - Summer 2021 - ISTAT News & Events
ISTAT Jetrader - Summer 2021 - 9
ISTAT Jetrader - Summer 2021 - Perspectives: Q&A With Dean Gerber
ISTAT Jetrader - Summer 2021 - 11
ISTAT Jetrader - Summer 2021 - 12
ISTAT Jetrader - Summer 2021 - 13
ISTAT Jetrader - Summer 2021 - Reunited in the Magic City
ISTAT Jetrader - Summer 2021 - 15
ISTAT Jetrader - Summer 2021 - 16
ISTAT Jetrader - Summer 2021 - 17
ISTAT Jetrader - Summer 2021 - 18
ISTAT Jetrader - Summer 2021 - 19
ISTAT Jetrader - Summer 2021 - 20
ISTAT Jetrader - Summer 2021 - 21
ISTAT Jetrader - Summer 2021 - Understanding Lease-Encumbered Values
ISTAT Jetrader - Summer 2021 - 23
ISTAT Jetrader - Summer 2021 - 24
ISTAT Jetrader - Summer 2021 - 25
ISTAT Jetrader - Summer 2021 - ISTAT Foundation: Supporting UN Humanitarian Air Service Efforts
ISTAT Jetrader - Summer 2021 - 27
ISTAT Jetrader - Summer 2021 - Appraisal: 737 MAX 8 and DHC-8-400
ISTAT Jetrader - Summer 2021 - 29
ISTAT Jetrader - Summer 2021 - 30
ISTAT Jetrader - Summer 2021 - 31
ISTAT Jetrader - Summer 2021 - At a Glance: Dezhi Zhu
ISTAT Jetrader - Summer 2021 - 33
ISTAT Jetrader - Summer 2021 - From the Vault: ISTAT Latin America Forum 2017-2019
ISTAT Jetrader - Summer 2021 - 35
ISTAT Jetrader - Summer 2021 - Advertiser Index
ISTAT Jetrader - Summer 2021 - Cover3
ISTAT Jetrader - Summer 2021 - Cover4
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