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October 20, 2017  

Fitch Report Dooms Global Jet Transaction

The cancellation of Global Jet Capital’s debut securitization offers a rare look at the process of pulling a deal from the market.

The $1.4 billion offering started making the rounds on Sept. 27 with Morgan Stanley running the books and Kroll assigning ratings of single-A down to triple-B to its various classes. But marketing efforts stalled when Fitch released an unsolicited report criticizing the transaction on Oct. 10, just days before it was set to price.

Now, the buzz is that Morgan Stanley and Kroll are furious with Fitch, which they see as sabotaging the effort.

Sources said Morgan Stanley had lined up buyers for about $700 million of the bonds by the time Fitch’s report came out, but was having a harder time placing the rest given the large size of the offering and Global Jet’s status as a first-time issuer. Still, the bank believed it could have brought enough buyers on board if Fitch hadn’t published its commentary.

As the effort unraveled, Morgan Stanley considered restructuring the transaction. It also thought about pushing ahead with a smaller version of the deal, taking advantage of a willingness among investors with existing orders to stand by those commitments.

Those buysiders may have asked for higher yields, however. And Fitch’s criticisms certainly turned off some investors who weren’t already on board, creating something of a dead end for Global Jet’s marketing efforts. “What Fitch did was get everybody looking closer at the deal. And with the corporate-jet market struggling, some investors didn’t like what they saw,” one buysider said.

Fitch’s report was written by senior director Hylton Heard and managing director John Bella. Its conclusion: The deal shouldn’t have earned single-A or even triple-B ratings due to insufficient credit enhancement — offered in the forms of excess spread, over-collateralization, cash reserves and subordination — and concerns about its revolving master-trust structure.

“The transaction . . . does not meet our investment-grade standards,” Heard and Bella wrote.

Rating agencies occasionally release unsolicited commentaries on new deals, but rarely as the bonds are about to price. Perhaps adding to the buzz surrounding Fitch’s action was the fact that it had evaluated the offering, but decided against grading it.

Meanwhile, several investors said they called Fitch for more information but never heard back.

So what was Fitch’s motivation? The agency isn’t talking. Kroll, however, has told buysiders that Fitch is resentful of its status as the most active rating agency in the asset class. Since the beginning of 2016, Kroll has graded 14 aircraft-lease securitizations totaling $7.7 billion. That compares to just two deals adding up to $948 million for Fitch, according to Asset-Backed Alert’s ABS Database.

Kroll also reiterated that it was comfortable with its ratings. It additionally pointed out that the deal got a look from senior managing director Tony Nocera, a former S&P executive whose evaluations of commercial-asset deals are well regarded across the industry. “We were very comfortable with the deal and addressed everything in our presale report. So we were surprised by the timing of the [Fitch] report,” a Kroll spokesperson said. “We’ve been the number-one rating agency in aircraft securitizations.”

Global Jet formed in 2014, and in 2015 struck a deal to buy some $2.5 billion of corporate jets from GE Capital — the former employer of several of its top executives.

Since then, Global Jet has been funding leases on those aircraft and others through a floating-rate line of credit from Morgan Stanley, Bank of America, Citigroup and Deutsche Bank. The plan had been to repay that facility with the proceeds from the securitization, which would have converted the Danbury, Conn., company’s obligations to fixed rates.

With the deal on the shelf, Global Jet remains exposed to the risk that a near-term increase in interest rates will cause its financing costs to rise. “That doesn’t seem like a big deal now with rates low,” one source said. “But who knows what’s going to happen a couple months down the road?”

To that end, sources said Morgan Stanley is looking at ways to offer fixed-rate financing that would hold Global Jet over until it can float another securitization, possibly with a revised structure. Even if that doesn’t work, it will be a few years before the existing floating-rate facility expires — meaning Global Jet is unlikely to be desperate for capital.

The company additionally has backing from AE Industrial Partners, Carlyle Group, Franklin Square Capital and GSO Blackstone.