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Rating Action: Moody's assigns a provisional rating to Castlelake Aircraft Structured Trust 2021-1, Class C NotesGlobal Credit Research - 01 Feb 2021New York, February 01, 2021 -- Moody's Investors Service (Moody's) has assigned a provisional rating to the class C notes to be issued by Castlelake Aircraft Structured Trust 2021-1 (CLAS 2021-1), a Delaware statutory trust. The ultimate assets backing the rated class C notes will consist primarily of a portfolio of aircraft and their related initial and future leases. Castlelake, L.P. (Castlelake) will be the sponsor of the transaction, and Castlelake Aviation Holdings (Ireland) Limited (Castlelake Aviation) will be the servicer of the underlying assets, with Castlelake as sub-servicer. The aircraft lease asset backed securities (ABS) will be primarily repaid by cash flows from payments on initial and subsequent leases attached to the portfolio of aircraft to be securitized, and proceeds from aircraft dispositions (aircraft sales). As of December 31, 2020, the initial assets primarily consisted of 27 aircraft subject to initial leases to 11 lessees domiciled in 10 countries.The complete rating actions are as follows:Issuer: Castlelake Aircraft Structured Trust 2021-1Class C Notes, Assigned (P)B2 (sf)CLAS 2021-1 is Castlelake's first aircraft lease ABS of the year and its seventh transaction since 2014. CLAS 2021-1 plans to issue to class C notes on 10 February, and previously issued the class A and B notes on 28 January.CLAS 2021-1 used the proceeds from the issuance of the CLAS 2021-1 class A and B notes to acquire the series A and B AOE notes, and will use the proceeds from the issuance of the CLAS 2021-1 class C notes to acquire the series C AOE notes (together with the series A and B AOE notes, the AOE notes). The AOE notes are or will be issued by each of CLSec Holdings 20 DAC and CLSec Holdings 21 LLC, the two underlying AOE issuers, one incorporated under Irish law and the other under Delaware law. In turn, the AOE issuers will use the class C AOE note proceeds, along with the class A and class B AOE note proceeds, to acquire the initial assets from funds affiliated with and managed by Castlelake through the acquisition of contribution entities that either directly or indirectly own, or will acquire, the 27 aircraft subject to the initial leases. The AOE issuers expect to acquire the initial assets during the 270-day contribution period after the transaction's closing date.RATINGS RATIONALEThe provisional rating of the CLAS 2021-1 class C notes is based on (1) the results of Moody's quantitative modeling analyses, including sensitivity analyses with respect to certain assumptions, (2) Moody's assessed cumulative loan-to-value (CLTV) ratio for the class C notes, (3) the credit quality of the underlying aircraft portfolio, their related leases and their expected performance, including the leases' initial and assumed subsequent lease terms, (4) the transaction structure and priority of payments, (5) the ability, experience and expertise of Castlelake as the sub-servicer of the securitized assets and (6) qualitative considerations for risks related to legal, operational, country, data quality, bankruptcy remoteness, and ESG (environmental, social and governance) factors, among others. The rating actions also consider the heightened risk and continued global economic disruption caused by the COVID-19 pandemic.The class C notes have a Moody's CLTV ratio of 104.3%. The class C CLTV ratio would be materially lower, at around 87.7%, after reflecting the projected end of lease (EOL) payments, discounted at the weighted average note rate. Moody's assessed value reflects the minimum of several third-party appraisers' initial half-life market values, plus a maintenance adjustment provided by morten beyer and agnew (mba). Moody's CLTV ratio reflects the loan-to-value ratio of the combined amounts of each class of notes and the classes that are senior to it. The EOL payments are due from certain airlines at lease expiry based on contractual return conditions, maintenance costs and escalators, that are available to repay the notes. mba provided initial projections of the EOL payments based primarily on forecasted aircraft utilization.Key credit strengths of the transaction include (1) mostly strong leasing assets, (2) strong initial contractual cash flows from lessees of relatively strong credit quality, (3) limited lease maturities through 2024, (4) large EOL payments and leases with full life aircraft return conditions, (5) new debt paydown feature whereby unscheduled note principal payments cause each note's balance to remain ahead of schedule, and (6) a class C partial class sweep trigger and class C-specific reserve account supporting the notes.Key credit challenges include (1) heightened asset risks owing to the continuing negative effects of the global coronavirus pandemic, (2) weakened airline credit quality, (3) exposure to vintage or widebody assets, (4) technological and environmental risk, (5) volatility in aircraft values and lease rates, (6) potential credit migration risk, (7) potential large maintenance expenses, (8) unrated sponsor/servicer, (9) leakage of cash flows to the E-Certificates, and (10) novation risk. In assessing the impact of the credit challenges, Moody's considered the various mitigants to the risks and performed sensitivity analyses in the quantitative modeling.As of the closing date, Castlelake funds will endeavor to contribute the asset entities that own the aircraft to the AOE issuers in exchange for the E-Certificates during a 270-day contribution period. As a result, ownership of the aircraft will not change and lease novation will be much less complex, compared with cases where aircraft ownership is changing. Also, the novation process may protect investors from reduced cash flows owing to airline defaults after deal closing but prior to the asset entities being contributed to the transaction, since aircraft with delinquent leases may not be contributed.On 29 January, Air Namibia reached an out of court settlement with one of its creditors who had previously petitioned for an involuntary insolvency of the airline in local court that triggered a technical event of default under the lease agreement. Air Namibia remains current on all lease payments because the Government of Namibia (Ba3 negative), the lease guarantor, continues to fulfill the lease obligations. To protect investors, the relevant contribution agreement prevents the contribution of the ultimate interest in the A330-200 aircraft (7% of Moody's initial assessed value) and the related lease, until a resolution is finalized with respect to the airline's involuntary insolvency petition. If the aircraft is not contributed, noteholders will receive their pro-rata share of the debt allocated to the aircraft using funds deposited in the acquisition account from the note proceeds.In our quantitative analysis we assessed the impact of the aircraft not being contributed on the rated notes.CREDIT QUALITY OF UNDERLYING AIRCRAFTHighly liquid, narrowbody aircraft that are less than five years old comprise 20% (by Moody's initial assessed value) of the portfolio to be securitized, while midlife and older, narrowbody aircraft make up 42% of the portfolio. Across all ages, liquid narrowbody aircraft, which make up 56% of the pool and include the A320ceo (38%), A220 (8%) and B737NG (17%) models, are considered strong leasing assets owing to their large diversified operator bases. Compared with widebody aircraft, narrowbody planes typically have lower expenses associated with maintenance, reconfiguration and transition. The pool consists of 63% mid-life or older aircraft (vintage aircraft). Risks typically associated with vintage aircraft include diminished re-leasing prospects, higher volatility in values, technological obsolescence and higher costs related to ongoing maintenance. The weakest combination of the pool consists of around 24% of leases with less liquid, mid-life, widebody aircraft to weak airlines or with relatively short maturity terms, increasing the transaction's exposure to re-leasing risk. The aircraft include one A330 (7%) and two B777-300ERs (16%). Widebody aircraft typically have higher expenses associated with maintenance, reconfiguration and transition costs compared with narrowbody aircraft. In its cash flow analysis, Moody's assumed that most aircraft are scrapped when they are 21-24 years old. Moody's assumed that one 17-year old A320-200 and one 14-year old B777-300 ER had an economic useful life of 19 years to address the risk of accelerated near-term retirements stemming from the pandemic.CREDIT QUALITY OF INITIAL LEASES AND LESSEESThe vast majority of the aircraft in the portfolio have leases that will expire at a time which is beyond Moody's current expectation for a recovery in global air travel demand approaching 2019 levels by 2024. Leases attached to only five aircraft comprising 15% of the pool expire prior to 2025, with 7% expiring in 2023 and the remainder in 2024. The weighted average remaining lease term of the initial leases is 7.7 years, longer than the 4.0-4.5 years in prior Castlelake aircraft lease ABS deals. Therefore, the transaction is generally well protected from the near-term COVID-19-related asset risks such as potentially long periods of aircraft downtime and the re-leasing of new aircraft to weakened lessees at depressed lease rates.Around 67% of the initial contractual cash flows come from lessees or guarantors of relatively strong quality, likely providing a strong and steady source of cashflow to the transaction.Noteholders will benefit from EOL payments received from certain lessees at the end of their leases. Based on projections from the appraisal firm mba, the aggregate projected EOL payments from the lessees total $253 million, or 43% of the aggregate note balance. In our analysis, we reduce the estimated EOL payments to account for (1) the projected costs required to ensure that the maintenance condition of the plane is sufficient to attract a subsequent lessee at reasonable terms, (2) the potential volatility in mba's projected EOL amounts owing to uncertainty around utilization of the aircraft during the lease terms, and (3) the probability of lessee defaults prior to lease expiry.STRENGTH OF TRANSACTION STRUCTUREThis transaction structure includes some new features to support performance. Unlike prior aircraft lease ABS, note amortization schedules are specific to each asset in the pool, providing additional protection to noteholders for two reasons. First, prepayments of note principal from aircraft disposition proceeds or EOL payments at lease expiry will result in unscheduled note principal payments that will cause each notes' principal balance to remain ahead of its targeted amortization schedules. Second, each aircraft in the pool has its own CLTV ratio at closing, with the strongest aircraft (young or narrowbody) and/or lessees generally having a higher CLTV, and the weakest aircraft (older or widebody) and/or lessees, a lower CLTV. Also, the debt amortization schedules attached to weaker assets are faster protecting noteholders from the risk that weaker credits default, exposing the deal to re-leasing risk.The transaction also includes triggers that will benefit the class C noteholders. These triggers include a class C partial cash sweep, where a portion of available funds are used to repay the class C notes in years four through seven. This repayment is in addition to the class C scheduled principal payment. In addition, the deal includes early amortization triggers that if breached will result in interest and principal on the class C notes being paid only after the class A and class B are paid in full, but before the E-Certificates. One such trigger will be breached if the number of aircraft in the portfolio falls below eight, mitigating tail risk in the transaction. Similar to other aircraft lease ABS transactions, the E-Certificates receive a portion of the transaction cash flows assuming a senior rapid amortization trigger has not been breached.Furthermore, the deal includes a class C-specific reserve account that will be fully funded at closing and will be used to cover shortfalls on interest and principal on the class C notes. The account will be replenished up to a maximum amount that steps up over time.QUANTATIVE MODELING ASSUMPTIONSInitial value: Moody's initial assumed maintenance-adjusted value of the aircraft in the portfolio is $646.5 million. Moody's initial maintenance-adjusted value assumed value is equal to the minimum of (i) three half-life market value appraisals provided by the issuer (mba, IBA Group Ltd., and Aircraft Information Services, Inc.), using mba's maintenance adjustment, and (ii) half-life market values provided by two independent appraisal firms that we traditionally use, using mba's maintenance adjustment. Moody's initial assessed maintenance-adjusted half-life market value is 19% lower than the average maintenance adjusted half-life base values provided by the issuer. In commercial aviation industry downturns, half-life market values are typically lower than half-life base values because base values look through the cycle.Lessee defaults: In simulating lessee defaults, we use a Monte Carlo simulation that accounts for each airline's default probability. Lessee defaults are correlated using an approach similar to CDOROM. For initial lessees, we inferred the probability of default of each airline (or any guarantor) using either its (1) actual credit rating where available (53% of the initial contracted lease rent, having a weighted average (WA) rating of around Ba2), (2) credit estimate where available (14% of the initial contracted lease rent, with a WA credit estimate of around B3) after applying required notching downward as per "Moody's Approach to Using Credit Estimates in Its Rating Analysis," March 2020) or (3) a default probability equivalent to a low speculative-grade rating for non-rated lessees ranging from Caa2 to B3 (33% of the initial contracted lease rent, with a WA default probability of Caa1). When an aircraft is re-leased to a new lessee in our asset model, Moody's assumed that the new lessee has a default risk equivalent to a low speculative-grade rating of B3.EOL payments: Moody's assumed a 30% haircut to all projected EOL payments to account for volatility in mba's estimate and maintenance required to attract a new lessee. Moody's also reduced the resulting amounts by each lessee's default probability.Payment deferrals: Leases on partial payment deferrals are attached to around 30% of the aircraft in the pool (by Moody's initial value). Moody's also deferred an additional 25% of lease rent until the end of 2022, followed by a recovery of 75% of the deferred rent in 2023, given the ongoing stressed operating environment resulting from the COVID pandemic.Recession timing: Moody's typically assumes a downturn occurs once every 10 years and lasts for 3 years, roughly consistent with historical experience. The timing of the first assumed recession is equally weighted for each of the 10 years after closing. Consequently, in our analysis, a typical aircraft lease securitization will experience two or three downturns during its lifetime.Remarketing and repossession periods: For a return of an aircraft at lease expiry, Moody's assumes aircraft downtime of five months outside of a recession and eight months during a recession. For a lease default and aircraft repossession, we assume aircraft downtime of eight months outside of a recession and 11 months during a recession. These periods are at the high end of our indicative assumptions owing to the pandemic.Economic useful life: All aircraft in the portfolio follow our indicative assumptions, except for one 17-year A320-200 and one 14-year B777-300 ER, which have an assumed economic useful life of 19 years.Please see our aircraft lease ABS methodology for our indicative model assumptions that are not mentioned above.ESG CONSIDERATIONSEnvironmental riskThe environmental risk for this transaction is moderate. Current and future carbon and air emission regulations for airplanes could make older and fuel inefficient aircraft more expensive to operate, or require retro-fits that may still make them less attractive to airlines, reducing demand for these aircraft. The lower demand could (1) negatively affect both the values and lease rates of aged aircraft, and (2) relegate older aircraft to airlines with lower credit quality or those operating in jurisdictions where regulations have not been implemented. The transaction has a long legal final maturity and is therefore exposed to regulatory changes. However, these risks are mitigated by the sizable contractual cash flows of the initial leases, as well as the transaction structure, which accelerates note amortization with the receipt of EOL payments and disposition proceeds.Social riskThe social risk for this transaction is moderate. The ongoing global coronavirus pandemic, which we regard as a social risk under our ESG framework, will continue to negatively affect global air travel, resulting in (1) lower demand for aircraft and therefore depressed aircraft lease rates and values, higher risk of extended remarketing periods and accelerated retirements of older aircraft, and (2) weakened credit quality of airline lessees, elevating the risk of bankruptcies, additional lease payment deferrals and re-leasing risk. We expect a full recovery in global air travel demand to 2019 levels until 2024. However, the vast majority of the aircraft in the portfolio have leases that will not expire until after 2024 when the commercial aviation industry recovers, protecting the transaction from near-term COVID-19-related asset risks. In addition, in its cash flow analysis, Moody's considered the depressed values as the initial values and assumed elevated default risk for the initial lessees to reflect pandemic-related risks.The coronavirus outbreak, the government measures put in place to contain it, and the weak global economic outlook continue to disrupt economies and credit markets across sectors and regions. Our analysis has considered the effect on the performance of corporate assets from the current weak US economic activity and a gradual recovery for the coming months. Although an economic recovery is underway, it is tenuous, and its continuation will be closely tied to containment of the virus. As a result, the degree of uncertainty around our forecasts is unusually high.We regard the coronavirus outbreak as a social risk under our ESG framework, given the substantial implications for public health and safety.Governance riskThis securitization's governance risk is moderate and typical of other aircraft lease transactions in the market. As described in our publication "Governance considerations are a key determinant of credit quality for all issuers," September 2019, we examine five governance considerations in our analysis as described below. Governance risks are mitigated by this transaction's structure, documentation and characteristics of the transaction parties.1) Financial strategy and risk management -- this transaction limits the ability of the issuers and their respective subsidiary asset entities to engage in activities other than the ones related to the underlying assets and this transaction.2) Management credibility and track record -- While the sponsor and servicer are not rated by Moody's, the legal structure and documentation of the transaction mitigates the governance risk.3) The organizational/transaction structure -- These transaction's issuers are structured as bankruptcy-remove special purpose entities. The transaction could have misalignment of interests among the transaction parties, and specifically between the holder(s) of the Class E-Certificates and the noteholders. For instance, the servicer may execute aircraft sales upon direction from the E-certificate holders that are disadvantageous to noteholders providing a portion of the sales proceeds to the equity.4) The board structure -- includes a board of directors for the issuers, with one independent director, that makes decisions to maximize the value of the collateral, such as disposing of aircraft at favorable prices, restructuring leases to prevent defaults, or finding a replacement servicer. The deal has an independent trustee, managing agent, and paying agent. The independent directors, however, are not from a nationally recognized corporate services provider.5) Compliance and reporting - this securitization's consistency and quality of reporting in the form of servicing reports.In addition, Moody's notes that this securitization has no objective standard of care for the servicer. Furthermore, the servicer may have potential conflicts of interest in servicing the securitization aircraft because it also services its own aircraft portfolio. However, the servicer covenants not to discriminate among the securitization assets and its own assets, partially mitigating this governance risk.PRINCIPAL METHODOLOGYThe principal methodology used in this rating was "Moody's Global Approach to Rating Securities Backed by Aircraft and Associated Leases" published in July 2020 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBS_1232482. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.Factors that would lead to an upgrade or downgrade of the rating:UpFactors that could lead to an upgrade of the ratings on the notes are (1) collateral cash flows that are significantly greater than our initial expectations and (2) significant improvement in the credit quality of the airlines leasing the aircraft. Moody's updated expectations of collateral cash flows may be better than its original expectations because of lower frequency of default by the underlying lessees, recovery in aircraft values owing to stronger global air travel demand, lower than expected depreciation in the value of the aircraft that secure the obligor's promise of payment, and higher realization of EOL payments that are used to prepay the notes. As the primary drivers of performance, positive changes in the global commercial aviation industry could also affect the ratings.DownFactors that could lead to a downgrade of the ratings on the notes are (1) collateral cash flows that are materially below our initial expectations and (2) a significant decline in the credit quality of the airlines leasing the aircraft. Other reasons for worse-than-expected transaction performance could include poor servicing of the assets, for example sales disadvantageous to noteholders, or error on the part of transaction parties. Moody's updated expectations of collateral cash flows may be worse than its original expectations because of a higher number of lessee defaults or greater than expected deterioration in the value of the aircraft that secure the obligor's promise of payment owing to weak global air travel demand, and lower than expected realization of EOL payments. Transaction performance also depends greatly on the strength of the global commercial aviation industry.REGULATORY DISCLOSURESFor further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.Further information on the representations and warranties and enforcement mechanisms available to investors are available on http://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBS_1263596.The analysis relies on a Monte Carlo simulation that generates a large number of collateral loss or cash flow scenarios, which on average meet key metrics Moody's determines based on its assessment of the collateral characteristics. Moody's then evaluates each simulated scenario using model that replicates the relevant structural features and payment allocation rules of the transaction, to derive losses or payments for each rated instrument. The average loss a rated instrument incurs in all of the simulated collateral loss or cash flow scenarios, which Moody's weights based on its assumptions about the likelihood of events in such scenarios actually occurring, results in the expected loss of the rated instrument.Moody's quantitative analysis entails an evaluation of scenarios that stress factors contributing to sensitivity of ratings and take into account the likelihood of severe collateral losses or impaired cash flows.For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.The rating has been disclosed to the rated entity or its designated agent (s) and issued with no amendment resulting from that disclosure.This rating is solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1243406.At least one ESG consideration was material to the credit rating action(s) announced and described above.The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the UK and is endorsed by Moody's Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating. Gideon Lubin Vice President - Senior Analyst Structured Finance Group Moody's Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A. 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MJKK and MSFJ are credit rating agencies registered with the Japan Financial Services Agency and their registration numbers are FSA Commissioner (Ratings) No. 2 and 3 respectively.MJKK or MSFJ (as applicable) hereby disclose that most issuers of debt securities (including corporate and municipal bonds, debentures, notes and commercial paper) and preferred stock rated by MJKK or MSFJ (as applicable) have, prior to assignment of any credit rating, agreed to pay to MJKK or MSFJ (as applicable) for credit ratings opinions and services rendered by it fees ranging from JPY125,000 to approximately JPY550,000,000.MJKK and MSFJ also maintain policies and procedures to address Japanese regulatory requirements. ​