CIT Aviation Finance III Ltd.

Transcription

1 Presale: CIT Aviation Finance III Ltd. Primary Credit Analyst: Jing Xie, CFA, New York (1) ; Secondary Contacts: Weili Chen, New York (1) ; Tracy Xie, New York; Corporate And Government Ratings: Betsy R Snyder, CFA, Credit Analyst, New York (1) ; betsy.snyder@standardandpoors.com Table Of Contents $640 Million Class A-1 Asset-Backed Notes Series Transaction Overview Rationale Transaction Strengths Transaction Weaknesses Mitigating Factors Notable Features Legal Structure Portfolio Details Aircraft Asset Analysis Aircraft Maintenance JUNE 30,

2 Table Of Contents (cont.) Lessee Analysis Aircraft Leasing Business Outlook Servicer/Lessor Review Other Service Providers Payment Priority Events Of Default Cash Flow Analysis Assumptions Maintenance Cash Flow Assumptions Cash Flow Analysis Results Sensitivity Analysis Surveillance Standard & Poor's 17g-7 Disclosure Report Related Criteria And Research JUNE 30,

3 Presale: CIT Aviation Finance III Ltd. $640 Million Class A-1 Asset-Backed Notes Series This presale report is based on information as of June 30, The rating shown is preliminary. This report does not constitute a recommendation to buy, hold, or sell securities. Subsequent information may result in the assignment of a final rating that differs from the preliminary rating. Preliminary Rating As Of June 30, 2014 Class Preliminary rating Preliminary amount (Mil. $) A-1 A (sf) (i) The rating is preliminary and subject to change at any time. Transaction Overview The class A-1 notes issued by CIT Aviation Finance III Ltd. (CAF 3), an exempted company incorporated under the law of Bermuda and Irish tax resident, are backed by a portfolio of 28 commercial passenger aircraft and their related leases. The 28 aircraft are 21 narrow-body planes (11 B /-800, nine in the A320 family, and one B ), four wide-body planes (A /-300), and three regional jets (ERJ-195) with a 6.1-year weighted average age. At closing, all the aircraft are on lease to 20 airlines worldwide, with a 7.1-year weighted average remaining lease maturity. CIT Aerospace International and certain affiliates--including CIT Aviation Finance I Ltd. (CAF 1), CIT Aviation Finance II Ltd. (CAF 2), and C.I.T. Leasing Corp.--are the sellers. CIT Aerospace International will be the servicer of these aircraft. Similar to the rated obligations in AABS Ltd., Emerald Aviation Finance Ltd. (Emerald), and RISE Ltd., the class A-1 notes follow a 16-year straight-line amortization, and after the scheduled final payment date (July 20, 2021), they will have accelerated principal payments if they are not refinanced. This means there will be no distribution to equity investors until the class A-1 notes are paid off. Profile Expected closing date July 3, 2014 Borrower Collateral Seller Servicer Manager Trustee Liquidity facility provider Cash manager Structuring agent CIT Aviation Finance III Ltd. A portfolio of 28 commercial passenger aircraft and their related leases CIT Aerospace International and its affiliates, including CIT Aviation Finance I Ltd., CIT Aviation Finance II Ltd., and C.I.T. Leasing Corp. CIT Aerospace International C.I.T. Leasing Corp. Deutsche Bank Trust Co. Americas Credit Agricole CIB Deutsche Bank Trust Co. Americas Goldman, Sachs & Co. JUNE 30,

4 Profile (cont.) Joint lead arrangers Goldman, Sachs & Co. and Credit Agricole Securities Rationale The preliminary rating assigned to CIT Aviation Finance III Ltd.'s (CAF 3's) class A-1 asset backed notes series (class A-1 notes) reflects: The aircraft collateral's value and favorable rent-generating potential. The initial and future lessees' estimated credit quality. The 68.94% loan-to-value (LTV) ratio for the class A-1 notes. (We base this figure on the mean and median of the aircraft half-life base values and half-life market values, whichever is lower.) The transaction's legal structure, which is expected to be bankruptcy remote. Our projections regarding the timely interest (excluding the step-up amount) and the ultimate principal payments on the class A-1 notes, which we assessed using our cash flow analysis and assumptions commensurate with the preliminary rating. CIT Aerospace International's servicing ability. The senior liquidity facility covering at least nine months' interest (excluding the step-up amount) on the class A-1 notes provided by Credit Agricole CIB. Our rating on the class A-1 notes addresses timely interest (excluding the step-up amount) and ultimate principal payments on or before the rated note's legal final maturity date (which is 25 years after the transaction's closing date). The step-up amount is payable only after the class A-1 notes are paid in full. According to the transaction documents, the failure to pay the step-up amount if there is insufficient available cash is not considered an event of default. Transaction Strengths The transaction's strengths include: Most of the aircraft in the portfolio are among the newest and most popular commercial jets in the aviation market. These aircraft tend to have strong liquidity, and it is relatively easy to lease them. The servicer, CIT Aerospace International, is an experienced global aircraft lessor with a demonstrated history of servicing aircraft asset-backed securities (ABS) transactions, such as CAF 1 and CAF 2. The transaction has performance triggers, including aircraft utilization (75%) and DSC ratios (1.15x for cash sweep and 1.20x for cash trap), to speed up principal amortization or retain available cash if the trigger tests fail. The transaction has a maintenance reserve top-up mechanism based on a third-party appraiser's maintenance cash flow forecast. At closing, the transaction has a liquidity facility that covers nine months' interest on the class A-1 notes. As the class A-1 notes' outstanding balance amortizes, the liquidity facility maximum commitment will scale down accordingly until the scheduled final payment date, after which it will remain at the same size until the 15th anniversary of the closing date. Following the 15th anniversary of the closing date, the liquidity facility maximum commitment amount reverts back to cover nine months' interest on the class A-1 notes outstanding balance. Many lessees in the portfolio are in regions where the commercial aviation market has evolved rapidly during the past few years and have positive long-term growth prospects. JUNE 30,

5 The lease rate (1.04%), as measured by the portfolio's weighted average lease rate factor based on aircraft half-life value, is higher than those in other recently rated aircraft transactions. Transaction Weaknesses The transaction's weaknesses are: Cyclical demand, aircraft lease rates, and customer airlines' often weak credit quality are inherent risks in the aircraft leasing business. Although lease rates for certain aircraft types have been under pressure over the past few years, there is recent evidence that lease rates have stabilized or are even beginning to improve. In addition, economic weakness in the eurozone, which resulted in many airline bankruptcies and aircraft repossessions for aircraft lessors, has abated since early Furthermore, access to capital, which was a concern when European banks reduced lending to the aviation sector in 2011, has continued, with many banks worldwide (including in Europe) and capital markets transactions accounting for larger shares of industry financing. Many of the lessees have low credit quality, which is typical for aircraft lease securitizations. Although this fleet comprises generally popular aircraft, it is less diverse than other aircraft ABS portfolios. The 28-aircraft portfolio is among the smaller ones in aircraft lease-backed ABS transactions, though it is similar in size to recently rated transactions. The small size resulted in relatively high concentrations among the top lessee and countries. Of the 28 aircraft-owning SPEs, 21 are pre-existing SPEs that are owned by CAF 1, CAF 2, or other CIT affiliates prior to the closing of this transaction. A potential liability claim arising from the pre-existing SPEs' prior activities could have a negative impact on this new transaction. Mitigating Factors The transaction's weaknesses are partially mitigated by: Our cash flow assumptions, which consider the initial and future lessees' credit quality as well as the lessee and aircraft model concentrations. The assumptions stress lessee default, lease rates, and aircraft residual value. In addition to our June 2010 published standard cash flow stress assumptions, we are incorporating sensitivity analyses focused on end-of-useful-life assumptions (with shorter lives and lower cash flow for the selected models) and lease rates. Although the portfolio is not well diversified by aircraft type, the concentration is in favorable, easy-to-lease aircraft. To cover the potential liability claims arising from the pre-existing SPEs' prior activities, we applied a $100,000 additional expense per aircraft when the initial lease of the aircraft under the pre-existing SPE that owns the aircraft defaults in our rating run. Notable Features Aircraft substitution To limit the potential risk of adverse selection, the following conditions are expected to be met to substitute any aircraft in the portfolio: The aircraft substitution can only occur before the scheduled final payment date. JUNE 30,

6 The substitution doesn't cause a concentration default. The substitution doesn't result in fewer aircraft. (The exception: Substitutions may result in fewer aircraft as long as the added aircraft are A319, A , A , A330, A350, B , B , B ER, B ER or B787 and the total number of the aircraft as a result of such substitutions is not reduced, in the aggregate, by more than two.) The added aircraft is not in a freighter configuration and is manufactured by Boeing, Airbus, or Embraer. (Only the Embraer 190, 195, and E2 qualify as added aircraft, and the issuer may not own more than four Embraer aircraft.) The added aircraft must be manufactured no earlier than 12 months before the manufacture date of the substituted aircraft. The added aircraft is subject to a lease having an aggregate rental payment for the remaining lease term with a present value that is no less than 90% of the present value of the aggregate rental payments for the remaining lease term of the substituted aircraft. The added aircraft has an average base value equal to or greater than the substituted aircraft's average base value. The added aircraft is subject to a lease containing the core lease provisions, and the remaining lease term is greater than or equal to the lesser of the remaining lease term of substituted aircraft or the date that is 18 months after the scheduled final payment date. The aggregate average base value of all aircraft to be substituted shall not at any time exceed 30% of the aggregate average base value of all the initial aircraft as of the closing date. Legal Structure CIT Aviation Finance III Ltd. is a bankruptcy-remote special-purpose vehicle newly established in Bermuda. It is a resident in Ireland for tax purposes. In addition to the class A-1 notes, CAF 3 will also issue class E-1 notes and class A shares. The class E-1 notes will be held by CIT Transportation Holdings B.V. (CIT Holdings), a private company with limited liability incorporated under the laws of the Netherlands. Of CAF 3's class A shares, 90% are held by a charitable trust, and the remaining 10% of the class A shares are owned by CIT Holdings. Similar to other aircraft securitization transactions, CAF 3 is not expected to directly own any aircraft. Rather, it will own 100% of the beneficial interest in each of the 28 aircraft-owning SPEs that in turn own the 28 aircraft. Among the 28 aircraft-owning SPEs, 21 are not newly established. CAF 3 will have a board of three directors with at least one independent director. As security for their obligations, CAF 3 and its subsidiaries will pledge the following to the security trustee: The interests in the aircraft and engines; The beneficial interests in the aircraft-owning entities and in certain other wholly owned subsidiaries; The leases and associated payments; The accounts; The cash on hand and invested cash; The interests under any currency hedge agreements and the liquidity facility; Certain other collateral; and The collateral proceeds. Chart 1 below shows the ownership structure. JUNE 30,

7 The CAF 3 transaction features the registration of interests under the Cape Town Convention and its related aircraft equipment protocol (the Convention). The Convention is an international treaty that creates a centralized, electronic registry for interests--called international interests--in "aircraft objects" like those in the portfolio. When international interests are created and assigned, they must be registered under the Convention to ensure that the interests and their relative priorities are effective against other subsequently registered international interests. Each aircraft owner is located in a contracting state under the Convention. They are expected to pledge interest in their aircraft and engines to the security trustee, which is expected to be registered as an international interest under the Convention. Other interests in the aircraft that may be registered under the Convention include certain lease agreements, head-lease agreements, sale contracts, and international interest assignments. Similar to other aircraft securitization transactions, local law mortgages generally will not be filed in the aircraft registries where the aircraft are registered, even though security interests will be granted under the security agreement JUNE 30,

8 and, in some cases, registered under the Convention. If the security granted under the security agreement is not effective in a local jurisdiction because a mortgage has not been filed, then a registration under the Convention would not necessarily enable creditors to exercise certain direct rights and remedies regarding the aircraft. However, if an international interest under the Convention is created but not registered, then the unfiled interest could be primed by a subsequently filed international interest in terms of the international registry priority scheme. Pre-existing aircraft-owning special-purpose entities (SPEs) Twenty-one aircraft in this portfolio are each owned by a pre-existing aircraft owning SPE. There is risk associated with potential liabilities arising from a pre-existing SPE's previous leasing activities. To address this issue, CIT Aerospace International provided an officer's certificate stating that the officer is not aware of any lawsuit or legal proceeding on any aircraft owning SPEs sold by CAF 1 and CAF 2. C.I.T. Leasing Corp. provided a similar officer's certificate on the aircraft-owning SPEs sold by CIT Aerospace International and its affiliates (excluding CAF 1 and CAF 2). However, the current lessees of the related 21 aircraft have not provided such officer's certificates. To address this potential risk, we added $100,000 to each aircraft's repossession cost if any of the 21 initial leases defaults in our rating runs. Portfolio Details The portfolio's initial appraised value (LMM of the half-life base values and half-life current market values) was $928,388,118 as of March 31, Ascend Aviation LLC, Avitas Inc., and BK Associates Inc. provided the appraisals. Unlike the maintenance-adjusted value, which reflects an aircraft's actual technical status and maintenance condition, the half-life value assumes that an aircraft is halfway between major maintenance overhauls. We use the half-life value in our analysis to project future lease rental and sale proceeds because it does not consider an aircraft's actual maintenance status at any point in time, so it does not fluctuate as much as the maintenance-adjusted value does. At closing, the aircraft are expected to be leased to 20 lessees in 12 countries. The portfolio comprises primarily used popular narrow-body, wide-body, and regional aircraft manufactured by Boeing, Airbus, and Embraer. The fleet contains approximately 33.17% Boeing /-800 narrow-bodies, 23.38% Airbus 319/320/321 narrow-bodies, 32.17% Airbus /-300 wide-bodies, 9.25% Embraer ERJ195 region jets, and 2.03% Boeing narrow-body aircraft (see Table 1). Table 1 Portfolio Compositions At Closing (i) CIT Aviation Finance III Ltd. RISE Ltd. Emerald Aviation Finance Ltd. AABS Ltd. No. of aircraft Weighted avg. age (years) Developing market exposure (%) Narrow-bodies/wide-bodies/cargo/regional jet (%) 58.6/32.2/0/ /8.7/0/0 72.7/20.8/0/ /0.0/0.0/0.0 Largest initial country concentration (%) Canada (23.66) China (17.21) U.S. (19.02) U.S. (16.54) JUNE 30,

9 Table 1 Portfolio Compositions At Closing (i) (cont.) Largest initial lessees (%) Sunwing Airlines (13.01) Avianca (12.63) Virgin Atlantic (11.70) Royal Air Maroc (15.64) CIT Aviation Finance I Ltd. Aircraft Lease Securitisation Ltd. (2007) Genesis Funding Ltd No. of aircraft Weighted avg. age (years) Developing market exposure (%) Narrow-bodies/wide-bodies/cargo/regional jet (%) 82.5/17.5/0.0/0.0 80/16/4/0 79/7/11/3 Largest initial country concentration (%) U.K. (19.70) U.K. (11.58) China (20.70) Largest initial lessees (%) Thomas Cook (9.60) Air Berlin (7.54) Air China Cargo (8.90) (i) All percentages and averages are weighted by the aircraft initial appraised values. Aircraft Asset Analysis More than half of the aircraft (by half-life value) in the CAF 3 portfolio are newer-technology narrow-body commercial passenger planes, which are among the most liquid aircraft assets. The portfolio also has a significant exposure to wide-body passenger planes (32% of the aircraft portfolio value), which is higher than that in other recently rated aircraft ABS transactions. The aircraft's weighted average age is 6.1 years (see Table 2). Table 2 Aircraft Portfolio Composition By Type Aircraft Aircraft value (%) No. of aircraft A A A A A B B B ERJ Total Approximately 32% of the portfolio's value consists of Boeing's B narrow-body jets. The B , a midsize narrow-body plane, is Boeing's most popular aircraft. Given the plane's modern technology, its wide user base, and the expectation that demand will exceed supply over the next several years, we consider it to be one of the most desirable models from a collateral standpoint. To compete with Airbus's new A320 NEO family of aircraft, Boeing has launched the B737 MAX, a successor to the B737 NG with a remodeled engine. Although successor planes will eventually pressure B values, Boeing JUNE 30,

10 doesn't expect to deliver the new MAX model until 2017, and replacing all of the current B747 NG's will take many years. We see both developments as a moderate threat to aircraft values, and we incorporated this into our collateral evaluation. Airbus models 319, 320, and 321 (all members of the A320 family) make up about 23% of the portfolio value. The A320, a medium-sized narrow-body jet introduced in 1989, remains one of the most widely used and marketable aircraft. The A319 is a similar but slightly smaller model introduced in The A321, introduced in 1988, is also similar but slightly larger. The A has not been as successful as the A320 or smaller A319 but nonetheless is operated by 67 airlines worldwide, many more than Boeing's competing B ER (although the latter is a newer model and thus has had less time to attract orders). All three models, but particularly the A320, have broad airline user bases that would likely attract many potential lessees if an aircraft in the portfolio is repossessed from its original lessee. Airbus plans to introduce a new engine option (NEO) version of these planes starting in 2015, but replacing all of the current A320s and A321s will take many years. There is some concern among leasing companies and investors of aircraft-backed debt that Airbus's plans to increase production rates on the current version of the A320 family will hurt resale values. We see both of these developments as moderate threats to aircraft values, and we incorporated this into our collateral evaluation. Since 2009, lease rates for these aircraft have been under more pressure than the rates for the comparable (but slightly larger) Boeing , but they have recently stabilized or even modestly recovered. We believe that this is because of the larger supply of A320s and the substantial number that leasing companies own. Because leasing companies own a relatively high proportion of the global fleet, there are more repricing opportunities, and the market is usually more competitive as a result. Leasing companies tend to re-lease their aircraft after three to seven years. (By contrast, airlines typically keep their planes for much longer.) The relatively high turnover also tends to hurt aircraft values and lease rates. Two Airbus s account for approximately 21.5% and two Airbus A s account for approximately 10.7% of the portfolio's value. The A and A are popular Airbus widebodies operated globally. However, they compete in the global aircraft market with the B787, which incorporates newer technology. The A , which is a larger version of the A , has become quite popular in Asian markets. Approximately 9% of the portfolio's value consists of three Embraer 195 regional jets. The ERJ195 is the largest aircraft in the Embraer regional jet family. It is an extended version of the ERJ190, though it's not as popular as the ERJ190, which has longer range capability. Aircraft Maintenance Aircraft maintenance, which is heavily regulated, is essential in keeping aircraft in serviceable and reliable condition. An aircraft's maintenance status is also important in determining its value, especially for older aircraft. Depending on the type of work needed, aircraft maintenance, such as Airframe maintenance, airframe component maintenance, and engine maintenance (including engine performance restorations and limited part replacements) can be very costly. Lessors typically manage their exposure to maintenance expenses by either requiring lessees to pay maintenance JUNE 30,

11 reserves (also referred to as maintenance or utilization rent) during the lease or requiring an end-of-lease maintenance adjustment payment. In the case of the former, lessors typically calculate the regularly collected maintenance reserves based on flight hours and flight cycle. When due, lessees typically have the maintenance work done, pay the maintenance provider, and then claim a reimbursement from the lessor from the maintenance reserve account. In the case of the latter, if the lessee defaults on the lease and doesn't pay an end-of-lease maintenance adjustment payment, the lessor will have to bear the maintenance cost when the aircraft is returned. For the CAF 3 portfolio, the initial aircraft leases contain provisions specifying maintenance standards and the aircraft's required condition on redelivery. All of the initial 28 leases require either payment of monthly cash maintenance reserves or a letter of credit to secure maintenance obligations. Lessee Analysis A majority of the lessees are in emerging markets with growing commercial aviation sectors (see Table 3). Sunwing Airlines is the largest lessee (accounting for 13.01% of the portfolio value), and Cebu Air is the second-largest (10.88%). We estimate the initial airline lessees' overall credit quality to be well into the speculative-grade range, which is typical for aircraft operating lease portfolio securitizations. Our airline default modeling assumptions were similar to those we've used for rating most aircraft operating lease securitizations. Table 3 Lessee Country Distribution Country Aircraft value (%) No. of aircraft Canada Brazil South Korea Philippines Russia Poland Mexico U.K Turkey Hong Kong Iceland Serbia Total Aircraft Leasing Business Outlook Airbus and Boeing forecasts predict that airline passenger traffic will grow approximately 5% per year through 2032, with most of the growth coming from the Middle East and Asia-Pacific regions. Over this period, Airbus forecasts that it will deliver 28,355 new passenger aircraft, and Boeing forecasts 35,280. They will deliver most of the aircraft to JUNE 30,

12 either Asia-Pacific and emerging markets to meet demand or to North America and Europe to replace aging aircraft. The number of lessor-owned aircraft has been steadily growing. Operating leases currently account for about 40% of the global commercial fleet, and this figure could grow to approximately 50% over the next five to 10 years. Aircraft leasing is attractive to airlines because if they don't need to outlay as much capital, it gives them flexibility in fleet planning and delivery location availability as well as eliminating any risk relating to residual value. Since Jan. 1, 2013, when the higher pricing and equity contributions became effective and resulted in increased export credit financing costs for aircraft, many airlines have found it more cost efficient to lease aircraft. We expect lessors to take over some airline orders for new aircraft through sale/leaseback transactions because of this development and because their generally better creditworthinesscould give them continued access to capital at more attractive pricing than many airlines. The recent European sovereign debt crisis forced some banks to reduce their involvement in traditional aircraft bank lending, which had been a major source of funding for aircraft lessors and the aviation industry. As a result, since 2011 many aircraft lessors have turned to the capital markets to raise secured and unsecured debt to fund new aircraft deliveries and refinance debt maturities. More recently, many European banks have increased their lending to the sector. Banks in other regions, particularly Asia, have also either increased their lending or entered this segment for the first time, and some aircraft lessors have obtained equity investments. Early in 2013, Onex invested in Fly and its affiliate BBAM, and in July 2013, Fly received proceeds of $184 million from a secondary offering. Marubeni also invested $209 million in Aircastle in July In May 2014, AerCap acquired competitor International Lease Finance Corp. (ILFC). The combined organization is the second-largest aircraft lessor behind GECAS (ILFC was the second-largest prior to the acquisition). In early June 2014, Avolon filed for an IPO. Servicer/Lessor Review CIT Aerospace International, under the transportation finance segment of CIT Group Inc. (BB-/Positive/B), is the servicer for this transaction. CIT Aerospace International is primarily an operating lessor of 270 aircraft ($8.4 billion), and it has more than 100 lending and leasing clients in 50 countries. CIT Aerospace International will provide the transaction with re-lease remarketing, aircraft sales, and other professional services. Standard & Poor's Ratings Services currently rates seven other aircraft lessors that have corporate credit ratings that range from 'BBB' to 'BB'. CIT Aerospace International's ability to re-lease aircraft in a timely manner and dispose of aircraft approaching the end of their useful lives is critical for maximizing this transaction's cash flows. We believe its competency in this regard is adequate. Other Service Providers Manager C.I.T. Leasing Corp. will act as the manager and will provide certain administrative, accounting, reporting, and other services to CAF 3. These include preparing and arranging for all regulatory and other filings on CAF 3's behalf. JUNE 30,

13 Cash manager As cash manager, Deutsche Bank Trust Co. will provide certain cash management and other services to the issuer. Maintenance appraiser ICF International Inc., an international air transport consulting firm, forecasts the CAF 3 aircraft portfolio's maintenance-related cash flows over the aircrafts' remaining useful lives before the transaction closes, as well as annually thereafter, to account for any lease and maintenance reserve provisions when an aircraft is re-leased. This annual maintenance update is a new feature found in recent aircraft and engine lease transactions. We believe it will lead to a more stable cash flow if it is factored into the payment priority's maintenance reserve mechanism. Initial liquidity facility provider Credit Agricole CIB provides a liquidity facility that CAF 3 may draw on to pay senior expenses, senior hedge payments, and interest (excluding the step-up amount) on the class A-1 notes. Our 'A' credit rating on Credit Agricole CIB is consistent with the preliminary rating we have assigned to the class A-1 notes, per our counterparty criteria. Payment Priority Payment priority pre-default notice or acceleration default The available collection in the collection account is payable on each payment date in the following priority if no default notice has been delivered to the issuer and no acceleration default has occurred and is continuing (see Table 4). Table 4 Collection Account Payment Priority (Before An Event Of Default) Priority Payment 1 The required expense amount, which includes issuer expenses, ordinary course expenses, service provider fees, senior servicing fees, liquidity facility expenses, and indemnification amounts subject to a $10 million cap 2 Pro rata, the class A-1 note interest and any hedge payments (i) 3 Repay the liquidity facility advance obligations 4 Replenish the maintenance reserve account up to the required amount 5 The class A-1 notes' scheduled principal payment amount 6 The class A-1 notes' aircraft event shortfall amount 7 Class A share payment 8 If a DSCR cash trap event has occurred and is continuing, but no rapid amortization event has occurred and is continuing, all the remaining amounts to the DSCR cash trap account 9 If a rapid amortization event has occurred and is continuing, the class A-1 notes' outstanding principal amount 10 Special indemnity payments 11 Subordinated hedge payments (i) 12 After the scheduled final payment date, the subordinated servicing fees 13 After the scheduled final payment date, the step-up amount (5% of class A-1 notes, accruable) on the class A-1 notes 14 Discretionary modification payments or refinancing expenses 15 Net payments to the applicable seller relating to a non-delivery event or the delivery of substitute aircraft 16 All the remaining amounts to class E noteholders (i) At closing, there are no hedges or swaps in place in the transaction structure. LTV--Loan-to-value. JUNE 30,

14 A DSCR cash trap event means that on a payment date occurring on or after the sixth payment date after the initial closing date, the DSCR for that payment date or either of the two immediately prior payment dates equals less than 1.20x. A rapid amortization event is when one or any combination of the following exists regarding a payment date: A DSCR amortization event--the DSCR for a payment date or either of the two immediately prior payment dates is less than 1.15x; A utilization event--less than 75% of aircraft by number of aircraft is on lease on a payment date or either of the two immediately rior payment dates; and The occurrence of the scheduled final payment date. We assumed the $10 million senior indemnity payment cap amount will be paid out in the transaction's first year in the cash flow tests we applied to the transaction. Payment priority following default notice or acceleration default The available collection in the collection account is payable on each payment date in the following priority after either the delivery to the issuer of a default notice or the occurrence of an acceleration default (see Table 5). Table 5 Collection Account Payment Priority (Following An Event Of Default) Priority Payment 1 The required expense amount, which includes issuer expenses, ordinary course expenses, service provider fees, senior servicing fees, liquidity facility expenses, and indemnification amounts 2 Repay liquidity facility advance obligations 3 Class A-1 notes interest and any hedge payments (i) 4 Class A share payment 5 The class A-1 notes' outstanding principal balance 6 After the scheduled final payment date, the subordinated servicing fees 7 After the scheduled final payment date, the step-up amount (5% of class A-1 notes, accruable) to the class A-1 notes 8 Special indemnity payments 9 Subordinated hedge payments (i) 10 Net payments to the applicable seller relating to a non-delivery event or the delivery of substitute aircraft 11 All the remaining amounts to class E noteholders (i) At closing, there are no hedges or swaps in place in the structure. Aircraft disposition distribution Provided that no default notice has been delivered to the issuer and no acceleration default has occurred, the aircraft net sale proceeds or total loss proceeds will be distributed according to the following payment priority. Table 6 Aircraft Disposition Distribution Priority Payment 1 Any liquidity facility advance obligations payable 2 An amount equal to 107% of the class A-1 notes' allocable note balance related to such aircraft 3 Hedge termination payments( i) regarding such aircraft dispositions JUNE 30,

15 Table 6 Aircraft Disposition Distribution (cont.) 4 Unpaid sales fees 5 Aircraft event shortfall amount to the class A-1 noteholders 6 Disposition premium to the class A-1 noteholders 7 If a DSCR cash trap event has occurred and is continuing but no rapid amortization event has occurred and is continuing, all the remaining amounts to the DSCR cash trap account 8 If a rapid amortization event has occurred and is continuing, the outstanding principal balance of the class A-1 notes 9 After the scheduled final payment date, the step-up amount to the class A-1 notes 10 The remaining amounts to the class E noteholders (i) At closing, there are no hedges or swaps in place in the structure. Events Of Default Any of the following constitutes an event of default: The issuer fails to pay timely interest (other than the step-up amount) on the class A-1 notes, and it is not cured within five business days; The issuer fails to pay the class A-1 notes' principal or fails to pay all accrued and unpaid interest (other than the step-up amount) on the class A-1 notes on the final maturity date; The issuer fails to pay any amount (other than the class A-1 notes' stated interest) when due and payable on any notes to the extent that amounts are available in the collections account and default continues for five or more business days; CAF 3's representations or warranties fail under the transaction documents; Insolvency (voluntary or involuntary) relating to the borrower and its subsidiaries; or Judgments or payment orders against the issuer exceeding 5% of the adjusted portfolio value. Cash Flow Analysis Assumptions To assess the portfolio's ability to service the class A-1 notes, we conducted our own stress tests built around a few deterministic scenarios. The stress test assumptions include: Lessee defaults; Reduced rental rates on leases during a recession; Diminishing aircraft residual value during a recession; The repossessed aircraft's off-lease time period; New leases' shortened term; Remarketing/reconfiguration/repossession costs; Deferred maintenance; and Reduced security deposit requirements. Lessee defaults assumptions In general, we assume one recession will occur in every seven- to 10-year commercial aviation industry cycle, which reflects the industry's historical averages. The portfolio's aircraft are assumed to have a 25-year useful life. Therefore, we modelled three recessions, each four years long. During the first two modeled recessions, we stress both the lease JUNE 30,

16 rates and residual values. For the last downturn, when we believe most of the planes in the portfolio will have reached the end of their useful lives, we stress only the residual values, as the majority of the cash flow during this recession is likely to be generated from the aircraft's sale. We use a Monte-Carlo simulation model (Standard & Poor's CDO Evaluator) to project the default rate at the aircraft portfolio level. The simulation model inputs include lessee name, lessee credit quality, aircraft value, correlation within the airline industry, lessee country, country rating, and correlations among countries and regions. For airline lessees in the portfolio that we do not rate, we assess creditworthiness based on public information. In general, we view the airline industry as a "high risk" industry. Our assessment reflects our view of the sector's "high risk" cyclicality (based on observed cyclicality in revenue and profit margins) and its "moderately high risk" competitive risk and growth. This model enables us to address lessee industry, country, and region by running 500,000 correlated simulation scenarios to address the lease portfolio's concentration risk instead of setting a hard percentage limit on lessee, country, and region concentration. Under our default simulation model, a concentrated portfolio means a higher portfolio default rate and less generated cash flow. Once the model determines the portfolio default rate, we run a few deterministic default patterns, including defaulting by highest to lowest aircraft value, defaulting by lowest to highest credit quality lessee, and defaulting by highest to lowest lease rental. In all of the runs, defaulting by highest to lowest aircraft value usually provides the most onerous result, which we use as a rating run. Lease rates assumptions in and outside recessions We base the lease rates at times other than during recessions interest rates and aircraft age. During recessions, we stress lease rates and values by applying additional reductions to a projected base-case depreciated value. The magnitude of the decline in the lease rates and sales proceeds generally correlates with the aircraft model's liquidity and technology level, the servicer's remarketing and disposition capability, the aircraft diversification in the portfolio, and the rating on the transaction at various levels. Such declines reflect our view of a particular portfolio's ability during recessions to maintain cash flow consistent with the ratings on obligations that the portfolio backs. We intend this stress to reflect the lower residual values of the aircraft sold as well as the lower rental rates on planes re-leased during recessions. The model applies the full amount of the lease-rate decline during the second and third years of a four-year recession, but it applies only 50% in the first and last years of the recession. Repossession and remarketing period assumptions The repossession period is the time it takes for the lessor to repossess an aircraft or an aircraft engine if the defaulting lessee has not agreed to a voluntary return of the equipment. The remarketing period is the time necessary to find a new lessee once the lessor has taken back the aircraft. In summary, we assume that outside of a recession, an aircraft will be not leased out for three to six months. We increase that period to six to 12 months during a recession. Within a recession, we also assume a longer remarketing period. Repossession/remarketing/refurbishment (RRR) costs assumptions If a lessor has to repossess an aircraft or aircraft engine, it will typically incur various costs related to legal work, insurance, pilot expenses, fuel, storage, technical checks, and deregistration documents. These costs are in addition to the refurbishment or modifications necessary to re-lease the aircraft or the aircraft engine. We generally assume that JUNE 30,

17 wide-body planes have a higher RRR cost than narrow-body planes. In addition, passenger planes have higher RRR costs than freighters, and RRR costs often increase during a recession. Lease terms assumptions For re-leasing events, we typically assume lease terms of three to five years during a recession and five years outside of a recession. Security deposit assumptions If a lessee defaults, the issuer's security deposits held at the rated transaction's commencement could partially offset the RRR costs. We incorporate the security deposit into our modeling after reducing the amount by 10%-40% of the security deposits for initial leases (the higher percentage reductions correspond to the higher rating levels). For modeling purposes, we assume no security deposits for subsequent leases. Table 7 lists the above mentioned cash flow stress assumptions for this transaction at 'A' rating. Table 7 Typical Range Of Cash Flow Stresses For An Operating Lease Transaction Rating A (sf) Recession 1 start (months) 1 Recession 2 start (months) 109 Recession 3 start (months) 246 Length of recession (years) 4 Lessee defaults (Recession 1) (%) Lessee defaults (Recessions 2 and 3) (%) Value decline (Recession 1) (%) Value decline (Recessions 2 and 3) (%) Repossession/remarketing time (in recession) (months) 10 Repossession/remarketing time (outside recession) (months) 3 Lease term (in recession) (years) 3 Lease term (outside recession) (years) 5 Repossession costs (narrow-body passenger) ($) 500,000 in a recession; 350,000 outside a recession Repossession costs (wide-body passenger) ($) 1,500,000 in a recession; 1,000,000 outside a recession Maintenance Cash Flow Assumptions Maintenance cash flow is an integral part of our cash flow model. We input the aircraft maintenance cash flow (month-by-month maintenance reserves and expenses) that ICF International generates into our overall cash flow model and model the maintenance account activity per the maintenance account mechanism outlined in the transaction documents. For the initial fleet, the ICF International model forecasts each aircraft's utilization rates and conditions according to the existing contractual lease terms and projected future lease terms, together with the associated maintenance-related cash flows. Specifically, the model predicts the timing and lessor-related inflows and outflows associated with airframe (heavy checks), engine (performance restorations and life-limited part replacements), and component (landing gear JUNE 30,

18 and auxiliary power unit overhauls) maintenance. The model does not forecast cash flows related to remarketing, lease transition, repossession, etc. The ICF International analysis includes both base- and stress-case scenarios. The base-case scenario (a cash flow run without any stresses) assumes that: All aircraft remain subject to existing lease agreements through the initial leases' contractual expiration dates; Each aircraft will be re-leased to consecutive new lessees until it reaches its assumed retirement age; All payments are made in a timely manner; and There are no events of default. Under the stress-case scenarios, we provided ICF International with a set of assumptions including recessionary periods, default rate, RRR duration, and the length of the new lease. These assumptions are consistent with our assumptions for stressed cash flows, many of which are outlined in Table 7 above. Given the uncertainty as to how many new leases would require maintenance reserve payments after the initial leases mature, we assume that the number of leases that have maintenance reserve requirements will decline by 50% after the initial leases mature in the stress-case scenario. We further assume that aircraft subject to defaulted leases have had no major maintenance performed within the 12 months before the default, which means that the transaction will bear the cost of any required major maintenance. Using these assumptions and ICF International's assumptions on aircraft and engine maintenance expense timing, ICF International ran a set of Monte Carlo simulations involving 250 trials. The simulation varied the specific lease defaults and their timing, and it then took the average of the maintenance-related cash inflows/outflows. ICF International projected the total maintenance-related cash inflows at about $430 million in an 'A' rating stress and $686 million in a base case; and the total maintenance-related outflows to equal approximately $525 million in an 'A' rating stress and $577 million in a base case. Therefore, the cumulative projected maintenance profit/loss is a deficit of approximately $95 million in an 'A' rating stress and a $109 million surplus in the base case. Chart 2 shows the cumulative maintenance profit/loss under base-case and 'A' stress scenarios. JUNE 30,

19 Chart 2 The transaction has a maintenance reserve account that is expected to funded at $9.01 million at closing. According to the transaction documents, any funds the maintenance reserve receives go into the collection account and the maintenance expenses will be drawn first from the maintenance reserve account, and if insufficient, then from the collection account. After paying senior fees and expenses, interest, and liquidity facility advances, the remaining funds in the collection account will be used to top up the maintenance reserve account, which must be at least $1 million and the sum of the projected next five months' maintenance expenses (100% of Month 1's, 80% of Month 2's, 60% of Month 3's, 40% of Month 4's, and 20% of Month 5's maintenance expenses), which are based on ICF International's projections. The excess maintenance reserve over the required maintenance amount will be transferred to the collection account and distributed according to the collection account payment priorities and aircraft disposition distribution. Cash Flow Analysis Results Our ratings approach considers cash flow primarily from the 28 planes in the portfolio. Cash is generated from lease or re-lease payments, aircraft disposition proceeds, security deposits, and the liquidity facility. The leases are operating leases that were initially signed for fixed periods and, at closing, have a 7.1-year remaining weighted average term. JUNE 30,

20 Under our stress scenarios commensurate with the preliminary 'A (sf)' rating, the cash flow shows that timely interest (excluding the step-up amount) and ultimate principal on the class A-1 notes are paid off by May Chart 3 below shows the lease revenue projections in 'A' and base-case scenarios. Chart 3 Chart 4 below shows the class A-1 notes' projected amortization curve under an 'A' stress compared with the scheduled amortization curve. JUNE 30,

21 Chart 4 Sensitivity Analysis Aircraft are operating assets with lease revenue that are highly sensitive to lease rates, their useful lives, and the servicer's capabilities. We performed five sensitivity analyses to analyze the aircraft collateral performance under further cash flow stresses. In sensitivity run 1, we analyzed the sensitivity of lifetime revenue (lease rental and disposition proceeds) to the aircraft's useful life. In our standard rating run, we assumed a 25-year useful life for all of the aircraft in the portfolio. In this sensitivity run, we shortened the useful life for all aircraft to about 20 years, when the issuer would stop re-leasing and instead sell the aircraft. In sensitivity run 2, we analyzed how sensitive the pay-off dates of the rated loans are to the utilization trigger in the payment priority. Similar to the recently rated aircraft ABS transactions, this one has a utilization trigger, which--if it fails--will cause the rapid amortization of class A-1 notes. We turned off the utilization trigger to see its effect on the class A-1 notes' amortization speed. In sensitivity run 3, we analyzed how sensitive lifetime revenue is to our assumed lease rate factors (or lease yield). We JUNE 30,

22 reduced the lease rate factor by a 1.8% break-even haircut at the 'A' level, under which stress the class A-1 notes can still pay timely interest (excluding step-up amount) and ultimate principal. In sensitivity run 4, to address the trend toward earlier aircraft retirement via sale of the aircraft or its parts, we shortened the A /-300, B , and ERJ195 aircraft model's end-of-lease age to 20 years, as an example, and assumed its values will not recover after a recession once it is 20 years or older (known as permanent value impairment). In addition, we used two sets of assumptions regarding aircraft-on-ground time and RRR cost, depending on whether an aircraft becomes on-ground because its lease matures or defaults. If an aircraft is on-ground after lease maturity, the aircraft-on-ground time period is shorter, and the associated RRR cost is lower. The shorter aircraft-on-ground time period in a nondefault scenario reflects both the possibility of a lease renewal and the much shorter time it takes to return the aircraft back to the lessor. The lower RRR cost in a nondefault scenario reflects that repossession is easier and less costly and that the refurbishing costs are likely to be lower because the aircraft is more likely to be returned with a required return condition. For each of the sensitivity runs, we calculated the net present value (NPV) of the lifetime revenue and compared it in each scenario with that in a base-case scenario (i.e. a cash flow run without any stresses in an aircraft lease rental and sales proceeds analysis). See Table 8 for each sensitivity test's revenue NPV with a 5% discount rate as a percentage of the base-case run's revenue NPV at the 'A' rating levels. Table 8 Sensitivity Runs--Series A Notes Revenue NPV as a percentage of the base-case run (discounted at 5%) Cash flow test result Base-case run Class A-1 notes are paid off in November 2025 'A' rating run Class A-1 notes are paid off in May 2032 'A' sensitivity run 1 'A' sensitivity run 2 'A' sensitivity run 3 'A' sensitivity run 4 NPV--Net present value Class A-1 notes are paid off in December 2033, but there is approximately $92,000 interest shortfall Class A-1 notes are paid off in May Class A-1 notes are paid off in October Class A-1 notes are paid off in July 2031 Table 9 compares the sensitivity test results for CAF 3, RISE Ltd., Emerald Aviation Finance Ltd., and AABS Ltd. Table 9 Revenue NPV As A Percentage Of The Base-Case Run (Discounted At 5%) CIT Aviation Finance III Ltd. RISE Ltd. Emerald Aviation Finance Ltd. AABS Ltd. Series A rating 'A (sf)' (preliminary) 'A+ (sf)' 'A (sf)' 'A+ (sf)' Series A LTV (%, based on LMM of half-life values) Base-case run (%) 'A+'/'A' rating run (%) JUNE 30,