hard · Asset-Backed Securities asset-nuances

Why is this approach most likely to understate the senior notes' true risk profile relative to, say, an auto-lease ABS?

1. Because aircraft leases historically exhibit higher recovery rates on repossession than auto leases given the asset's mobility and deep global secondary market, the investor should size lower enhancement, so the approach actually overstates rather than understates the senior notes' true risk
2. Because the dominant driver of cash-flow loss is residual-value and re-leasing risk on the aircraft—lease rates, downtime, and remarketing costs on lessee default or lease expiry—rather than the default probability itself, and this asset-value volatility is correlated across the fleet in a downturn
3. Because aircraft ABS senior bondholders are contractually protected by the Cape Town Convention's streamlined repossession rights in ratifying jurisdictions, the only risk needing modeling beyond lessee default is sovereign expropriation, which historical airline default statistics already fully capture
4. Because the maintenance reserve account is specifically sized to fully offset any residual-value decline and remarketing cost risk on the airframes and engines over the lease term, the investor is correct to focus solely on lessee default, and the only real omission is interest-rate risk on the floating-rate notes

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