hard · Asset-Backed Securities

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 have higher recovery rates than auto leases, the investor should use lower enhancement, so the approach overstates rather than understates 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 bondholders are protected by the Cape Town Convention's repossession rights, the only modeled risk should be sovereign expropriation, which historical airline default rates already capture
4. Because maintenance reserves fully offset residual-value risk, the investor is correct to focus on lessee default, and the only omission is interest-rate risk on the floating notes

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