Aircraft leasing mergers have short-term uncertainties, but longer-term advantages for aircraft ABS, says Moody's in its latest Weekly Credit Outlook.

AerCap Holdings announced its intent last month to acquire Genesis Lease in an all-stock merger of the two European aircraft leasing companies. Reportedly, several other aircraft leasing companies, accounting for approximately one-third of the global aircraft leasing market, are also considering sales of their businesses.

Moody's notes that both AerCap and Genesis, as well as most of the companies considering sales, have outstanding pooled aircraft securitisations for which they typically act as servicers. "We believe that re-shuffling in the industry may cause uncertainties and perhaps even negative ratings pressure for securitisations in the near term. Nevertheless, there clearly are some possible advantages in the longer term, such as greater stability," says the rating agency.

Aircraft leasing is a specialised industry and investors rely upon servicers for their industry expertise and their relationships with airlines and aircraft manufacturers, which are key ingredients to profitably manage a fleet of securitised aircraft. "Thus, when a leasing company is acquired or when leasing companies are merged, the capability and strength of the successor company to service the securitised pools is crucial," says Moody's.

"Credit risks may arise if the successor servicer were not able to extract the same value out of the pooled aircraft as its predecessor," it adds. "For example, the successor servicer may take on aircraft outside of its particular expertise, such as wide-body versus narrow-body, and may not have retained the appropriate expertise from the absorbed entity. Or problems could arise during the integration of diverse servicers' platforms."

However, Moody's believes that in the long-term the leasing sector is likely to benefit from consolidation. "The larger surviving leasing companies will eventually benefit from a more diversified global client base and greater negotiating power," it says. "This is evident in the AerCap Genesis merger; AerCap is expected to add 23 new clients to its customer list and to become the biggest independent leasing company."

The agency concludes: "According to AerCap's merger filings, its management also projects that Genesis will be a net generator of cashflow in the next few years. If those expectations materialise, then this cashflow should, at minimum, provide greater stability to the credit profile of the combined entity."