20-year old ISTAT definitions “archaic”

Special to Leeham News

By Michael Allen

  • ISTAT definition “quite archaic.”
  • Appraisers says aircraft disparity in ABS transaction can be due to lack of information provided by the arrangers.

Jan. 25, 2018, © Airfinance Journal, Dublin: “We get asked to value a portfolio of 35-aircraft,” says Rikard de Jounge vice president – asset valuations at Avitas.

“No one tells you that the valuation is for an ABS transaction. They just ask for market and base values,” he adds.

Stuart Hatcher, head of intelligence at IBA Group, says it is still a “secretive market”.

“Providing that we are dealing with sellers, the information is generally good. The issue we tend to find is with the arrangers. And the communication can be quite sporadic,” he says.

The other issue is how much you are including into a valuation for a lease-attached aircraft.

ISTAT definition 20 years old

“There is reticence in the market to not providing lease-unencumbered values for ABS transactions and it’s a standard ISTAT-defined term. We have the same methodology but ultimately we share different views of the market.”

De Jounge disagrees: “We follow the ISTAT definitions but we may not have the same data and the same methodology. Methodology is up to yourself, as long as you can justify and show your work, and have an acceptable methodology, that’s fine with ISTAT.”

He adds: “Some variation in values should be a level of comfort. If we were all at $0.5 million for the same aircraft, that would be a source of concern. We provide an opinion, the data – and the world in which we operate is very opaque.”

ISTAT definitions are more than 20 years old and Hatcher believes they are “quite archaic.” About 25 years ago, the leasing market was small and back then aircraft were trading as naked aircraft, he says.

“You constantly have to make adjustments. Base values are a long-term trend rather than a market value, which is an evolving point at a point in time,” he recalls.

De Jounge agrees: “The business has changed. We do not only trade naked aircraft. Aircraft are now financial instruments with cash flows and future residuals, and that is a completely different analysis.”

5 Comments on “20-year old ISTAT definitions “archaic”

  1. It’s still possible to get through with the old definitions. However, it would probably be more efficient to revise these somewhat in an effort to make them more representative of typical trading today.

  2. Is that a friendly warning that these airliner based ABS products may show a similar contraction that we saw with the mortage based ones ( whose values had been massaged into the sky ) ?

  3. As a long-time Citibank lender/lessor, I certainly understand the gist of this article. When doing portfolio novations, we took great care to look at both the underlying “bare” asset valuation (with flexibility based on the lessee’s credit) and the present value analysis of the cash flows, including the residual assumption. The residual number can be a time bomb waiting to explode, if one is not careful. Of course, fiddling with the residual value and the discount rate used in the NPV analysis can make the results anything you want them to be. Therein, lies the danger.

    • I am not in the aircraft/airline business, but in mining the same happens. You can massage numbers in any/many ways to make it fit the outcome what you want it to be.

  4. Indeed one has to be sharp and get knowledge. I’d watch product support, not to be taken for granted. And data to support operations and maintenance – one airline did not get adequate data from the seller abut modifications made two owners earlier, apparently the last seller who was a subsidiary of an established airline did not provide it.

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