Whenever there is a hint of recession, in sectors where secured leverage is used to boost investment yields, talk about LTV (loan-to-value) tests on assets and portfolios starts to percolate. These tests, propagated by banks, are a covenant put in place to protect the lender from a drop in asset value. One fundamental problem with LTV tests is that they do not account for cashflow support generated by the underlying asset. For example, if a sudden market condition causes an asset value drop, but there is a rental stream that more than covers the required interest and amortization, then is the asset distressed? In the eyes of an investor like GA Telesis, no, but from the perspective of the lender, yes, and in order to avoid a covenant breech, an investor would have to contribute more equity funds towards their investment to reduce the outstanding principal balance. While contributing additional equity is an obvious solution for a lender, it is not always that simple from an investor’s perspective and quite often investments are siloed, so the additional top-up funds are not available.
However, from the inception of GA Telesis 18 years ago, looking back on asset-backed-financings and how they performed during a downward-cycle, we see that market conditions are a driver for CMV or Current Market Value versus FMV which is Fair Market Value. Simply put, CMV is more like a current liquidation value and FMV represents the value if one was not seeking immediate liquidity. If the asset is continuing to generate cashflow then immediate liquidation would not be applicable.
Over the past five years, investing in income streams generated by commercial aircraft and jet engines became widely accepted as a new asset class, joining the likes of real estate, infrastructure, equities, fixed income and commodities. From an investor’s perspective, this new asset-class brought scale, sound underwriting properties, an asset-class where there was no near-term replacement, global diversification, measurable credit metrics, and finally, something that could be securitized and rated, thus opening the market where GA Telesis has participated in since inception, to a wider range of investors.
At GA Telesis we feel that the complexity in any new asset-class comes when new equity is attracted to compelling yields and meaningful scale, without a sufficient appreciation for the sector specific nuances and risks. These investors are often looking at the potential gains to be made and might therefore be relying on investment ratings and third-party valuations versus real market knowledge. Once any disruption enters the market, those sources can quickly change their opinions to cover their liability and exposure without taking into account the relative strength of a specific transaction. There might be periods where the market feels difficult, but over the long-term, a good asset in a well-structured transaction will persevere, it just might feel encumbered because of the CMV impact.
For those of us who have built our careers around commercial aviation and investing in commercial aircraft, we shrug-off these market-driven-blips, because we know that the industry is resilient and always comes back. The fundamental value of our assets is there, and a disciplined investment underwriting process will weather temporary market pressures.
GA Telesis suggests a new take on LTV – LONG-TERM-VALUE.