Aviation finance asset-backed securities (ABS) represent a small but differentiated corner of the securitized credit market, which is a market segment ripe with opportunity within the broader fixed income universe. Investors may be more familiar with established ABS sectors such as auto loans and leases, which represent a significantly larger share of the market. For aviation ABS, while the underlying assets are different, the fundamental structure is similar: contractual cash flows generated by a diversified pool of financed or leased assets are packaged into securities and distributed to investors through a defined payment structure.

Despite its relatively limited market size, aviation ABS can offer a compelling combination of contractual cash flows, structural protections, and exposure to tangible, globally utilized assets. This recipe creates the potential for attractive risk-adjusted returns and portfolio diversification.

What is Aviation Finance?

The aviation market itself is broad and diverse, spanning a wide range of aircraft types and end uses. These include large commercial passenger planes used for domestic and international travel, charter aircraft operated by corporations, private jets serving high-net-worth individuals, and smaller propeller-driven aircraft used for agricultural, industrial, and other specialized purposes.

Given the substantial cost of acquiring any form of aircraft, financing is an important piece of the industry. It enables corporations and individuals to acquire aircraft without committing the full purchase price upfront while also potentially supporting fleet expansion and providing greater flexibility in capital allocation.

Financing an aircraft can be structured in several ways, including traditional purchase loans, leases, and lease-to-own arrangements. Each structure carries different costs, payment terms, and ownership considerations, ultimately shaping the economics of the transaction. Revenues for creditors and lessors are driven by a variety of factors including recurring payment streams, interest income, maintenance fees, origination fees, and/or the sale of the physical aircrafts depending on the business.

Investors can access these economics in both public and private markets through corporate bonds issued by aviation finance companies, term loans via specialty lenders or banks, and ABS backed by pools of loans or leases. While corporate bonds provide exposure to an issuer’s broader results and term loans typically provide direct exposure to a specific borrower, aviation finance ABS provides exposure to the cash flows generated by a diversified pool of aircraft loans (where the user/borrower owns the aircraft) or leases (where the lessor retains ownership). For this discussion, we focus on aircraft leases and the ABS backed by their associated cash flows and aircraft values.

From Leases to Asset-Backed Securities

The path from an aircraft lease to an asset-backed security starts with underwriting the aircraft and the leases supporting them. Investors consider aircraft type and age, lessee credit quality, geographic diversification, and use case to assess the reliability of lease payments and potential resale value of the aircraft.

For the owners of the aircraft, securitization of leases provides another source of funding and allows them to free up capital tied to existing aircraft and put it toward new opportunities. Leased aircraft are pooled and transferred to a bankruptcy-remote special purpose vehicle (SPV), which issues ABS to investors.

The ABS is typically divided into classes with different levels of seniority and risk. Structural protections, including subordination, overcollateralization, payment priorities, and maintenance reserves, provide additional support for investors.

Importantly, aircraft are tangible, mobile assets. If a lessee defaults, the aircraft can generally be repossessed and leased to another operator or sold, providing another potential source of recovery. Ongoing reporting, appraisals, and collateral monitoring provide visibility into performance throughout the life of the transaction.

The Investment Opportunity

Despite meaningful structural protections and cash flows supported by diversified pools of aircraft leases, aviation leasing ABS carry risks that require careful evaluation, including changes in aircraft values, lease rates, and operator credit quality. The sector can also be less liquid and more complex than traditional fixed income markets. As a result, aviation ABS often trade at wider spreads than similarly rated corporate bonds and more established ABS sectors, providing a potential liquidity and complexity premium for investors with the expertise to evaluate the underlying risks.

The sector also benefits from favorable supply-and-demand dynamics, particularly for commercial aircraft. Airline demand can outpace available supply amid production constraints and lengthy manufacturer backlogs, supporting aircraft utilization, lease rates, and residual values. At the same time, the aviation industry is not immune to disruption, whether from economic downturns, changes in travel demand, technological shifts, or unexpected events that can affect aircraft demand and values. These dynamics reinforce the importance of evaluating both the durability of current demand and the long-term relevance of the underlying aircraft.

For credit-focused investors, the sector can create opportunities to identify individual transactions where the yield appropriately compensates for the underlying risks. With a selective approach, aviation leasing ABS can offer a differentiated source of yield, diversification, and attractive risk-adjusted return potential, supported by contractual lease cash flows, tangible aircraft collateral, and structural protections.

All investments contain risk and may lose value. This material contains the opinions of Manning & Napier, which are subject to change based on evolving market and economic conditions. This material has been distributed for informational purposes only and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable but not guaranteed.