As the number of aircraft traded on a standalone basis diminishes, aircraft values are increasingly needing to assess the value of the attached lease – the Lease Encumbered Current Market Value (LECMV) or Securitized Value (SV).
The value of the attached lease is increasingly being calculated as an addition to the current market value. With the rise of the lease there has been a growing imperative to include the value of the attached lease. Most appraisers use the definitions defined by ISTAT. “Securitized Value or Lease-Encumbered Value is the Appraiser’s opinion of the value of an aircraft, under lease, given a specified lease payment stream (rents and term), and estimated future residual value at lease termination, and an appropriate discount rate. Comment: The Securitized Value or Lease-Encumbered Value may be more or less than the Appraiser’s opinion of Current Market Value.” (ISTAT). To an extent, valuing the attached lease by means of the above ISTAT definition is a simple arithmetic exercise and does not need the input of the appraiser given that all appraisers using such definition would see the same premium – or deduction – to the market value. Apart from the probable base value to which the “value” of the lease stream is added, the ISTAT definition of the value of the attached lease is a statement of fact rather than an expression of opinion. However, some appraisers may use alternative market relevant methods to assess the LECMV such as taking the difference between the actual lease and the market lease over the remaining term of the lease and adding to the current market value. Also, other appraisers may take into account the financial standing of the lessee as well as whether the lease is the result of a sale and leaseback.
While there is a need to assess the “value” of the attached lease there also exists a concern that a simple arithmetic solution may be more relevant to financial engineering rather than an assessment of market attraction particularly if base values are used. Seeking to add a premium – which is likely to be purpose of such a calculation – to the standalone asset value also has more relevance to some parties than others.
The regulatory authorities overseeing the financial standing of the banks have made considerable demands for asset values to be more realistic. The exclusive application of a premium to the asset value as a means of expressing the value could negate this pursuit of prudence should the aircraft need to then be sold without the attached lease. The resulting disposal could then result in a significantly lower figure than the LECMV, particularly if used without reference to standalone market values. In the event a number of deals involving the sole use of a LECMV resulted in distressed sales, the losses could lead to contagion and aversion to future aircraft financing. The use of only LECMVs as the book value for investors and lessors could also lead to difficulties both in terms of the market and regulators.
The difficulty of applying the ISTAT arithmetic calculation is further compounded by the use of lease rentals resulting from a sale and leaseback transaction (SLB) which would distort the lease element. Such SLBs usually see a premium already being applied due to a higher purchase price of the aircraft. In this instance, the lease calculation could be significantly above that of a standard operating lease even though the market value used is the same in either case. The SLB lease premium applied in this method seems to takes no account of the premium paid for the aircraft, again perhaps reflecting financial engineering imperatives than the assessment of risk.
The use of the LECMV is indeed relevant though perhaps complementary to asset values. The method used to calculate the value of the attached lease may need to be indicated as well as being provided as a separate amount such that users can clearly see the asset risk and the financial engineering element.