Morningstar DBRS Assigns Provisional Credit Ratings to PK ALIFT Loan Funding 3 LP

DBRS, Inc. (Morningstar DBRS) assigned provisional credit ratings to the following classes of notes to be issued by PK ALIFT Loan Funding 3 LP:

-- $122,000,000 Class A-F Senior Secured Floating Rate Notes at AAA (sf)
-- $290,000,000 Class A-1 Senior Secured Fixed Rate Notes at AAA (sf)
-- $43,500,000 Class B Secured Fixed Rate Notes at AA (high) (sf)
-- $102,000,000 Class C Secured Deferrable Fixed Rate Notes at A (high) (sf)
-- $64,750,000 Class D Secured Deferrable Fixed Rate Notes at BBB (low) (sf)

CREDIT RATING RATIONALE/DESCRIPTION
The provisional credit ratings are based on the review by Morningstar DBRS of the following analytical considerations:

The transaction assumptions consider Morningstar DBRS’ baseline macroeconomic scenarios for rated sovereign economies, available in its commentary Baseline Macroeconomic Scenarios For Rated Sovereigns March 2024 Update, published on March 27, 2024. These baseline macroeconomic scenarios replace Morningstar DBRS’ moderate and adverse COVID-19 pandemic scenarios, which were first published in April 2020.

Transaction capital structure and sufficiency of available credit enhancement to withstand stressed cash flow assumptions for the applicable ratings, and repay investors in accordance with the transaction terms and documents under which they have invested:
-- CE is comprised of overcollateralization (OC) as measured by two levels of LTV measurement and subordination;
-- Morningstar DBRS' ratings address the payment of timely interest (with respect to Classes A-F, A-1, and B), ultimate interest (with respect to Classes C and D) and ultimate principal repayment by the Stated Maturity.
-- The transaction is backed by 122 Collateral Obligations and ultimately, on a look-through basis, by a highly diversified pool of aircraft and engines with the Issuer having senior first liens on the assets. The underlying collateral consists of 115 aircraft and seven aircraft engines including:
• 70 NB passenger aircraft with a majority comprising young-to-mid-life assets, including, but not limited, to A320 family (26 aircraft; 33.6% of loan balance), A320/321 neo family (13;19.1%) and Boeing B737 family (24;10.5%).
• Four Boeing B787 family aircraft, which Morningstar DBRS considers some of the most liquid widebody aircraft, support 14.3% of the loan balance.
• 29 B737-400SF, which account for nearly 24% of the pool by count but support only 2.1% of the loan balance. The majority of the underlying assets are in-demand, highly marketable aircraft due to their dominant commercial aircraft market presence with a large operator bases.

The transaction is supported by strong cash generation from the loan principal and interest and potential disposition of aircraft. The portfolio is relatively young, with more than a decade of leasable life and, compared with the transaction term, exhibits a marketable pool if the assets are required to be sold at any time.
-- The aircraft pool consists of mostly young aircraft with a WA age of approximately 8.0 years. A significant portion (95%) of the pool consists of early-to-mid-life aircraft, aged less than 15 years. Additionally, younger aircraft (less than 10 years of age) make up 70% of the pool, which is a credit positive.
-- Based on an assumed economic useful life of 25 years for the underlying passenger aircraft, the pool has approximately 17 years of WA remaining economic useful life.
-- Aircraft disposition proceeds were assessed based on proposed rating-level stress assumptions within stated methodology ranges.

Morningstar DBRS used its proprietary CLO Insight Model to derive various rating pool level scenario default rates. The model accounts for lessee concentration risk based on the number of lessees, lessees’ default probabilities and collateral tenor.
-- Underlying assets in the 122 aircraft pool are leased to 52 airlines across 32 countries, and thus are significantly more diversified, based on lessee count and distribution, than most securitized aviation-related pools.
-- Approximately 63% of the pool is supported by airlines with Morningstar DBRS-equivalent corporate default ratings in the B rating category or higher. The large majority of the non-rated airlines in the pool were assigned CCC category ratings, representing the remaining 37% of the collateral.
-- Based on the overall credit profiles of the lessees and tenor of the corresponding loans, Morningstar DBRS assumes approximately 81% of lessees will default under the AAA stress scenario, approximately 80% under AA (high) stress, approximately 70% under A (low) stress, and approximately 65% under BBB stress.

The transaction’s structural features are generally consistent with those seen in other loan transactions (i.e., collateralized loan obligations (CLO)) and prior issued loan ABS. Cash flow is protected via several mechanics and provisions:
-- Performance triggers
-- Two waterfalls: one for interest proceeds, and one for principal and disposition proceeds
-- Pro rata principal payment switching to sequential when the portfolio value reaches 50% of the portfolio value as of the Closing Date.
-- Potential deferral of interest to Classes C and D until due at Stated Maturity
-- Prefunding Account

The adequate capabilities of PKAir as the servicer. Morningstar DBRS conducted an operational review of PKAir/Perseus Asset Management Limited (Perseus)/Merx Aviation Finance, LLC (Merx) in May 2024, and considers them to be an adequate aircraft aviation loan servicer and service providers. PKAir has solid experience managing loan facilities, through multiple historical economic and aviation cycles, and the Special Advisor has significant technical and repossession experience over similar periods along with managing their fleet, including aircraft securitized through aircraft ABS.

The historical credit performance of PKAir’s portfolio; over the past 22 years, cumulative net losses have totaled less than 25 basis points (bps) as a percentage of originations.

Consideration of the two separate potential repayment sources on a Facility Collateral Obligation – the borrower under Facility/Collateral Obligation, payments under leases on the Underlying Collateral, and, ultimately, aircraft (or metal) disposition proceeds.

Morningstar DBRS assessed jurisdictional risk across the 32 countries represented in the pool. Such risk is mitigated by (1) the pool diversification with 27 facilities and 122 individual aircraft; (2) the fact that PKAir has historically repossessed 48 aircraft over 23 years; (3) strong historical performance with minimal defaults and net losses from 2001–23 (i.e., 12 loss events in 22 years and cumulative net losses (CNL) of 0.23%); (4) the two layers of protection: (A) facility borrowers and (B) the aircraft and related leases thus containing losses to the very low levels described above; and (5) origination, underwriting, and servicing capabilities of PKAir to manage its book (including with the assistance of Special Advisor Perseus) across global jurisdictions. Notwithstanding the foregoing mitigants, Morningstar DBRS reviewed jurisdictional risk in the pool by considering past transactional experience, available jurisdictional questionnaires and summaries, and other relevant publicly available and information provided by PKAir and Perseus. In summary, the repossession prospects for the jurisdictions reviewed is viewed as adequate in the context of the other protective mechanisms present.

Consideration of the absence of a dedicated interest reserve account, which is a common feature of ABS transactions though less common in a CLO transaction, to which this transaction could be, at a high level, compared. This is further mitigated by (A) an insulated legal structure where all cash remains within the transaction; (B) the fact that key transaction parties are bankruptcy-remote special purpose entities (SPEs); (C) the inclusion of numerous legal opinions with respect to the structure and its parties; (D) during the first six months, the presence of other cash in the form of a temporary reserve account; and (E) trapped monthly equity distributions (payable, instead, on a quarterly basis).

Morningstar DBRS reviewed multiple factors and features which are rarely seen together in transactions in considering a AAA (sf) rating for the Class A Notes: (1) the deep experience and long-term success of PKAir and its platform over multiple cycles; (2) extremely low cumulative net losses totaling less than 25 bps over the past 20+ years, including through stressed periods (e.g., COVID-19 pandemic and the financial crisis; (3) the strong franchise among PKAir and its affiliates (specifically Apollo, Merx, and Perseus); (4) the significant pool diversification across borrowers, lessees, aircraft, and jurisdictions that is unmatched across recent aviation debt transactions; (5) the nature of the assets and credit enhancement on the loan portfolio as well as, and, additionally, the Underlying Assets, resulting in a look-through LTV of near 42%; and (6) additional features included in the transaction for which no quantitative credit was given but which provide qualitative benefit.

Morningstar DBRS materially deviated from its Rating Structured Aircraft Transaction Methodology by (1) applying assumptions for a rating that is not delineated therein and (2) applying certain published assumptions for a non-aircraft asset type (engines). See the Cash Flow Analysis section of the Presale Report for more information on the transaction cash flow analysis.

Morningstar DBRS’ credit rating on the securities referenced herein addresses the credit risk associated with the identified financial obligations in accordance with the relevant transaction documents. The associated financial obligations are the related Investment Amount, Current Interest, Deferred Interest on the Class C Note and the Class D Notes, Interest on any Class C Deferred Interest at the Class C Note Rate and Class D Deferred Interest at the Class D Note Rate.

Morningstar DBRS’ credit rating does not address nonpayment risk associated with contractual payment obligations contemplated in the applicable transaction document(s) that are not financial obligations. For example, interest on unpaid interest on the Class A-F, Class A-1, and Class B Notes, and redemption premium amounts on the Class A-F, Class A-1, Class B, Class C, and Class D Notes.

Morningstar DBRS’ long-term credit ratings provide opinions on risk of default. Morningstar DBRS considers risk of default to be the risk that an issuer will fail to satisfy the financial obligations in accordance with the terms under which a long-term obligation has been issued. The Morningstar DBRS short-term debt rating scale provides an opinion on the risk that an issuer will not meet its short-term financial obligations in a timely manner.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factor(s) that had a significant or relevant effect on the credit analysis.

A description of how Morningstar DBRS considers ESG factors within the Morningstar DBRS analytical framework can be found in the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (January 23, 2024; https://dbrs.morningstar.com/research/427030).

Notes:
All figures are in U.S. dollars unless otherwise noted.

The principal methodology applicable to the credit ratings is Rating Structured Aircraft Transactions (March 13 ,2024). https://dbrs.morningstar.com/research/429263/rating-structured-aircraft-transactions

Other methodologies referenced in this transaction are listed at the end of this press release.

Morningstar DBRS materially deviated from its principal methodology when determining the credit ratings assigned to the notes by (a) applying assumptions for a rating that is not delineated therein and (b) applying certain published assumptions for a non-aircraft asset type (engines):

Specifically, with respect to (a), a AAA rating is recommended to be assigned to the Class A-F and Class A-1 Notes by applying the following assumptions that were outside of the methodology-defined ranges:

-- An 18 month Cash Flow Delay Period was assumed for the AAA rating; the range defined in the Methodology is shown as 4-14 months
-- MVDs assumptions were derived for the AAA rating; no specific ranges are included in the Methodology
-- Haircut assumptions were derived for the AAA rating; no specific ranges are included in the Methodology

Second, with respect to (b), Morningstar DBRS utilized published aircraft ranges and considerations in setting assumptions and analyzing engine collateral (including AAA assumptions immediately above).

The material deviation is warranted given (a) consideration of the published assumption ranges in conjunction with additional value analysis and the specific features of this transaction, (b) consideration of the volatility of the given non-aircraft collateral being perceived no greater than that for the corresponding aircraft assumption ranges.

Further details on such assumptions are included in the related presale report https://dbrs.morningstar.com/research/434495.

The credit rating was initiated at the request of the rated entity.

The rated entity or its related entities did participate in the credit rating process for this credit rating action.

Morningstar DBRS had access to the accounts, management, and other relevant internal documents of the rated entity or its related entities in connection with this credit rating action.

This is a solicited credit rating.

A provisional credit rating is not a final credit rating with respect to the above-mentioned securities and may change or be different than the final credit rating assigned or may be discontinued. The assignment of final credit ratings on the above-mentioned securities is subject to receipt by Morningstar DBRS of all data and/or information and final documentation that Morningstar DBRS deems necessary to finalize the credit ratings.

Please see the related appendix for additional information regarding the sensitivity of assumptions used in the credit rating process.

DBRS, Inc.
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New York, NY 10005 USA
Tel. +1 212 806-3277]

The credit rating methodologies used in the analysis of this transaction can be found at: https://www.dbrsmorningstar.com/about/methodologies.

Global Methodology for Rating CLOs and Corporate CDOs and the CLO Insight Model v1.0.1.0 (October 22, 2023),
https://dbrs.morningstar.com/research/422269

Rating U.S. Structured Finance Transactions (April 15, 2024), https://dbrs.morningstar.com/research/431204/rating-us-structured-finance-transactions

Operational Risk Assessment for U.S. ABS Servicers (March 21, 2024), https://dbrs.morningstar.com/research/430003/operational-risk-assessment-for-us-abs-servicers

Operational Risk Assessment for U.S. ABS Originators (March 21, 2024), https://dbrs.morningstar.com/research/430004/operational-risk-assessment-for-us-abs-originators

Legal Criteria for U.S. Structured Finance (April 15, 2024), https://dbrs.morningstar.com/research/431205

For more information on this credit or on this industry, visit dbrs.morningstar.com or contact us at info-DBRS@morningstar.com