Scope Ratings is calling for comments on its new Aircraft Non-payment Insurance Methodology (NPI methodology) by 17 February 2020.

Scope’s NPI methodology goes beyond the traditional emphasis on probability of default, and systematically incorporates the severity to the investor of diverse credit-impairment events contributing to total expected loss. The focus on expected loss adds value for investors, as it credits the severity-mitigation effect of insurer diversification when NPI protection is provided by a portfolio of insurers.

Methodology highlights

Expected loss. Scope’s NPI methodology reflects the expected loss for an investor in a debt instrument typically designed to fund the acquisition of aircraft and benefiting from non-payment insurance protection. The methodology focuses on the analysis of the reduction of the severity of airline default resulting from the protection provided by insurers. Consequently, Scope sees the protection provided by insurers as an additional source of security for the benefit of investors that adds to the value of the underlying aircraft.

Credit to insurer diversification. Scope gives credit to the severity-mitigation effect of insurer diversification when NPI protection is provided by a several guarantee by a portfolio of insurers (even if the commitments are not joint and several). A higher number of insurers will generally represent a credit positive because the final expected loss for the investor will be lower than for the case of a single insurer – assuming equivalent average credit quality of insurers.

Discrimination of insurer credit quality and exposure. Scope’s analysis captures and reflects the impact of the different credit quality of insurers across transactions as well as their concentration in the portfolio of insurers. This analytical framework consequently gives more latitude to arrangers at the time of structuring the NPI protection package for a given transaction.

Industry perspective. The analytical approach is consistent with the fundamentals of the NPI product as created by the industry, which was looking for a product to cover the risk of transactions exposed to weaker airlines and benefit from loss-severity diversification across a pool of insurers.

Scope’s aircraft NPI ratings constitute a forward-looking opinion on relative credit risk. A rating reflects the expected loss associated with payments contractually promised under a credit exposure to aviation finance by its legal maturity, accounting for the time value of money, at the rate promised to the investor.

Scope’s NPI methodology is applied in conjunction with Scope’s General Aviation Finance Rating Methodology and should not be used on a stand-alone basis.

Call for comments

Scope invites sponsors, investors, arrangers and other interested parties to comment on the methodology by 17 February 2020, as part of the agency’s ongoing commitment to transparency and open dialogue with market participants.

Please send your comments to consultation@scoperatings.com

Scope will review comments on the proposed methodology and will publish the final version of this rating methodology report thereafter.

The ‘Aircraft NPI Methodlogy – Call for Comments’ is available for download at www.scoperatings.com or on this link.