S&P Cuts Ratings on Notes of Aircraft Deal ALPS 96-1

Business Wire, Nov 15, 2002

Business Editors

LONDON--(BUSINESS WIRE)--Standard & Poor's

Nov. 15, 2002--Standard & Poor's Ratings Services said today that it lowered its credit ratings on all classes of notes issued by special-purpose entity ALPS 96-1 Pass Through Trust (see list below).

The notes are backed by lease rentals from a portfolio of aircraft.

This action reflects the reduced lease rental rates witnessed over the past year, the likelihood of further reductions to cash flows, and the increased uncertainty regarding the current market for the sale of used aircraft.

At the same time, the ratings on all classes of notes have been removed from CreditWatch, where they had been placed on Sept. 27, 2001, in the case of the class B, C, and D notes, and March 21, 2002, in the case of the class A notes.

ALPS 96-1 was formed to acquire notes issued by ALPS 92-1 Ltd. Its portfolio of aircraft is small compared with that of other aircraft lease portfolio securitizations, consisting of 10 planes, all delivered between 1989 and 1991 (14 planes at closing). One plane is currently off lease. While all of the planes are widely used models, many have seen substantial pressure on values and lease rates over the past two years, and prospects for a material recovery over the remainder of the term of this transaction are uncertain.

The best of the planes in the portfolio, representing about 9% of the portfolio, is an A320-200, a popular, modern technology aircraft. About 37% of the portfolio value is provided by two B767-300ERs, a small widebody aircraft, and 13% by a B757-200, a large narrowbody. Both are widely used planes introduced by Boeing in the early 1980s, which have recently seen value declines due to excess supply. Another 29% of the value is represented by three B737-400s and one B737-500, both widely used narrowbodies introduced in the 1980s and which have since been superseded by Boeing's 737 "next generation" series. The final two aircraft are MD83s, narrowbodies that are gradually being phased out of the fleets of most major operators.

The current lessee customer base is relatively narrow for an aircraft portfolio lease securitization, with Air Canada (B+/Negative/--) by far the largest lessee, at 47% of the portfolio value. Other current lessees are located in Asia, Europe, and North America and are of mixed credit quality, though not atypical for this type of securitization.

Throughout the past year, the revenues received by ALPS 96-1 have suffered greatly. Several leases have expired during this time, which has contributed directly and significantly to these lower revenues. In order to re-lease aircraft in the current environment, many lessees are demanding favorable lease contracts, such as "Power By Hour" (PBH) leases, whereby the lessees' payments are driven by the usage it derives from the aircraft. In ALPS 96-1, there are now five aircraft on PBH leases. There is therefore a risk that lease rentals to be collected over the next couple of years may be further negatively affected.

To ensure ultimate payment of principal on all classes of notes, the servicer, Babcock & Brown, has the task of selling these aircraft prior to the transaction's legal final maturity, in June 2006. The expected maturity for all classes has passed already. The present demand for used aircraft is extremely poor, and values realized on recent sales have been depressed. There is no indication of when the market will improve, and therefore there is added uncertainty embedded in this transaction. However, the servicer has almost managed to get the whole portfolio on lease (the one aircraft off lease is currently the subject of lease negotiations and is expected to be delivered by the end of this month), and this fact should help them in their sale task.

Also, sources of liquidity available to the class A, B, and C notes have not yet been utilized, thereby limiting the risk of a cash shortage in the short term.

The ratings on the notes in this transaction will continue to be closely monitored.

OUTSTANDING RATINGS LOWERED AND REMOVED FROM CREDITWATCH
ALPS 96-1 Pass Through Trust
$393,531,750 Pass Through Certificates Series 96-1
Class Rating
            To                From
A           A+                AA/Watch Neg
B           BBB+              A/Watch Neg
C           BB-               BBB/Watch Neg
D           CCC+              B+/Watch Neg

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