Modeling risk can be associated with the data quality as well as simple bugs in the calculation engine. The sector came of age at a time when the reporting requirements were minimal. Some servicers have voluntarily increased the volume of reported data. Best practices for disclosure in the sector include web-posted reports, detailed lease rollover information and investor updates detailing extraordinary items—especially related to expenses.

Other securitized assets tend to have reasonable proxies for collateral performance, such as loans of a similar credit profile and vintage. There is no market indicator for the risk and performance of an aircraft lease contract, which means the servicer has a monopoly on the pieces of information necessary to forecast deal performance.

Investors in the aircraft ABS sector must be diligent about doing the work to become comfortable with the risks inherent in this asset class. Modeling aircraft lease cash flow and then evaluating the corresponding liability waterfall is fraught with potential modeling risks. Even though the focus of this discussion is on asset-side modeling, the resulting analytics will also depend on the assumptions made in the liability model. From this perspective, the modeling of interest rate hedges represents a risk. The swap notional amount varies as a percentage of the Class A balance outstanding on each deal with varied standards of disclosure to help or hinder modeling.

Investors should avoid the pitfall of attributing too much predictive power to even the most elegant models. The key from the investor viewpoint is to evaluate opportunities in the sector in such a way as to gain comfort that model error is skewed to the upside.