Fitch Ratings has downgraded the ratings on the series A and B notes issued by Willis Engine Structured Trust III (WEST III), affirmed the series A and B notes issued by Willis Engine Structured Trust IV (WEST IV), and affirmed the series A, B and C notes issued by Willis Engine Structured Trust V (WEST V).

The Rating Outlook for all of the notes is Stable.

RATING ACTIONS

Entity / Debt

Rating

Prior

Willis Engine Structured Trust IV

Series A 97064EAA6

LT

Asf

Affirmed

Asf

Series B 97064EAC2

LT

BBBsf

Affirmed

BBBsf

Willis Engine Structured Trust V

Series A 97064FAA3

LT

Asf

Affirmed

Asf

Series B 97064FAB1

LT

BBBsf

Affirmed

BBBsf

Series C 97064FAC9

LT

BBsf

Affirmed

BBsf

Willis Engine Structured Trust III

Series A 2017-A 97063QAA0

LT

BBBsf

Downgrade

A-sf

Series B 2017-A 97063QAB8

LT

BBsf

Downgrade

BBB-sf

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VIEW ADDITIONAL RATING DETAILS

Transaction Summary

The rating actions reflect current performance, Fitch's cash flow projections, and its expectation for the structures to withstand stresses commensurate with their respective ratings. The rating actions also consider lease terms, lessee credit quality and performance, updated engine values, and Fitch's assumptions and stresses, which inform our modelled cash flows and coverage levels.

Willis Lease Finance Corp. (WLFC, not rated by Fitch) acts as sponsor, servicer and administrative agent to the transactions. Fitch believes WLFC is an adequate servicer to service these transactions based on its experience as a lessor, and overall servicing capabilities of its owned and managed portfolio including prior ABS transactions.

KEY RATING DRIVERS

Stable-to-Improving Lessee Credit

The credit profiles of the airline and other engine lessees in the pools have remained stable or improved since the prior review in January 2022. Nevertheless, many lessees remain under stress due to the negative ongoing effects of the pandemic on air travel. The proportion of lessees with assumed Issuer Default Ratings (IDRs) of 'CCC' or below in WEST III improved to 25% from 47%; in WEST IV it improved to 27% from 43%. The 'CCC' and below exposure for WEST V increased to 40% from 32%, although the rating composition shifted away from 'D' credits so the overall pool credit quality has remained stable. The IDR assumptions reflect the lessees' ongoing credit profiles and fleets in the current operating environment. Ratings for lessees in the pool were updated for this review.

Asset Quality and Appraised Pool Value

WEST III, IV and V each include mostly in-demand engines that support narrow body (NB) airframes representing 87%, 71% and 71% of their respective pools. The remaining portion of each pool is split between engines that support widebody (WB) and regional jet (RJ) airframes, with WB engines representing 7%, 20% and 24% of each respective pool, and RJs engines representing 6%, 8% and 5% in each respective pool.

Off-lease assets for WEST III and V total 26% and 17% respectively, which is similar to the prior review in which off-lease assets totaled 28% and 20%. Off-lease assets in WEST IV increased to 36% from 31% versus the prior review.

The appraisers for the three transactions include IBA Group Limited (IBA) and AVITAS, Inc. (Avitas), while WEST III and IV also include BK Associates Inc. (BK), and WEST V includes Morten Beyer & Agnew Inc. (MBA). The maintenance-adjusted base values (MABVs) are $312.0 million for WEST III, $391.3 million for WEST IV and $410.3 million for WEST V, based on December 2021 appraisals. When controlling for asset sales since the last appraisals, the pool values declined by approximately 2.1%, 1.2% and 1.7% per annum for WEST III, IV and V respectively.

Transaction Performance

Lease collections have fluctuated in 2022 but remained rangebound since the prior review despite slight declines for WEST III and IV. Based on the November 2022 servicer report (October collection period), WEST III, IV and V received $1.5 million, $1.8 million and $3.3 million in basic rent, respectively, which were higher for West IV & West V compared to their LTM average monthly receipts of $1.7 million, and $2.5 million, respectively. West III basic rent collections were lower than their LTM average monthly receipts ($1.5 million vs. $1.7 million).

LTVs on WEST IV and V outstanding notes improved from the prior review as note amortization was larger than collateral value declines, while the LTV for the West III notes increased.

The debt-service coverage ratios for WEST III, IV and V are currently at 1.24x, 1.13x and 1.9x. The DSCR is above the rapid amortization trigger, which is 1.1x for all of the transactions. The DSCR is above the cash trapping trigger for West III: 1.24x vs 1.15x and West V: 1.90x vs 1.15x. West IV has a trigger level of 1.15x and a current DSCR of 1.13x.

The West III notes have fallen further behind scheduled principal balances vs. the prior review with the A notes $17.5 million (approximately 8%) and the B notes $4.2 million (approximately 13%) behind schedule.

RATING SENSITIVITIES

Factors that could, individually or collectively, lead to negative rating action/downgrade:

Downgrades are possible if the collateral value in the portfolio declines more than forecast, if lessee payment performance deteriorates further, thereby reducing cash flows, or if utilization rates decrease.

Factors that could, individually or collectively, lead to positive rating action/upgrade:

Key drivers of potential upgrades would be strong collections, debt service coverage maintained above trigger ratios and a decline in LTVs sustained over a period of time, among other factors.

Rating upgrades are limited as Fitch caps the aircraft ABS ratings at 'Asf'. This is due to heavy servicer reliance, historical asset and performance risks and volatility, and its pronounced exposure to exogenous risks. This was evidenced by the effects of the events of Sept. 11, 2001, the 2008-2010 credit crisis and the global pandemic, all impacting demand for air travel. Finally, the risks that aviation market cyclicality presents to these transactions are compounded because when lessee default probability is highest, aircraft values and lease rates are typically depressed.

Fitch also considers jurisdictional concentrations per the 'Structured Finance and Covered Bonds Country Risk Rating Criteria,' which could result in lower rating caps. Hence, senior class 'Asf' rated notes are capped, and there is no potential for upgrades for certain tranches at this time.

For classes rated below 'Asf', upgrades are also limited given ongoing pressure on transaction performance and the ongoing geopolitical risk, which combined will retain negative ABS rating pressure, especially for transactions that are underperforming relative to Fitch's COVID recovery expectation.

Best/Worst Case Rating Scenario

International scale credit ratings of Structured Finance transactions have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of seven notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of seven notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAAsf' to 'Dsf'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579.

USE OF THIRD PARTY DUE DILIGENCE PURSUANT TO SEC RULE 17G -10

Form ABS Due Diligence-15E was not provided to, or reviewed by, Fitch in relation to this rating action.

DATA ADEQUACY

The data used for the development of the rating included information from the following sources:

Issuer and Servicer reports as of interest payment date on November 2022 provided by Willis Engine Structured Trust.

REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING

The principal sources of information used in the analysis are described in the Applicable Criteria.

ESG Considerations

Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg.

Additional information is available on www.fitchratings.com

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