Methodology

Methodology & Framework

Understand the rigorous quantitative framework behind our stress testing platform. Transparent methodology, validated assumptions, and industry benchmarks.

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7-section comprehensive guide covering all risk metrics, scenarios, and validation

Risk Metrics Framework

Expected Loss (EL)

Probability-weighted loss across all assets. Calculated as:

EL = Σ(PD × LGD × EAD)

Shows expected dollar loss if portfolio experiences the stress scenario.

Value at Risk (VaR95)

95th percentile loss using Monte Carlo simulation. More conservative than EL.

Captures tail risk: 95% probability losses won't exceed this level, but 5% chance they could.

Typically 2-3x higher than EL for aviation portfolios.

Concentration Risk (HHI)

Herfindahl-Hirschman Index measures portfolio concentration.

• HHI < 1,500: Diversified

• HHI 1,500-2,500: Moderate concentration

• HHI > 2,500: High concentration risk

Cash Flow at Risk

Monthly revenue impact and security deposit burn analysis.

Shows how long lessor can sustain defaults before cash runs out. Critical for liquidity planning.

Recovery Analysis

Expected recovery value by jurisdiction, accounting for repossession costs and legal delays.

US/UK: 30 days | EU: 60 days | Asia: 90 days | Russia/China: 180+ days

Breakeven Analysis

Months of security deposit coverage at default rates.

Helps identify portfolios with insufficient liquidity buffers in stress scenarios.

Stress Scenarios

Scenario A: COVID-19 Repeat
Demand shock with operator differentiation

Default Multiplier: 3.0x (AAA/AA: 2.0x, BB/B: 5.0x)

Value Decline: Narrowbody 20%, Widebody 25%, Regional 30%

Models demand collapse with greater impact on low-cost carriers and widebody aircraft.

Scenario B: Oil Price Spike
Fuel cost shock with carrier differentiation

Oil Price: +50% ($80 → $120/bbl)

Lease Rate Decline: Narrowbody -15%, Widebody -8%

Low-cost carriers (BB-rated) hit 2.0x harder than premium carriers (AA-rated) with hedging.

Scenario C: Interest Rate Shock
Refinancing pressure with leverage differentiation

Rate Increase: +200 basis points

Default Multiplier: High-leverage (BB): 2.0x, Moderate (BBB): 1.3x, Strong (A): 1.0x

Highly leveraged operators face refinancing pressure; strong-balance-sheet carriers absorb rates.

Scenario D: Geopolitical Crisis
Legal complications with jurisdiction differentiation

Repossession Delay Multiplier: US/UK 1.0x, EU 1.2x, Russia 3.0x, China 2.5x

Recovery Rate Reduction: 20%

Models extreme repossession delays and recovery challenges in weak legal jurisdictions.

Scenario E: Custom
User-defined parameters for specific risks

Define your own default multiplier (0.5x-5.0x), lease rate change (-50% to +50%), aircraft value change (-50% to +50%), and recovery delay (0-365 days).

Validation & Benchmarking

Comparison to Industry Standards
Moody's Aviation Lessor Ratings

Investment-Grade Lessor Benchmarks:

  • • Typical EL: 2-5% of AUM
  • • Typical VaR95: 8-12% of AUM
  • • Typical HHI: 1,200-1,800

Our Tool Benchmarks:

  • • Narrowbody-heavy: EL ~3%, VaR95 ~9%, HHI ~1,400
  • • Widebody-mixed: EL ~4%, VaR95 ~11%, HHI ~1,600
  • • Regional-focused: EL ~5%, VaR95 ~13%, HHI ~1,900

Limitations & Assumptions

Key Assumptions
  • • Default Correlation: Assumes independence (no systemic correlation)
  • • Recovery Rates: Based on historical data; may not reflect future recoveries
  • • Aircraft Values: Use depreciation curves; actual values depend on market conditions
  • • Operator Ratings: Based on public credit ratings; may lag actual credit deterioration
  • • Scenario Multipliers: Calibrated to historical shocks; future shocks may differ