Asian investors are being targeted for increased participation in aviation debt capital market products, specifically in ABS transactions for both debt and E notes. Speaking at the ISTAT Asia 2015, an annual event of the International Society of Transport Aircraft Trading, Nicolas Parrot, Co-Head Transportation Sector Investment Banking for BNP Paribas commented that fixed income investors are migrating to equity trading, specifically ABS E notes, and that there is a move away from private equity or development funds buying equity to burgeoning interest from Asian investors. He admitted that having Asian investors regularly buying ABS E notes is some way off but that the “market is expanding every day”.
Asian investors are showing much more interest in debt capital markets products: BNP Paribas placed one Eximbond with an Asian investor, while Japanese investors also came into the Deucalion ABS transaction.
Panelist Masao Masuda, Head of the Global Aviation Team at the Development Bank of Japan, also discussed the gap in the JOLCO market for leasing companies to attract Japanese equity investors since there has been a dearth of JOLCO issuances by top tier airlines. Lessors will be able to take advantage of the spare capacity to free up their own equity for other deals and receive 100% financing. Masuda did acknowledge that JOLCO investors tended to prefer strong airline credits but this could be solved by ensuring the sub-lessee of the aircraft was a recognised brand. Although leasing to a top tier credit usually depresses lease rates, this needs to be balanced against the aforementioned advantages. There is also a certain degree of inflexibility for JOLCOs since the contracts cannot be terminated or easily renegotiated in a distressed situation but the equity advantages and diversification funding benefits ensures the product is still attractive for lessors.
It has to be said that right now there is a great deal of money ready to be deployed, seemingly by all major market players. However, most that we have spoken to insist that they have been unable to deploy funds because they simply are not seeing deals coming to the table that are worth chasing. Now much of that is due to the depression of potential return on investment of late and much of that is due to the flurry of manically-priced deals that have flowed through the market in recent years. Some of this is due to a few Chinese based lessors going all out for market share with all other concerns seemingly rescinded. So the question is this: Do companies really feel the need to compete right now when deals have been done with high/moderate risk clients at LTV ratios of sub 65% at extraordinarily low rates, conversely at the same time deals have been done at LTVs on book values far in excess of 100%, not exclusively with low risk clients, at very (dangerously) low rates of return.
The middle ground on many deals has seemingly evaporated into thin air. A form of consolidation is underway with CDB Leasing, ICBC, Intrepid, AWAS and some others of note maybe in the very near future looking very different from what they do today in terms of both management and existence as independent brands. Some lessors of note within China must have management who know full well that it will be impossible to turn a profit on a number of deals done over recent years – Those same lessors also suffer from, how shall I put it; “government interventions”…? You may recall that there were a number of aircraft lessors in China some 30 odd years ago with state involvement – today none of those exist and the run-off of those books proved to be most costly. Have no lessons been learned? At the same time some established western lessors of note are having a hard time trying to sell off parts of their business. The leasing market is strong and awash with money – It is hoped that from this point it will get stronger as some lessors pull back, as they do filtering out of the system the ultra-competitive deals – creating as they do a warning for others not to follow in their footsteps (until the next time). Those playing the long prudent game will gain the winning edge once again and the money built-up of late will be deployed, perhaps late 2015 and 2016 will be a boom period for many.
Meanwhile, Norwegian Air Shuttle (NAS) has priced two US Eximbonds at mid-swap + 55bps, or 2.372% coupon for the refinancing issuance and 2.415% coupon for the prefunded issuance. The 2.372% coupon is equivalent to 3 months Libor + 41.5bps, while the 2.415% coupon is equivalent to 3 months Libor + 45.3bps.
Credit Agricole Securities and Goldman Sachs acted as Joint Book Runners and Structuring Agents. This deal will be analyzed in detail in the next issue of Airline Economics (sign up today atwww.airlineeconomics.co).