Aviation Capital Group (ACG) has broken an Eximbond pricing record through its entity called Santa Rosa Leasing LLC, a wholly owned subsidiary of ACG, this week. Just a few days after Ryanair priced the lowest recorded pre-funded Eximbond, ACG, in a $119m deal, priced an Eximbond at 61bps over mid-life swaps, which is equal to a fixed rate of 1.693%, at a weighted average life of 6.16 years (8/15/2024 Maturity). This is equivalent to Libor +29 bps. The transaction was priced at par. The transaction was 4.7 times oversubscribed. The deal is fixed against three 737-800s. Two are leased to GOL and one to Skymark.
Joint Book Runners on the deal are Credit Agricole Securities, Goldman Sachs and Mitsubishi UFJ Securities.
There are so many factors in play in the market today it is hard to keep up but in the end it all comes back to access to cheap financing – those who have it and those who do not. As interest rates are set to be low for at least the next three years or so, due to the amount of car crash economic disasters out there waiting to happen, it can be assumed with some degree of certainty that there are going to be a great many deals priced very low indeed as we have seen of late. In the past week Willis Lease Finance, Ryanair and ACG have all benefited from ultra-low rates. Over the summer ELFC managed to leverage its associations with banking partners to finance a deal at super low rates.
We are in a market where airlines and lessors will rise or fall depending on the availability of cheap finance. Lessors have in many ways completed their transition into commercial financial services companies. Who has access to capital remains the bottom line. Good credit and pre-existing relationships with banks are key of course but we are seeing people wishing to do all sorts of financing but who do not have the access to capital. So as some banks pull back and become more selective it is the lessors that are stepping up and creating a second level financing industry, they are borrowing at LIBOR +250bps or better, taking money and renting it out in the form of aircraft and/or engines. The lessors are the lenders of choice for some and necessity for others.
On the airline side those that do not and are clinging on by their fingertips and in Europe at least it is hard to see how people can keep up with the likes of Ryanair, Easyjet and Norwegian. There are about 1,000 aircraft on order between these three airlines and as they have access to cheap capital they can out price other airlines with ease – the other guys cannot compete with this and there will be consolidation and failures to come for sure. There are also very few airline start-ups and the aftermarket is depressed, which is in part due to the lack of access to capital for people wishing to purchase second hand aircraft. Look at the 737-800 and A319 aircraft – they are both out there in the market now priced in the low teens, these are fantastic investments. Many will wonder why airlines continue to order new aircraft when there are these remarketing deals to be had. The answer is of course new aircraft discounts and cheap financing of new aircraft – the Ryanair deal priced at 1.78% is a case in point. Many lessors are paying an average of 10% for their loan funding from investors.
So the conclusion? These market moves are due to the interest rate structure of late (and the foreseeable future) and shows up well the impact on our industry of government manipulation of the capital markets through quantitative easing. Some lessors in the market are paying 9-10% for loan funding from their own investors, so they must be charging airline customers about 11% for lease finance. Compared with that rate, paying 1.7% for Ex-Im funding is a great deal for an airline. This in turn means buying a new aircraft is a far better option than cheaper (on the face of it more logical) alternatives.
In additional ACG news, Stephen Hannahs is to step down from his post as CEO of Aviation Capital Group and will be moving up to the board to become Vice Chairman after meeting mandatory leaving no alternative than to step aside. There is no question that were it not for corporate governance both Pacific Life and Stephen Hannahs would be in full agreement that he stay on. A beach and a snazzy cocktail with an umbrella awaits Stephen in 2013. Denis Kalscheur, SVP Treasurer of Pacific Life will become the CEO of Aviation Capital Group. One person of note said to me yesterday “Father time taps all of us on the shoulder one day. Stephen is lucky to be able to say that he went the whole nine yards, is in great health and has made a transition on his terms”….now how many times to you hear of that in big business these days? We wish him well.