Bohai Leasing to acquire 100% interest in Avolon; Delta launches EETC

Avolon has entered into an exclusivity agreement with Bohai Leasing granting Bohai exclusivity to negotiate with Avolon until September 7, 2015 (the “Exclusivity Period”) with respect to the possible acquisition of 100% of the issued and outstanding common shares of Avolon at a price of US$32 per share. During the exclusivity period, Bohai and Avolon will attempt to negotiate definitive agreements on terms previously discussed and accepted by the parties. Bohai’s offer is subject to completion of satisfactory and customary due diligence.

In connection with Bohai’s obligations under the exclusivity agreement, Bohai will make a good faith deposit of US$50 million into an escrow account within two business days, which amount will be in addition to the US$25 million currently held in escrow in connection with the cash tender offer made by Bohai on July 31, 2015, for an aggregate deposit of US$75 million. Avolon will be entitled to receive the US$75 million deposit in certain circumstances, including if Avolon is willing to execute definitive documents in connection with the Transaction and Bohai is unable or unwilling to do so. Upon execution of definitive documents in connection with the Transaction, the US$75 million deposit will be increased by Bohai to $250 million, payable to Avolon in the event the Transaction is not consummated under certain circumstances.

Pursuant to the exclusivity agreement, Avolon and Bohai will amend the Investment and Tender Offer Agreement, dated July 14, 2015 between Avolon, Bohai and an indirect wholly owned subsidiary of Bohai, to extend the expiration time of the Offer to midnight at the end of the day on September 18, 2015.

Avolon remains subject to the agreement. There can be no assurances that Avolon and Bohai will enter into a binding agreement to consummate the transaction or that Avolon’s Board of Directors will approve the deal. Avolon continues to carefully evaluate the transaction and the terms and conditions of the definitive documents relating to the deal with its financial and legal advisors and continues to negotiate terms with Bohai.

Meanwhile Delta Air Lines has launched and priced a $500 million enhanced equipment trust certificates (EETC) issuance. The offering is split into three tranches. Two senior slices comprise: $312.524 million Class AA notes, rated Aa3 by Moody’s and AA by Standard & Poor’s, which amortize over 11.9 years, with a 8.9 year average life and a 45% initial loan-to-value ratio (LTV), priced at 3.625% and 20 basis points (bps) make-whole spread over Treasuries; and $69.449 million Class A notes, rated A1 by Moody’s and A+ by S&P, which also amortize over 11.9 years with a WAL of 8.9 years and an LTV of 55%, priced at 3.875% with 25bps make whole over Treasuries. The subordinate B Class of notes totalling $118.027 million, rated Baa2 by Moody’s and BBB by S&P, have a LTV of 72% and priced at 4.250% with a 40bps make-whole spread over Treasuries. There is an 18 month liquidity facility provided by Commonwealth Bank of Australia (New York branch).

The sole structuring agent and lead joint bookrunner on the deal is Morgan Stanley. Joint lead bookrunners are Credit Suisse, Citi, Deutsche Bank and Goldman Sachs. Passive bookrunners are BNP Paribas, Credit Agricole and Natixis.

The certificates are secured on a portfolio of 15 Boeing B737-900ER aircraft delivered new to Delta between September 2013 and February 2014, which were originally funded with cash.

The Aa3 rating of the Class AA is eight notches above Delta's corporate rating of Ba2, and two more than has been typically assigned to the most senior tranche of EETCs. Moody’s states that this reflects the superior characteristics of the Class AA notes.

“The sizing of the senior tranche reflects a change from the norm for EETCs. Moody's estimates the peak loan-to-value (LTV) in the mid-40% range (before priority claims), or about ten to fifteen points lower than that of the most senior tranche of EETCs issued since 2004. Moody's estimates the peak LTV of the Class A tranche in the mid-50% range, about level with that of the senior tranche of other EETC transactions.”

The strong collateral in the 737-900ER, which is forecast to remain the backbone of Delta's narrow-body fleet over the next 12 years, contributed to the high rating so too did the combination of the relatively lower LTVs and the low coupon pricing, which the rating agency says increases “the probability of affirmation by Delta during a reorganization relative to that of the company's existing EETCs”.

Delta is also planning to arrange a $1.5bn revolving credit facility due in 2020 and a $500 million term loan B due in 2022. The proceeds of the term loan ($500 million), the proceeds of the Series 2015-1 EETC ($381 million) and cash will repay the company's $1.3 billion term loan scheduled to mature in March 2017. The new revolver will replace the company's $1.225 billion revolver scheduled to expire in April 2016.