ICBC Leasing is in the market with an offering of $583 million fixed rate eight-year notes, secured by 18 aircraft. This is the first secured capital markets offering for a Chinese lessor, which is also acting a sole servicer – again another first.
Moody’s has assigned the notes with an A3 rating. The notes, due 2022, are being issued by Dragon Aviation Finance Luxembourg S.A. acting in respect of its Dragon Aviation 2014-01. The notes will be secured by a portfolio of asset loans, in which the repayment is indirectly and fully supported by ICBC Financial Leasing Co., Ltd. (ICBCFL).
The issuer will use the proceeds of the notes to fund a portfolio of asset loans to Dragon Aviation Finance Limited, a special purpose vehicle incorporated in Ireland. This SPV will, in turn, use the asset loan proceeds to fund a portfolio of intercompany loans (I/C loans) made to some affiliates of ICBCFL (asset owners). These asset owners will use the loans to refinance a portion of the purchase prices of certain aircraft. The I/C loans will be secured by these aircraft, which are understood to be mostly narrowbody aircraft on lease to non-Chinese airlines.
The asset loans and I/C loans pay monthly fixed interest rate payments -- at a higher interest rate than that of the notes -- and have a pre-determined principal repayment schedule, which is the same principal amount payable as that of the notes.
Prior to a default of the I/C loan or a total loss event on the associated aircraft, the issuer will use the payments -- ultimately from the performing I/C loans -- to repay the notes' principal and interest.
Upon a default of the I/C loan or a total loss event on the associated aircraft, the I/C loan will be accelerated and the security trustee will -- on an I/C loan-by-I/C loan basis -- exercise a put option and sell the associated aircraft to ICBCFL.
ICBCFL, as the put option provider, will then be obliged to make a put option payment into the borrower SPV's account within 30 days upon receipt of the notice from the security trustee.
The put option payment will be sufficient to repay the accelerated I/C loan in full, the associated interest, as well as the finance costs of the borrower SPV and the issuer.
The issuer will then partial redeem the notes early for an amount which is equal to the principal amount of the accelerated I/C loan amount.
As there could be a 30-day delay in the put option payment by ICBCFL, the issuer will draw on the liquidity facility -- to be provided by Credit Agricole Corporate and Investment Bank (CA CIB) -- to meet the timely payments of notes interest and principal in accordance with the principal repayment schedule.
Goldman Sachs and CA CIB are bookrunners on this deal, which is in the market now. Price talk for the coupon is rumoured to be 4%.
ICBCFL, which is wholly owned by Industrial & Commercial Bank of China, is one of the largest leasing companies in China by assets with total assets at RMB149 billion at end-2013. The lessor is expected to have a portfolio of 150 aircraft by the end of this year.
Chinese lessors are keen to gain access to US dollar financing in the international debt capital markets, although it has traditionally been difficult for them to borrow offshore from non-Chinese and non-bank investors in US dollars. As this is a Reg S deal, investors are being sourced from outside of the US and reports suggest interest is coming mainly from insurers and money managers.
It is demonstrative of ICBC Leasing’s credit and leasing story that it has been able to launch this issuance with the company also acting as the sole servicer for the aircraft – usually a deal such as this would require a back-up servicer. This is a problem Chinese lessors have been grappling with for some time. Mingsheng Leasing is also rumoured to have mandated arrangers to launch a secured notes issuance backed by a portfolio of aircraft that will include a non-Chinese back-up servicer.