Buoyed by the recent announcements from central banks across the globe that interest rates will not rise in the near term, some aircraft lessors are keen to cash-out. The latest lessor owner to contemplate a sale of its aircraft leasing arm is CIT Group, which is currently exploring how best to offload the business with all options on the table. CIT presents an obvious IPO possibility – its portfolio is heavily weighted towards the North American market with big exposure to American and Delta – clients that investors can immediately relate to. The CIT book average age is six years old but that is due to fall rapidly as the US$11bn delivery stream of Neo/Max/A350 and 787 aircraft gathers pace over the remainder of this decade. CIT is a very tempting target indeed for Chinese companies; the lessor gives very good access to North American markets while at the same time provides access to the latest, most promising widebody aircraft deliveries along with the Max and Neo. Now if an IPO or merger were to go off then we could assume a price of around US$2.48bn but given the Avolon sale price and the possible scramble from Chinese companies for the CIT business, we could be looking at the possibility of a US$3.2bn price tag. Therefore, a lessor such as Aviation Capital Group for example, could/should be looking closely at CIT on an M&A basis, while AerCap might wish to cement its leading position through a purchase deal. In both cases, a lessor could get a deal that backstops North American business but moreover, a deal that should give instant value if something can be agreed before serious Chinese interest shows.
Meanwhile, the Chinese banks are trying to offload aircraft leasing arms at pace as regulators step-up the reforms drive, forcing many banks to diversify businesses and services to improve stability of the sector. As a result both BOC Aviation and CDB Leasing are coming to market with IPOs. CDB Leasing should raise about US$1bn through a Hong Kong IPO in the first half of 2016 if all goes to plan. BOC Aviation on the other hand has a valuation of (in reality) around US$6.8bn but it is mooted that a maddening US$10bn price tag for the firm will be put up at this IPO as the bank goes for a US$4bn IPO for the 40% on offer – really? Bank of America Merrill Lynch, Citic CLSA and Deutsche Bank are leading the CDB Leasing IPO.
This week will also see the launch of the Indigo IPO – with many people watching with great interest given the very high price set for the offering. Some to this day argue that the Spring IPO was priced far too low, now we have the opposite end of the scale coming to market and that presents a risk for retail investors. The price is so high that retail investors have little choice but to wait for secondary market trading of the stock in all reality. The fact is that IndiGo is valued at 2.1 times its enterprise value (EV)/sales and at price-to-earnings ratio of 21.3 times the earnings reported in FY15. This puts the PE ratio above that of the mighty Ryanair and well above Southwest, American and Delta! As such if the IPO does well then the banks would have made a very good job of this IPO, more so than any other before it for some considerable time – We can but wait and see.