The global pandemic significantly impacted appetite for aircraft Japanese Operating Leases (JOLs) and Japanese Operating Leases with Call Options (JOLCO) due to the ensuing restructuring and insolvencies filings of certain airlines with aircraft financing using these structures. Many investors that did not have a diversified investment portfolio were badly impacted by the financial distress of certain airlines. However, airlines around the world have begun to benefit from the recovery in air travel with many returning to profitability. Likewise, the Japanese economy has also recovered and investors are once again turning to the aviation sector to put their money to work.
JOLs and JOLCO products are not only used for financing aircraft, they are also used very often in commercial shipping. Umid Sharipov, managing director, ABL Corporation Japan noted on a panel discussion at Airline Economics Growth Frontiers Tokyo that even though aviation was effectively grounded, the shipping industry was booming. “There was a natural shift of investor appetite from aviation into shipping, whereas pre-Covid it was a 50:50 split between the two industries it was heavily skewed to ships. But that balance appears to be coming back,” said Sharipov. He added that pre-pandemic Japanese investors had become “more adventurous” in terms of new airline credits outside of the more favoured flag carriers. “That innovation created a wider market, but it came with additional risk, which was realised during the pandemic.” As a result, Sharipov said, investors have naturally pivoted back to investing only in more “conservative names” such as major flag carriers that are top tier credits.
Shinichi Nakatani, head of structured finance and aircraft marketing at SMFL said that during the crisis it was almost inappropriate to suggest aircraft financing transactions especially during the peak of the pandemic crisis and as such the focus turned to the maritime industry. Nakatani also noted that once the scale of the crisis spread around the world, the bank had to ensure it continued to support its customers but he did see a number of other banks walk away from the industry and investor appetite dried up – at that stage liquidity and government support was key to airline survival. “Some major airlines had only four month of liquidity, while others had only a six months and very few had more than one year of liquidity,” he said [translated from Japanese]. “It was a very difficult time.”
Now the passengers have returned, so too has the investor appetite, said Nakatani, but the investors have now learned some hard lessons.
One of those lessons was to ensure the credit quality of the lender but more to have the technical ability or advice to ensure the value of the underlying assets. ABL Aviation has been working to advise its Japanese partners to ensure they have a view of the asset behind the financing, whereas before the emphasis was more on the credit of the lender. “No matter how good the credit is, if things go south you need to rely on the asset,” said Sharipov. “Not enough attention has been paid on monitoring the asset so we have been trying to educate investors to pay more attention to asset risk as well as credit risk.”
Despite the deep downturn caused by the pandemic, the aviation industry has revived with relatively few bankruptcies. Charles Zhou, managing director, head of aviation finance for the Asia Pacific region at Natixis, pointed out that the pandemic and strong recovery had demonstrated the resiliency of the industry and its ability to bound back quickly and strongly. Given the recovery, Zhao does not think that there will be any real fundamental change to the JOLCO market especially since there are few alternative tax efficient investment structures available and that the structure itself works. The only issue Zhao sees is the foreign exchange challenge. “With the appreciation of the Japanese Yen it is becoming increasingly difficult for active investors to consider US dollar denominated equity,” he said, adding that on the debt side there are more pressures from the geopolitical situation, especially the war in Ukraine. “But the aviation banks are committed to the product, which is still very tax efficient and the market now has confidence in the strong recovery of the aviation industry.”
Takahiro Matsumoto, managing executive officer, Financial Partners Group, noted that investors are able to manage the FX risk by increasing the cost of the equity to better meet the high cost of debt. He said [translated from Japanese]: “We need to match the equity and debt levels to better absorb the fluctuation effects, which is why we have adjusted the pricing level.” He also noted that before to the tax reforms that came into force on April 1, the new transaction special depreciation rate for the first year had been very attractive for investors, but since the reforms were enacted that rate is no longer applicable. Despite this, he said, that competition for deals was high and was increasing along with passenger demand.
Sharipov highlighted that despite the economic requiring an increase in pricing, he observes a lag in that trend mainly due to the limited supply of deal sin the market, which is feeding the highly competitive environment but also because these deals can take several months from mandate to close this is feeding that time lag between market conditions and an increase in pricing.
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