Air Lease Corporation (ALC) has frequently graced these pages with tales of the latest financing innovation (who could forget the now infamous Thunderbolt ABS magazine cover). The small but brilliant finance team at the LA-based aircraft lessor has stunned the market yet again with an inaugural sukuk issuance as well as forging new banking relationships in the Japanese market, attracting new sources of capital into the aviation sector.
Speaking to senior vice president and treasurer of Air Lease Corporation Daniel Verwholt shortly after the close of the sukuk on March 15, 2023, he said that ALC was working on a several more deals even as these two were closing – a challenging workload for a team of essentially just Verwholt and chief finance officer Greg Willis. Despite the heavy workload, the pride of the many achievements by the small team shines through the conversation. The entire company has learned the lessons of the various crises of the past few years well. Even as the company and industry continues to emerge from the most testing pandemic with the grounding of the world fleet, the team are cognizant of a possible correction in the banking market and the need more than ever to secure a diverse range of funding sources, especially given ALC’s industry leading $24bn orderbook of Boeing and Airbus aircraft.
ALC is committed to diversifying its funding sources but it goes beyond that simple policy: “It is important to have a diverse banking group – by size and also by region – but we have also made a commitment to raise capital where we invest our capital,” explains Verwholt. “It helps our airline relationships to work with their local banks; it adds creditability and demonstrates we are there for the long term in support of the broader aviation ecosystem.”
In the past six months, ALC has worked hard to execute this policy with two landmark deals expanding investor groups in Asia and the Middle East.
Tapping the Japanese market
At the end of December last year, ALC closed a five-year $400 million unsecured term loan facility arranged by Sumitomo Mitsui Trust Bank, and the deal has now been expanded with more Japanese lenders upsizing the facility to $475 million.
The deal has opened up a new Japanese banking group for ALC, where the lessor had a smaller banking footprint than other jurisdictions.
In the spirit of fostering financial diversity, Ritch Vilas Boas, head of the asset finance team, Americas at Sumitomo Mitsui Trust Bank in New York, approached the ALC team at the Airline Economics Dublin conference in January 2020 to pitch a lending proposal aimed at gaining more Asian investor exposure for the leasing company. The conversations were paused during the pandemic but were reignited last September as it became clear the aviation industry was recovering strongly.
“We knew that the Japanese market was starting to reopen and there could be an opportunity to start to engage local banks as well as banks across Asia that were keen on reopening discussions with aviation clients,” says Vilas Boas. “These banks realised that reopening their books with a strong credit like Air Lease Corporation would make the process much smoother and more successful.”
Talks began over a small $150 million credit facility but demand soon outpaced those humble beginnings. “As we started to talk with banks, it became clear that demand was overwhelming,” says Vilas Boas. “We went from talking about a $150 million deal to $300 million finally closing oversubscribed at $400 million in December 2022.”
Since December that demand continued and Sumitomo Mitsui Trust Bank has exercised two subsequent accordion options increasing the facility to $475 million with 13 different banks – seven Japanese banks – six of which are regional banks. Additional commitments are in place for a subsequent accordion in June 2023, to bring the facility to over $500 million.
The success of the deal surprised many especially since the consensus about the attitude in Japan regarding aviation investing was mainly negative since the pandemic which impacted many operating lease structures.
“I was positively surprised at the success of the deal,” says Vilas Boas. “Despite the negative backdrop in the market at that time, considering the rising cost of funds for banks and the recently announced impairments of Russian leased aircraft, we saw overwhelming responses from these banks.”
[ALC wrote down its Russian fleet in April 2022, but other lessors had followed suit throughout 2022 and in December were making moves to sue insurers for total loss claims].
Re-entering the aviation market post-pandemic with an investment grade US corporate credit is a much easier sell to a credit committee. It is testament to ALC’s rating and reputation in the market for attracting unsecured credit in such a nervous environment.
“Banks, especially Japanese banks, prefer to do secured transactions rather than unsecured deals,” says Vilas Boas. “But ALC is an investment grade, publicly-listed company with a top management team and a solid track record, as such many banks saw this deal as a gateway transaction back into the market.”
The focus remains for many banks on the quality of the credit and especially for smaller lending banks as are represented in this deal. The fact that ALC took the time to generate new relationships in Japan and Asia with medium-sized banks, which took relatively small $10 million-$30 million ticket sizes speaks again to ALC’s dedication to tapping into new source of capital. “For us, the focus is always raising cost efficient capital,” says Verwholt. “But very closely after that, given the amount of capital that we need to raise due to the capital intensive nature of our business, the diversification of funding and finding these $10, $20, $30 million tickets is what makes ALC that bit more special. We could get that extra $500 million from a secured or an unsecured term loan by going to the regular big banks. But what makes us special is our willingness to work and spend time with these medium-sized institutions. Over time that effort will import huge benefits to ALC because of that differentiation of funds and, once those banks get more comfortable with us, the relationship with grow, and those $10, $20 million tickets could increase to $50 million-plus tickets.”
The ALC team has certainly never shied away from hard work in the pursuit of leasing deals or diversification of funding. In the same way that the team tapping into the Japanese market, they also took the opportunities that arose in the Middle East region.
Inaugural sukuk
ALC’s inaugural sukuk issuance represented the first ever offering of its kind into the Middle East market from a North American corporate and the largest sukuk from a US-based borrower in history. The issuance forms a part of ALC’s funding strategy to diversify its investor base and tap into new pools of liquidity.
The offering consisted of US$600 million 5.85% trust certificates due April 1, 2028, paid semi-annually, pursuant to Rule 144A and Regulation S. The notes are rated “BBB” by both S&P and Fitch with a Stable Outlook and listed on the London Stock Exchange.
“This inaugural sukuk offering is a testament to ALC’s strong credit profile and further evidence of our commitment to a well-diversified, global funding program,” said Gregory B. Willis, executive vice president and chief financial officer of Air Lease Corporation, said in an official statement upon closing. “We are grateful to our banking partners for their commitment and support in structuring and executing this landmark transaction.”
Bank ABC, DIB, Al Rayan, Citi, Deutsche Bank, Emirates NBD, JPMorgan, KFH Capital and Warba Bank served as joint lead managers. Allen & Overy and Clifford Chance provided legal guidance.
“We are proud to highlight the strong liquidity in this region and the opportunity for other investment grade borrowers to raise funds at cost efficient rates. This transaction complements our strong airline relationships in the Middle East and we look forward to further developing our funding presence in this region,” stated Verwholt at the time.
Bank ABC, one of MENA’s leading international banks, acted as the sole arranger, structurer as well as joint lead manager and bookrunner for the sukuk.
Bank ABC, along with a number of regional and international banks listed above, announced the transaction on February 27, which was followed by a deal roadshow covering investors in the UAE, Qatar and the Kingdom of Saudi Arabia (KSA). As a 144A/Reg S issuance listed on the London Stock Exchange, the Sukuk was also open to the global investor community. With the strength of the JLM group, strong market appetite for Sukuks, and investment grade credit, the transaction closed 3.5x oversubscribed and priced successfully on March 6 at 5.85%.
Commenting on the landmark transaction, Christopher Wilmot, group head of treasury & financial markets at Bank ABC said on closing: “With ALC’s robust aviation business and solid financial position, the issuance presented an attractive Shari’a compliant investment opportunity for regional investors. We are committed to opening this avenue of funding for our clients in our core US market, enabling them to access a wider pool of liquidity.”
Greg Willis noted that the “quality and depth of demand for the transaction” had exceeded ALC’s expectations, and that the deal highlighted the opportunities and strong liquidity that exist in the Middle East region.
The hugely successful sukuk, like so many new aviation deals, took several months to prepare and close, which was built on solid relationships and aligned strategies. Bank ABC, while active in aviation finance for the best part of two decades, traditionally had focused more on regional credits such as GCC flag carriers and airlines in the Middle East and Africa region. However, the bank was eager to capitalise on its unique geographical footprint operating out of Bahrain with a global reach into the US and Asia to explore more deals that brought in clients from outside the region in order to connect them with local investors. “We had a natural link with ALC since it has 10% of its asset base deployed in the MEA region and was already a client with our US branch,” explains Wilmot, speaking to Airline Economics shortly after the deal was closed.
Verwholt notes that the ALC team had begun conversations with Bank ABC back in 2018 on future partnerships after the bank became part of the lessor’s group of lenders as part of the company’s annual extension to its revolving credit facility. “The whole genesis of Bank ABC entering the credit facility was to enhance our Middle East banking relationships and the fact that they were open to investing in new companies at the time. Bank ABC’s team spent real time getting to know ALC as a company and understanding our financial needs.”
The two companies continued to build upon their relationship until the global pandemic hit and discussions halted. Once the industry reopened, ALC realised that the Middle East region was flushed with liquidity and was worth exploring further.
“We had floated the idea [of a sukuk] to ALC before Covid but only got back in touch with them in September 2022 when we arranged a non-deal roadshow to gain feedback from local investors,” says Wilmot. “The response was encouraging that a deal was possible.”
“Bank ABC did a tremendous job shepherding us through the process and we found a very warm welcome from investors,” says Verwholt. Unlike a typical banking relationship that usually starts with a simple product like a loan, Bank ABC suggested a sukuk transaction that would get the market comfortable with ALC’s credit profile and open banks and other Middle East investors up to more unsecured deals in the future.”
Despite the warm investor reception, as Wilmot says, “the devil was in the detail”. What followed was several months of structuring work marrying an Islamic Shari’a format transaction with a US corporate entity as an issuer. “ALC’s large, unencumbered asset pool enabled us to structure a 100% tangible asset transaction, which is rare in the region where the average is between 30-50% tangible assets,” explains Wilmot.
Bank ABC brought in another bank, DIB, to work together on the complex structuring process, which had to consider multiple jurisdictions with the region. “Once we had a feasible structure in place, we were then in a position to go out to investors and have more concrete conversations with investors to better assess demand,” said Wilmot. “Once we were assured of that interest, we brought in several banks to assist with a wide distribution around the region. For example, we brought in Masraf Al Rayan bank to broaden interest in Qatar.”
Following a true deal roadshow, the team was predicting a book size of around $1.2bn for an issue size of US$500 million. “We were pleasantly surprised that we built a book of $2bn and needed to upsize the issuance to US$600 million to keep all those investors onboard,” adds Wilmot.
With such a large book, the deal could have been upsized further but, as Wilmot attests, as a new entrant to the region, the emphasis was on ensuring those anchor and initial investors were happy with their ticket size and also allowing them and other investors to assess the deal’s secondary performance. “Many investors were keen to ensure that this wasn’t a one-off deal, that ALC would become a repeat if not regular issuer in the region. We certainly hope that this is a starter programme for ALC, and we now have a proven programme for more lessors from outside the region to come and tap a new pool of investors,” says Wilmot.
“We raised $600 million and had over $2.25bn in demand – 90% of that demand came from investors and banking partners that we had never engaged with before and which had never invested into ALC before. This is true diversification. It makes a big difference if you can raise capital at or inside comparable levels without cannibalising demand.”
The sukuk priced at 5.85%, which based on ALC’s previous capital market issuance looks high, but in the new higher interest rate environment, the price is essentially flat to slightly inside ALC’s established issuance curve despite the expectation that there may have been a new issuer premium on this first deal in the region. “The pricing was five basis points inside of what US banks were quoting for a conventional investment grade deal at the same time, and in line with money we raised in the capital markets at the end of last year when rates were lower,” says Verwholt. “We have had to reframe our expectations in the higher interest rate environment.”
The deal has also paved the way for future US or other foreign investment-grade corporate issuers into the region.
As this magazine when to press, ALC was back in the market again with news of an increased revolving credit facility, while the team continues to work on a number of innovative deals for the next quarter.