ORIX Aviation has signed an agreement to acquire 30% of Avolon from Bohai Capital for $2.2bn. The transaction implies an Avolon enterprise value of $23.7bn as at 31 March 2018. ORIX Aviation will fund the purchase with available funds. Bohai Capital will retain 70% of Avolon.
Speaking with ORIX Aviation Chief Executive, David Power, and Deputy CEO and CEO of ORIX Aviation Hong Kong, James Meyler, this morning, the pair highlighted how well the two business complement each other since as a specialist lessor ORIX Aviation is focused on leasing, trading and the management of aircraft assets, whereas Avolon’s primary business is owning one of the largest fleets of modern fuel efficient aircraft and ordering and placing new aircraft from its OEM orderbook.
“ORIX and Avolon have been very large trading partners for a long time,” says Meyler. “We have bought more than 40 aircraft from them in the past three to four years. We know their style and discipline and have very good relations with them so this acquisition was a natural further development.”
Having such a good trading relationship has given ORIX knowledge of Avolon’s business and operating platform, which David Power describes as very successful and having shown strong growth since foundation in 2010. However, the new deal includes a new governance framework that strengthens protection for minority investors – ORIX Aviation – and in particular for Avolon’s debt investors. Avolon’s board of directors will be restructured to a smaller size, comprising two ORIX directors, three Bohai directors, Avolon CEO, Dómhnal Slattery, as executive director, and one independent director. The stronger governance structure and revised board composition provide comfort to investors and is also accretive to Avolon’s credit rating.
In February 2018, Avolon put in place new protections for bond investors that include a term that would force Avolon to repay its bonds if it made overly large investments in affiliates of HNA. The new structure is said to build on those protections.
Dómhnal Slattery, Avolon CEO, said in a statement that Avolon “will benefit from ORIX’s experience and relationships” while the new shareholder structure and the associated enhancements to its governance framework will also “accelerate our momentum towards an investment grade rating – a key objective for our business.”
The two businesses will continue to be run independently but the team hopes that both firms will be able to capitalise on the obvious synergies between the two companies.
Power adds: “For ORIX Aviation, this investment is a key part of our positioning in our investment sphere. We have had minority investments in airlines and other entities, which grows our balance sheet and boosts returns. We hope that there will be business synergies that we’d like to grow but not exclusively since we will retain our trading relationships with other large lessors. This transaction allows us to grow immediately without the delays and infrastructure you need to enter the new order space, which is completely different to our business. That scale boosts our balance sheet and profits overnight, while allowing us to continue with our very successful business of leasing – with specific focus on Japanese Operating Leases (JOL) – trading and buying aircraft in the secondary market and asset management and joint ventures for specific portfolios.”
ORIX Aviation has an ambitious growth plan, which Meyler says will continue. In the past six months, the company has hired 25 people and is continuing to grow its Dublin base as well as the new Hong Kong office set up last year.
When asked whether this 30% stake was a precursor to a merger or larger share of Avolon, Meyler responded: “Both parties are happy with their respect ownership percentages today. While we are a minority investment now, we hope there may be opportunities to increase our relationship in the future. But for now, this is a good level for us to be at.”