The aviation industry – already battered by two years of COVID-19 losses – must now adjust to Russian sanctions. This is an issue of supply under sanctions, which includes aircraft leasing, financing, maintenance and parts supply. The companies most affected are: Rolls-Royce, AerCap, SMBC Aviation Capital and Avolon. These companies can handle a total loss on these aircraft/parts/engines and services if the worst should happen; it is the other smaller companies with far more exposure to Russia as a percentage of their overall business that one needs to worry about greatly. I could list them but that would just compound their problems – I am sure all reading this will be aware of those in real difficulty as of today.
Aircraft lessors have been given a generous one month (until March 28th) to recover their aircraft by the EU/Irish authorities. Even so, we are talking about some 236 aircraft which remain to be taken off lease with Russian airlines and re-patriated to any other jurisdiction. AerCap has the most work to do – it needs to shift 154 aircraft (close to 5% of its entire fleet), to do this within the timeframe allowed AerCap will need (let alone Avolon and SMBC Aviation Capital) a very helpful client and some significant assistance from Russian authorities, along with more aircraft repossession teams than currently exist on a global basis. Add into the mix all the other 21-odd lessors with aircraft in Russia and you see that it is certain that many lessors will not be able to get aircraft out. Added into the mix that it is highly likely that Russian authorities might place a ban on aircraft leaving Russia, those aircraft may be required for spare parts if nothing else, and you see a tangled web of war risk now exists that will not be covered by many insurance policies.
There remain many middle-of-the-road options, including agreements with customers within Russia to ground and park aircraft in safe storage and suspend or terminate lease agreements by mutual consent until this crisis all blows over (this is a trusting and hopeful scenario – but one that might need to be deployed if Russia prevents aircraft leaving/being repossessed). In addition, further down the line we also can add into the mix the investors; a great many aircraft on lease within Russia are bound-up within ABS deals and other investment vehicles, and those investors could well suffer the brunt of losses over the coming weeks. It is understood that asset re-patriation flights will not be barred from entering EU airspace – this is good news. It is also clear that no US dollar lease payments can be accepted from Russian clients and no assets can be supplied to the same.
Many have asked, who is hardest hit by all this? The honest answer must be those with assets that were newly delivered to Russia over the past 12 to 24 months. Those are the assets that need to be repatriated first and re-deployed to new operators at speed. If the aircraft cannot get out then that is a loss. If on the other hand a great many aircraft do get out, then we will see lease rates collapse in an already poor market, as a huge glut of aircraft (this is a huge number) enter the market to be leased all at the same time when there is already a backlog to transition aircraft. There is a double sided potential loss of earnings to consider in this matter: The potential asset total loss and/or the cost of repatriation and transition and the lower future yield. It can be argued that the middle road view of most new aircraft getting out and a great many others not getting out is preferrable to the overall prospects of the global leasing industry, and those lessors with large numbers of aircraft in Russia might be prudent to take an approach of using some aircraft as “gifts” in order to get others out at speed.
The race is on to get assets out of Russia. The odds are not staked in favour of our industry in this matter, but even so, those companies involved have proven again and again that they have the skill to secure the future of their assets, both managed and owned, through even the most insurmountable odds. A great deal of hard work, a significant amount of goodwill and some luck are now what is required.
Moreover and more importantly, our thoughts are with all those subjected to or threatened by War.
Meanwhile, Chorus Aviation confirmed today that it has acquired Falko Regional Aircraft for a total consideration of US$855 million. That total comprises US$445 million in cash (inclusive of agreed adjustments) and US$410 million of existing indebtedness.
Chorus will acquire Falko and the equity interests in certain entities and aircraft that are ultimately owned by funds managed by Fortress Investment Group and managed by Falko. The transaction includes Falko’s asset management platform and Fortress' equity interests in 1263 owned and managed regional aircraft. The companies state that the combined company “will create new opportunities for growth and a differentiated business model to maximize returns on aircraft assets”. The combined company will have a total of 353 owned, operated, and managed regional aircraft. Upon closing, Chorus anticipates having 32 airline customers in 23 countries.
Brookfield, through its Special Investments program (BSI), and together with institutional partners, has agreed to make a strategic equity investment in Chorus in connection with the transaction. Conditional upon closing the acquisition, Brookfield will invest US$374 million in Chorus, including US$300 million of preferred equity and US$74 million of common equity. The preferred equity will be non-convertible and will initially pay a dividend of 8.75% annually in cash, or 9.5% in kind, at Chorus’ option, with step-ups after the sixth anniversary. Chorus will issue 25,400,000 common shares at CA$3.70 per share, representing 12.5% of the pro forma issued and outstanding common shares and an approximate 8% premium to the 30-day VWAP of Chorus’ shares as of January 28, 20227, and 18,642,772 common share purchase warrants with an exercise price of CA$4.608 per share, representing an approximate 35% premium to the 30-day VWAP of Chorus’ shares as of January 28, 20227.
Upon closing the transaction, Chorus will enter into an investor rights agreement with Brookfield providing for registration rights, standstill and transfer restrictions and the right to nominate two directors to Chorus’ Board of Directors. Upon closing the transaction, Brookfield will nominate David Levenson and Frank Yu to Chorus’ Board of Directors.
The acquisition transaction and the private placement to Brookfield are subject to applicable regulatory approvals and customary completion requirements, and are expected to close in the second quarter of 2022.
“The acquisition of Falko is transformative for Chorus, creating a world premier full-service provider in regional aviation,” stated Joe Randell, President and Chief Executive Officer, Chorus. “We are extremely pleased to have Brookfield, a well-respected company with global reach, as our strategic cornerstone investor, bringing extensive experience in asset management, fundraising and capital markets. The equity investment is an important endorsement of our strategy and simultaneously reduces leverage9. Brookfield’s significant financial strength and transaction expertise provides Chorus with increased stability and support to execute on our strategy to the benefit of all stakeholders. The size and scale of the newly combined entity broadens and enhances market opportunities. Growth through this established asset management platform meaningfully changes Chorus’ risk profile in terms of debt levels, residual value asset risk, and enhanced earnings stability and diversity. This transaction will be accretive10 to earnings and earnings per share in the first year.”
“We are very excited about this transaction as it combines two highly experienced platforms with complementary aircraft portfolios and diversified, high-quality customers worldwide,” said Jeremy Barnes, Chief Executive Officer, Falko. “Regional aircraft serve a critical role for airlines around the world and the growth trajectory is strong. In an increasingly competitive environment, together we’re better able to effectively address the needs of our customers and provide them with a larger scale of fleet solutions. Chorus’ technical skills and capabilities will help maximize asset returns for the benefit of shareholders and fund investors. This transaction caps over a decade of growth and success under the sponsorship of Fortress. We are grateful for the resources, expertise and partnership that Fortress provided as we built Falko into a truly best-in-class platform in a competitive industry, and we now look forward to an exciting next phase of success as part of Chorus.”
“We are pleased to partner with Chorus on the acquisition of Falko, which enables the combined company to execute on its asset-light strategy and benefit from the recovery in the aviation sector,” commented Angelo Rufino, Managing Partner and Head of Americas for BSI. “This investment is another example of how Brookfield partners with companies to originate flexible capital solutions to help them achieve their strategic goals,” said David Levenson, Managing Partner and Global Head of BSI.
The enlarged leasing business will be led by Jeremy Barnes as Chief Executive Officer and the rest of the existing Falko management team.
Deutsche Bank Securities is the exclusive financial advisor to Chorus. Dentons UK and Middle East LLP is the legal advisor to Chorus in connection with the acquisition transaction, and Osler, Hoskin & Harcourt is the legal advisor to Chorus in connection with the private placement.
Goldman Sachs International is acting as exclusive financial advisor to Fortress in respect of the sale of Falko. Milbank is acting as legal advisor to Fortress.