The leasing game…

Aircraft lessors have been through it all over the past 24 months and now that the rose-tinted glasses are back, where are now and what is on the cards for the next 12 months?
Many of you will recall that two years ago I wrote a feature about how airlines were the new lessors. That has, in many ways, come to pass and will continue to do so over the coming years as airlines find that their aircraft can earn them money no matter who is using them. At the time Jet Airways was the example of choice but now we sit here with a new player:
Hainan Airlines Co announced yesterday that it plans to team up with private equity firm Tianjin Yanshan Investment Management Co to launch China’s first private equity fund that invests in the aircraft leasing industry.

According to papers filed with the Shanghai Stock Exchange, Hainan Airlines will invest RMB 500 million in the fund, while Tianjin Yanshan Investment, a subsidiary of state owned China Ocean Aviation Group, will contribute RMB 3 million. The fund aims to raise RMB 5 billion and target an annualized investment return of at least 10%.
Hainan Airlines said that the investment will help improve its revenue structure, diversify its business and broaden its own options in aircraft leasing.

If this is the future, it is a mirror image of the past. Traditionally lessors relied on powerful parent companies, which were in effect the money behind the glass screen door. Alas “the money” have been in a bit of trouble of late, and subsequently the lessors have found themselves in financing limbo with no cheap money; rather like Joe Bloggs who is doing well in life but finds that his credit card has been cancelled and the repayment interest on what remains has risen significantly.

And so, leasing companies have spent the past year or so finding out how to tap other avenues of finance. This search would have inevitably led to a swift and painful conclusion: The cost of borrowing is very high and is only going up for the time being. Those lessors who are incorporated through shares, or which have floated in the past, have been buying them back while they were depressed (cheap dare I say Colm) ready to sell off and re-capitalise when the going was good. But that time is still not at hand yet, even though it is known that FLY Leasing are gearing-up for more aircraft orders on the back of a sell off.

Avolon, a venture backed by CVC Capital Partners, Cinven and Oak Hill Capital Partners which was founded in May of this year, rolled out its CEO this week as he confirmed: "When we think about debt, the differentiator in this cycle for new start-ups is those that are able to demonstrate the capabilities to tap into as many sources of debt capital as they can within a reasonable period of time," said Domhnal Slattery at the Aviation Finance Summit 2010 held in New York on 5-6 October.

Lessors must sell off older aircraft and use their assets more to gain financing in this new world. The capital markets have been rolling forward throughout 2010 and indeed the trend in EETCs has continued. Airlines have led the way in this area and now lessors must follow in their footsteps. Asian capital markets, especially Chinese side deals, have been flowing of late but again word is that there is a check on the way in this region and many are now looking to Singapore for the same. Some banks have once again over-leveraged themselves in the APAC region and there will be a slight check there around the turn of the year (although those in question are based in Europe). BOC Aviation, a Bank of China unit, is tapping the usual sources of funding, but also looking to Singapore at the moment for new sources, hedging its bets.

Of course for those that qualify for export credit that remains an avenue of possibility later down the road but word in the market is that Islamic Finance is growing again and will pop-up more and more in the coming months.

But there is another factor in play: Residual values, the topic of choice for many lessors throughout the past decade. There is a chance that many airlines and lessors will attempt to refinance in part by dumping older aircraft onto the market, but if this is done in spades by someone like, let’s say, ILFC, then there is a chance residual values on many types will take a dip. This will not help lessors. In fact ILFC would sell off its older aircraft and that would most likely be followed by a rights issue to raise funds.

Lessors who are cash rich could always go the extra mile and try tapping the MTN market for cheaper cash – I would not be surprised to see this being looked at in the near future.
So those lessors with aircraft on order are in a better shape than those who have older fleets with few or no orders. Other lessors have become boutique in their nature. The horizon for the leasing market looks bright, it is likely that the economic rebound will be complete just after the arrival of most aircraft on order giving good returns and likely increasing the leased fleet percentage close to 50%, it is just getting there that is the problem.