Aviation

February 10, 2017
 

Chinese Lessors Eye Further Acquisitions

China Eastern Airlines Airbus A330-243. B-6123

Although the Dollar interest rate cycle has finally turned, institutional investors are facing a long and gradual process as fixed income returns edge upwards.

That will mean a continuation of the trend towards more allocations to alternatives. Real estate and infrastructure top the list, though aircraft are going to be one of the asset classes favoured by pension funds and insurance companies from Europe, the US and Asia.

This weight of institutional money chasing real estate has itself pushed down yields on commercial property around the world. Hong Kong based Cheung Kong said in its last earnings report that it was a challenging environment in which to find opportunities with adequate returns, and is having to look at alternatives to real estate- notably aircraft.

This is the backdrop to the surprise announcement in December that the Accipiter leasing platform is being acquired by one part of Li Ka-shings business empire- Cheung Kong Holdings- from another- CK Hutchison. The transaction had not closed when GTF was going to press.

As of December 2016 Accipiter Holdings Designated Activity Company was the wholly owned aircraft leasing company of CK Hutchison Holdings. Established in 2014 and headquartered in Dublin, Accipiter announced its ambitions of becoming a leading player in the global aircraft leasing market, with growth plans focused on young, liquid, fuel efficient Airbus and Boeing aircraft.

Early in 2015 Li Ka shing completed a strategic restructuring of his two main companies, Cheung Kong and Hutchison Whampoa. Li is Hong Kong’s richest man, and Forbes magazine estimates his net worth at US$31.2 billion.

All the global property businesses were moved into Cheung Kong Property Holdings, making it a pure property play. The various other businesses were moved into CK Hutchison. The aircraft leasing unit formed part of the CK Hutchison infrastructure division. The group also has interests in ports, telecoms (including the 3 mobile group in Europe), retail (including the UK chain Superdrug) and energy.

Subsequently, in the August 2016 interim report, covering the first half of 2016, Cheung Kong Property noted that its contribution is mainly derived from property operations in Hong Kong and mainland China. “As it is presently challenging to identify property investments with reasonable returns in the current cyclical stage of the property market, the Group will pursue other global investments to extend our reach to new business areas. The objective will be to generate revenue from different sources to balance the cyclical impact of on cash flow associated with property development.”

Then in December 2016 Cheung Kong Property Holdings announced that it was acquiring the aircraft leasing business from Li’s other major listed company, CK Hutchison. The company said that the long term cashflows would provide a steady income stream as the property division tries to identify property investment targets with suitable returns.

This was taken by analysts as a caution against future lower returns from global property investments. Putting aircraft leasing into Cheung Kong Property would be a quick way to deploy large amounts of cash on hand, and get a decent return, but the main focus of investors was on the negative implications about returns on property. Cheung Kong Property shares were trading at HK$58 at the beginning of November, but were priced at HK$51 in early February.

The offer is for both for the CK Hutchison platform and its stake in the joint venture with MC Aviation Partners. The sale price agreed for the wholly owned leasing unit, which owns 43 aircraft, is $973 million. The valuation “was negotiated and determined by the parties on an arms length basis” according to the company announcement.

The joint venture is 40% owned by MC Aviation Partners of Japan, which is the aircraft leasing and trading arm of Mitsubishi Corp. As of December 2016 Vermillion owned 22 aircraft and has commitments to buy another eight. This joint venture will remain 40% owned by MCAP. Another 10% is owned by the Li Ka Shing (Overseas) Foundation.

“The aircraft leasing business will generate long-term steady income for the group,” Cheung Kong Property said in a December filing to the Hong Kong Stock Exchange. The purchases “will constitute a meaningful platform to further develop the aircraft ownership and leasing business for the group.”

Cheung Kong had been an early backer of Goshawk, along with Investec and Chow Tai Fook. But soon after its launch, Cheung Kong sold its stake, wanting to pursue its own aircraft leasing ambitions, and instead NWS became a shareholder in Goshawk. Investec sold out in October 2016, leaving Chow Tai Fook and NWS together owning 90%. NWS is the infrastructure and services flagship company of New World Development.

Li Ka-shing made his own initial moves into aircraft leasing back in 2014, with some sizeable portfolio acquisitions. At that time Cheung Kong, through Accipiter, agreed to buy eighteen planes from Gecas for $714.8 million, comprising eleven A320s and seven Boeing 737s, with an average age of 3.1 years. Accipiter also bought three 737-800s from Gecas affiliates for $101.2 million. Around the same time fifteen aircraft were acquired for the joint venture with MCAP. Cheung Kong also agreed to buy ten planes from BOC Aviation, totalling $492 million, and fourteen planes from Jackson Square Aviation for $584 million.

As of June 2016 the CK Hutchison aircraft leasing business, including its 50% stake in joint venture MC Aviation Partners of Japan, had a total fleet of 65 aircraft. Customers include Wizz, GOL, Philippine Airlines, Spring Airlines, China Eastern, Air Canada, American, IndiGo, Virgin America, Iberia, SAS, Jetstar, Norwegian, Lion Air, Hainan, Volaris, Vueling and Asiana.

In February 2016 Accipiter refinanced part of its aircraft portfolio via a $1.2 billion loan arranged by Credit Agricole and Natixis. Also participating on the syndicate were BNP Paribas, Bank of Tokyo Mitsubishi UFJ, Bank of China, Commonwealth Bank of Australia, National Bank of Australia, Citibank, Deutsche Bank, and Sumitomo Mitsui Trust Bank.

However, following the initial burst of activity in 2014, growth has since been fairly modest, so during 2017 Accipiter is expected to be in the market with some major deals, whether platform acquisitions, portfolio acquisitions, or aircraft orders.

Already in 2016 Accipiter was one of the bidders for the CIT Commercial Air leasing platform. Accipiter partnered with Apollo Aviation Group, and made it through to the second round. But Bohai Capital won the bidding, via its Avolon subsidiary.

At time of going to press both AWAS and the AirAsia leasing arm were up for sale, and both might be of interest to Accipiter.

Having a giant property company such as Cheung Kong looking to commit more resources to aircraft leasing, in the face of difficulty in sourcing well priced property investments, potentially creates a big aircraft leasing player.

Critical mass is an advantage. However Li Ka-shing has a reputation as shrewd judge of value and investment cycles, and is unlikely to get involved in a rush to do deals to climb league tables. If large M&A deals are not available, then selective portfolio acquisitions will be the chosen route to growth. But regardless, the proposed move of aircraft leasing from CK Hutchison into Cheung Kong Property Holdings could be the start of a major spurt of growth.

AWAS

AWAS, with a young fleet of two hundred planes including A350s, would certainly be an attractive target. But competition is likely to be fierce in the auction, which is being handled by Goldman Sachs.

AWAS is owned by two private equity funds, Terra Firma Capital Partners II and III. Another strategic shareholder is Canada Pension Plan Investment Board (CPPIB).

Terra Firma Chairman Guy Hands originally worked for Nomura, and his first fund, Terra Firma Capital Partners I featured Nomura as sole equity investor. It comprised assets acquired between 1994 and 2002, and is now fully realised, with investors paid out.

Terra Firma Capital Partners II closed in February 2002, raising Euro2.1 billion. Terra Firma Capital Partners III reached financial close in May 2007, raising Euro5.4 billion.

Terra Firma sent out its 2015 Annual Review to stakeholders in June 2016. One major exit during the year was Tank & Rast, the German motorway services group, which was another buy dating back to the boom years ahead of the financial crisis.

The report noted that the sale of the portfolio of 87 aircraft (to Macquarie), plus some smaller disposals made during the year (including 29 older aircraft sold via a securitisation deal in July 2015), has left AWAS with a younger, more concentrated portfolio for the business to manage. A total of 120 aircraft were sold over the course of 2015, comprising approximately one third of its fleet, “in order to take advantage of a strong market and improve the balance of its portfolio.”

Terra Firma acquired 75% of AWAS for $2.5 billion in 2006. One year later it acquired Pegasus and integrated it into AWAS. These deals were done in the boom years ahead of the financial crisis. Terra Firma deals included the disastrous Euro6 billion purchase of record company EMI, which led to big financial losses and also to a high profile loss to Citibank in a court action brought by Guy Hands.

In contrast the aircraft acquisitions look set to have a happier ending for Terra Firma investors. Terra Firma was never under pressure to sell, and so was able to take a patient approach, and has moved through into an environment when aircraft and leasing platforms have become highly sought after.

Early in 2016 Terra Firma was reported to have rejected a takeover offer from Bohai Leasing. A formal auction process was eventually initiated in late 2016, run by Goldman Sachs.

AirAsia Capital up for sale

The other leasing platform on the block, Asia Aviation Capital Limited, is part of the AirAsia group led by Tony Fernandes.

One of its attractions is heavily discounted aircraft from huge AirAsia orders with Airbus, some of which have been allocated to the leasing arm. The company has 575 A320s in service or on order, with the most recent order dating back to July 2016 when it signed up for 100 A321neos. AirAsia values Asia Aviation Capital at around $1 billion.

In December Reuters reported that AirAsia has received around a dozen bids for its leasing arm, mostly from China. It reported two of the bidders to be China Merchants Bank and Ping An Insurance.

Ping An has insurance, banking and investment arms. It is China’s second largest insurance group, both in the life and property & casualty segments. The aircraft assets are held by Ping An Financial Leasing.

Ping An already has a fleet of Boeing and Airbus aircraft. At the Paris Air Show in June 2015, Ping An International Financial Leasing signed an agreement with Commercial Aircraft Corporation of China (Comac) to buy fifty C919s, which are currently in development.

Another potential bidder could be China Aircraft Leasing Group (CALC), which listed on the Hong Kong Stock Exchange in July 2014. The company has said it is looking for opportunities overseas, as it is currently heavily focused on China.

Meanwhile both China Construction Bank and Bank of Communications are growing their aircraft leasing arms. Bocom Leasing also has big growth ambitions. At present fleet is 40 aircraft, but it has said that it would like to grow this number to 300. And China Development Bank subsidiary CDB Aviation Lease Finance has ambitious global growth plans.

Chinese lessors are currently on a hiring spree for experienced executives in both aircraft marketing and asset management. GIven their ambitious growth plans, they need to boost their level of expertise to match their vast financial resources.

In January CDB Aviation Lease Finance , the aircraft leasing unit of China Development Bank, announced the appointment of Peter Chang as its new President & Chief Executive Officer. The company said that Chang will lead CDBALF into its next phase of growth by building a world-class, industry-leading management team. The focus will be expanded beyond China to continue the company’s growth momentum “with a view to becoming one of the world’s leading aviation leasing companies.”

Chang has spent nearly four decades in the aviation industry, serving in executive positions with companies in manufacturing, sales, and leasing. He was first got involved in operating leasing in China while serving as Managing Director for Guinness Peat Aviation, and later founded his own consulting firm.

Also in January CDBALF announced the addition of three new members to its executive team. Rob Murphy will join the company as General Counsel and Chief Operating Officer. Pat Hannigan will assume the role of Chief Commercial Officer, and John Cunningham will take the position of Senior Vice President Asia Pacific. The three will be tasked with supporting the next stage of expansion and growth, focusing on strengthening the company’s aircraft portfolio and expanding its market reach beyond China.

One recent sale & leaseback transactions with CDBALF involved six A320neos for SAS. And in December Finnair signed up to take two A321s from the CDB portfolio.

CDB Leasing, which includes shipping and other equipmnt as well as aircraft, completed an Initial Public Offering on the Hong Kong Stock Exchange in July 2016. This came two months aftr BOC Aviation listed on the HKSE.

Bohai acquisition spree 

Whether Bohai Leasing puts in any bids for AWAS or AirAsia Capital remains to be seen, following its 2015 and 2016 acquisition spree involving both Avolon and CIT.

Over the past two years the group has also acquired stakes in Azul airlines, Hilton hotels, Gategroup, Swissport  and Radisson hotels. And in January the Federal State of Rheinland Pfalz announced that is in exclusive talks with a consortium comprising HNA Group and German company ADC to sell Frankfurt Hahn regional airport.

The State government considered three final bids, with the assistance of consultants Warth & Klein Grant Thornton, and that it has chosen ADC/HNA as the preferred bidder. The two other bidders were US-Chinese consortium Henan American Machinery, and MG Holding of Kazakhstan.

Hainan Island based HNA has partnered with German firm ADC on its bid. ADC is based in Deidesheim in Rheinland Pfalz, which gives the bid the advantage of having a strong local element, in addition to the financial resources and airport operating expertise of HNA.

Two of the biggest operators at Frankfurt Hahn are low cost carriers Ryanair and Wizzair. Hahn is located 120 kilometres from the City of Frankfurt, and is in the Federal State of Rheinland Pfalz, as opposed to Hessen where Frankfurt is located. The State of Hessen holds a small stake.

Hahn is a former US military airport, and handles cargo flights in addition to passenger services such as those operated by Ryanair to destinations such as London, Naples and the Azores. The loss making airport handled 2.6 million passengers in 2016.

In Summer 2016 a proposed sale to Shanghai Yiqian Trading was entered into without proper due diligence on the German side. The negotiations ended in chaos, as it turned out that the bid had no backer of substance behind it.

There was a political row in the Rheinland Pfalz Parliament over who was responsible for the farce, and the bidding process had to be re-started from scratch.

Passenger traffic growth at Frankfurt Hahn has been held back by its poor rail links. On the cargo side, the excellent motorway network makes Hahn well positioned for further growth. Cargo carriers already using Hahn include Atlas Air, Etihad Crystal Cargo, and Nippon Cargo Airlines.

HNA Airport Group operates a dozen airports, including Haikou Meilan International Airport, Yichang Sanxia Airport, and Weifang Nanyuan Airport.

HNA had previously been a bidder for London City Airport, which was put up for sale in late 2015. But the winner was a consortium which included Ontario Teachers’ Pension Plan and Borealis Infrastructure, paying Pounds2 billion.

HNA has also been on a land buying spree in Hong Kong, outbidding local developers such as Hang Lung, Cheung Kong, Hopewell and New World. The former Kai Tak Airport in Kowloon is being developed into a major residential area, and on 25 January HNA Group emerged as winner for its third plot of land at Kai Tak. This time it paid HK$5.5 billion, bringing the total for the three plots to HK$20 billion (US$2.57 billion).

Avolon acquisition loan refinancing

Meanwhile Avolon has begun 2017 with a refinancing of the acquisition loan for its takeover of the CIT leasing unit. CIT was one of the world’s top ten lessors with 331 aircraft.

Bohai Leasing is listed on the Shenzhen Stock Exchange. It is a majority controlled susidiary of HNA Group. Following the CIT acquisition Avolon has moved up into third place on the global lessors league table, behind Gecas and AerCap. Avolon will have a pro forma combined fleet of 533 aircraft and an order book of 316 additional aircraft as of 30 September 2016.  That will give a total fleet value of $43 billion. Avolon CEO Domhnal Slattery said at the time of the CIT deal that the aim was to build the firm up to become the number one aircraft leasing company in the world.

Morgan Stanley and UBS committed $8.5 billion worth of acquisition debt facilities for the CIT deal. In November $2.975 billion of this was syndicated with Barclays, JP Morgan Chase, BNP Paribas, Credit Agricole CIB and SunTrust Bank.

Avolon tapped the Dollar bond markets in January, and as part of this process the company received ratings from Moody’s, Fitch and S&P, all in Double B territory. In January Avolon, via Park Aerospace Holdings, launched a $3 billion offering of senior unsecured notes to partially pay down the acquisition loan. It also syndicated a Long Term Foreign Currency Secured Term Loan, rated Ba2

The Moody’s Ba2 rating assigned to the First Lien Term Loan B is based on the loan’s strong asset coverage, priority claim, and loan terms that reduce loss given default, including a loan-to-value covenant of 80% assessed regularly on the basis of re-appraisals of pledged aircraft, as well as asset concentration limits. The Term Loan is secured with the aircraft acquired from C2, and at the outset features a very strong LTV of 55%. The loan is guaranteed by Avolon Holdings Limited and subsidiary asset holding entities.

The Moody’s rating assignments reflect the increased franchise strength of the combined Avolon and CIT, and the high quality fleet and new aircraft order book which Moody’s expects will result in solid future profitability.

The ratings also reflect Avolon’s moderate leverage profile, continued high reliance on secured financing and the steps the company has taken to strengthen liquidity. However Avolon’s ratings are constrained by the relatively weaker credit profile of Avolon’s parent Bohai Capital Limited. The stable outlook reflects Moody’s view that the company will capably manage integration risks and that the combined company’s operating performance will improve once the two firms are fully integrated.

The company’s low average fleet age coupled with greater fleet granularity (partially a function of its increased size) suggest a lower performance volatility. Avolon’s increased operating scale will provide the company improved access to global airlines, a strong pipeline of desirable new technology aircraft, purchase economies with aircraft OEMs, operating economies, and the ability to engage in larger leasing transactions.

Moody’s noted that with the issuance of senior unsecured notes, Avolon is taking a step toward diversifying its funding. Avolon has also increased its unsecured revolving credit to a total line amount of $1.025 billion, which improves its alternative liquidity. Notwithstanding its liquidity strengthening efforts, Avolon remains highly reliant on secured financing. Nearly all of Avolon’s aircraft are pledged, which limits financial and operational flexibility and structurally subordinates holders of the senior notes.

January rush to the capital markets

Other major lessors have also tapped the capital markets in January, taking advantage of strong demand underpinned by institutional investors making new fixed income allocations for 2017.

On 20 January Newport Beach, CA based Aviation Capital Group sold $1 billion worth of five year notes paying 2.875%. ACG is the leasing arm of Pacific Life Insurance Company, though the notes were not guaranteed by ACG’s parent company. Bookrunners were BNP Paribas, Citi, Goldman Sachs and RBC Capital Markets.

“Today’s debt issuance represents a landmark transaction for ACG. This transaction was our largest unsecured offering to date, generated considerable interest among institutional investors and achieved highly competitive pricing,” commented Eric Blau, treasurer, Aviation Capital Group.

Also in late January AerCap sold $600 million of five year senior notes paying 3.5%, in an offering led by Citigroup Global Markets, Goldman Sachs, JP Morgan Securities and Merrill Lynch.

Around the same time AerCap announced that it has amended and extended two term loan facilities for a total of $2.25 billion. A $750 million term loan facility originally put in place by ILFC in February 2012 was amended and extended, with the maturity extended from April 2020 to October 2022.  RBC Capital Markets and Bank of America Merrill Lynch were lead arrangers on the extension. Meanwhile a $1.5 billion term loan originally put in place by ILFC in March 2014 was amended, and extended from March 2021 to October 2023. Deutsche Bank and Credit Suisse were lead arrangers on this extension.

Aircraft manufacturers have also been raising Dollar funding. On 26 January Embraer priced $750 million worth of ten year unsecured notes, paying a 5.4% coupon. Bookrunners were BB Securities, JP Morgan and Banco Santander.

There were also two ABS offerings sold by early February, for Elix Aviation and Dubai Aerospace Enterprise.

The debut ABS offering from Elix was the first ever all turboprop ABS deal, sized at $411 million. Back in 2015 Irish leasing platform Elix Aviation Capital’s closed an inaugural $316 million portfolio debt facility. This was an all-turboprop warehouse, a first in the industry, which combined a large blind pool element. Milbank represented Elix.

In late January Elix sold a three tranche, loan format securitisation backed by a portfolio of 63 turboprops leased to 17 airlines. The value of the aircraft is $545 million, and comprises most of the total Elix fleet.

The $411 million Prop 2017-1 deal was split into $300 million of A Loans, $57 million of B Loans and $54 million of C Loans. An E Note will also be sold. The deal was rated by Kroll Bond Rating Agency, with the three tranches rated A, BBB and B respectively.

The portfolio includes ATR-42s, ATR72s and Dash-8s, and has an inititial weighted average life of 9.7 years. The main lessees are Commut Air, Island Air, Alliance Air, Ethiopian Airlines and Piedmont.

On 2 February Dubai Aerospace Enterprise launched its debut ABS deal- also structured as loans rather than bonds.

Falcon Aerospace (Falcon 2017-1) priced three tranches of asset-backed securities. They comprised $315 million of 4.581% Class A Loans, $65 million of 6.30% Class B Loans, and $30 million of 8.353% Class C Loans. The transaction was arranged by Goldman Sachs. The liquidity facility is being provided by Credit Agricole CIB.

“We are extremely pleased with the very successful pricing of our inaugural ABS transaction”, commented Firoz Tarapore, Chief Executive Officer of DAE. “We welcome the opportunity to broaden our financing base and partner with sophisticated investors in the US capital markets. This transaction will help us achieve our goal of substantially increasing our footprint in the aircraft leasing space.”

Kroll Bond Rating Agency has assigned the Series A Loans an A (sf) rating.  The Series B Loans are rated BBB (sf), and the $30 million  Series C Loans BB. Proceeds from the sale of the loans will be used to purchase a fleet of 21 aircraft that are initially leased to 13 airlines located in 12 countries with an initial total value of approximately $496.1 million. The deal is also rated by S&P.

The Class A Loans have an initial loan-to-adjusted base value (LTV) of 63.5%. The Class B Loans have an initial LTV of 76.6%, and the Class C Loans have an initial LTV of 82.6%. Falcon Aerospace Limited will also issue an E-Certificate in partial consideration for the sale of the aircraft.

DAE will act as the servicer for the transaction. It is the largest aircraft lessor in the Middle East. As of December 31, 2016, DAE’s fleet consisted of 111 owned and committed aircraft that were on lease to 28 lessees in 22 countries across six continents. The Company is majority owned by Investment Corporation of Dubai, the investment arm of the Government of Dubai.

The transaction benefits from sufficient credit enhancement and liquidity, as well as a dynamic structure that accelerates principal payments on the Loans in the event of weak performance.

DAE has also been strengthening its management team. On 3 January the company announced that it has hired Bertrand Grabowski as Senior Strategic Advisor. Bertrand was most recently Member of the Board of Directors of DVB Bank in charge of Aviation and Rail. Prior to joining DVB, Grabowski worked at Citibank and Bank Indosuez.

HSH sells loan portfolio

Meanwhile, amidst this flurry of bond offerings and new lending activity, one legacy player has finally managed to finally exit the industry, and sell its aviation loans portfolio. HSH Nordbank has been cleaning up its balance sheet ahead of a planned sale of the bank required by the EU.

Macquarie came in as the buyer for the Euro800 million EaD (Exposure at Default) worth of aviation loans. It a separate deal, HSH sold Euro450 million EaD worth of real estate loans to Bank of America Merrill Lynch.

“This has been a transparent and competitive process that attracted very strong interest from international banks and debt investors” said Stefan Ermisch, Chief Executive Officer of HSH Nordbank. “It ensures that the Bank will be further relieved of legacy assets, as agreed with the EU. We are currently involved in talks at an advanced stage about the sale of further packages from this market portfolio. These also relate to non-strategic legacy exposures in the areas of energy as well as international real estate. The sale marks another important milestone on the road to a change of ownership.”

Korea  

During 2017 there is likely to be continued strong interest from South Korea private equity. In December IMM Investment Corp of South Korea established an aircraft leasing firm called Crianza Aviation. IMM Private Equity has established itself with some of the biggest institutional investors in South Korea, and manages DTA $1.5 billion for a group of more than fifteen major investors.

Crianza has got started with sale and leaseback deals involving Boeing 777s and Airbus A330s with carriers including Singapore Airlines and Qatar Airways. It is currently out in the market looking for more funds from institutional investors that are hungry for yield. Crianza has set an initial target of twenty aircraft by 2020, concentrating mainly on widebodies.

Institutional money out of South Korea has been an important niche in the market for single aircraft deals or small packages of aircraft. Some of the bigger insurance companies in particular now have enough in-house experience to negotiate deals directly, rather than relying on an arranger. For example the National Pension Service has been increasing its investment in alternatives including real estate and aircraft. But for the smaller firms, coming in via private placements of fund structures is the preferred route.

Deals out of Korea over the past two years include financing for A330s for Singapore Airlines, and A380s for both Emirates and Etihad. South Korean investors typically come in with different slices of the deal, from equity to mezzanine and senior debt, to provide 100% financing.

More institutional deals will follow from South Korea in 2017, but will typically involve single aircraft or small portfolios. But for larger portfolio acquisitions, it is China and Hong Kong that have been setting the pace out of Asia over the past two years, and this trend is expected to continue this year. It is also expected to be another busy year for the Japanese Operating Lease structure, as Japanese investors look for tax shelter opportunities.