Despite record-breaking oil prices and sub-prime woes, strong performances have been reported in Asia and the
In the
Private equity involvement in the aviation industry has never been greater and is likely to remain a source of liquidity for the aviation market throughout 2008. Terra Firma’s acquisition of AWAS in 2006 follows in the footsteps of other private equity giants such as Cerberus and
Fortress created AirCastle, securitised its debt and then took it to the market with an initial public offering (IPO) back in 2006.
Private equity players each follow their own strategy to realise a return on their investment. IPOs and securitisations have been particularly popular in 2006 and 2007. Established lessors, such as GE Commercial Aviation Services (GECAS), have used the same techniques during the same period. There are many reasons motivating established lessors to pursue IPOs or securitisations. First, there is the desire to release the profit from the portfolio when aircraft values are at their highest. As well as taking the profit from the assets and not having to carry the assets on its balance sheet, the lessor is usually appointed portfolio manager so maintains day-to-day commercial contact with the airlines. It also receives management and remarketing fees for doing so.
In addition to the increasing involvement of private equity, other alternative structures have developed. ‘Syndication’ is an off-market alternative to securitisation. The principles are simple, a portfolio of aircraft assets are sold to a special purpose vehicle established in a tax-friendly jurisdiction with a good double taxation treaty network. The
Consequently, there is no need to pay investment banks or monoline fees so the costs in structuring a syndication deal are dramatically less than with a securitisation. The investor base is somewhat different, however, and investors requiring rated paper, such as pension funds, cannot participate.
With the vast majority of aircraft finance deals being highly leveraged, whether finance is provided for a single asset or for a large portfolio, many of the traditional aircraft finance banks have seen their role evolve somewhat in recent years. While some have remained focused on the same deal profile they have always worked on, declining yields on senior debt tranches have refocused others. An increasing number of commercial banks are willing to provide equity or junior debt alongside senior debt offerings, effectively becoming one-stop shops for the financing of individual aircraft or small portfolios of aircraft. While increasing the overall return in the deal for the bank, they can also sell down these equity interests to satisfy the demand of private clients who seek diversified investment opportunities.
The major aircraft manufacturers continue to enjoy the support provided by their Government’s home export credit agencies. A notable development this year is the introduction of a new aircraft sector understanding (ASU). The ASU covers all the Organisation for Economic Co-operation and Development countries and includes
With recent liquidity issues in the market caused by sub-prime mortgage lending in the
It is very difficult at this stage to predict with any certainty what impact the sub-prime difficulties and oil prices will have on the aircraft finance market in the medium or long term. For the moment there have not been any notable casualties and aircraft continue to be financed. Against this backdrop, margin costs on senior debt are rising and banks are more cautious where they lend. IATA has slashed $2bn (£1.01bn) from its global profit estimates for 2008 and Altitude, the latest GECAS-sponsored IPO, has been postponed because of market volatility.
Has the market reached at the top of this cycle? This year is already shaping up to be an interesting one indeed. n
Keith Wilson is a partner and Norman Fraser an associate at Paul Hastings Janofsky & Walker.