A sharp rise in market volatility will likely weaken capital markets issuances by airlines and lessors in the coming quarters, says a US-based banker.
"There has been a steady drumbeat of capital markets offerings through June, but now that issuers have seen the negative side, I expect many will hit the pause button," says the source, adding: "The accelerated pace of issuances will slow because volatility in pricing and capacity won't. Market volatility in the past six to eight weeks has been dramatic."
The source points to recent financings by British Airways (BA) and Doric Asset Management "which priced wider than they would have if they were issued earlier this year".
BA's class A notes priced at 4.625%, while the Class B notes priced at 5.625%, meanwhile Doric's $462 million of class A notes priced at 5.25% and the class B notes priced at 6.125%.
The capital markets have been very receptive to airline and lessor issues, allowing these companies to reduce borrowing costs and bolster liquidity, but the source admits these financings come at a price.
"These deals are time-consuming and are a very costly exercise to get wrong as some lessors and airlines have experienced recently," he says.
"Market volatility will only increase, in my opinion, so a financing that looks good on day one, won't necessarily look so good once it closes, if it closes, so I think more issuers will think twice before going down that road now," says the banker.
Unstable market conditions, triggered by a warning by Ben Bernanke, the US Federal Reserve chairman, on 22 May of a possible slowdown in US quantitative easing, forced Air Canada to scrap its $1.1 billion offer to buy back outstanding debt in June.
In the same month, operating lessor Avolon decided to put its asset-backed capital markets financing "on hold" until conditions improve.
The first non-US EETC this year, Air Canada's $714.5 million financing in April, priced slightly tighter than BA's capital markets transaction. The $424.4 million senior A tranche carries a coupon of 4.125% and a final distribution of May 2025, while the $181.9 million subordinate B tranche has a 5.375% coupon and a May 2021 distribution.
The deal also features a $108.3 million C tranche, which has a 6.625% coupon and a bullet May 2018 maturity.