Global airlines will have more sources of financing available to them, thanks to the expansion of some existing lessors and financiers, and the emergence of others, when they set out to finance their $112 billion worth of expected aircraft deliveries this year.
A pullback in the financing markets following the 2008 financial crisis and tighter global financial regulation prompted existing aviation financiers Development Bank of Japan (DBJ) and Novus Aviation Capital to establish Tamweel Aviation Finance (TAF) along with Airbus in September last year.
"We realised there is growing potential for mezzanine financings in this space, as we expect financings will become more expensive and loan-to-values will decrease as a result of increased regulation," says Masao Masuda, director at DBJ.
"Airlines and lessors will still need support, even though there could be a tighter pool of investors due to more regulation. We are seeking to help fill any gaps with high-risk, high-return mezzanine capital."
In December, TAF and Emirates closed a finance lease transaction covering two Airbus A380s – the first deal to be struck by the new fund.
While Masuda would not be drawn on the amount of the fund, which will mainly finance widebody Airbus aircraft, market sources indicate that an initial investment of ¥10 billion ($101 million) is likely.
Airbus senior vice-president of structured finance Nigel Taylor says TAF will bring additional liquidity, particularly to long-range aircraft, for its airline customers whose orderbooks continue to grow.
Masuda says DBJ had been looking at entering the mezzanine market for some time, but with an experienced partner.
"We found that in Novus, which has been in the market since 1994 and manages a $2 billion portfolio," he says.
Airlines looking for A380 equipment will find relief in Doric Lease, the Dublin-based lessor that was launched on 14 June, days before it signed a memorandum of understanding with Airbus for 20 units at the 2013 Paris air show.
Doric Lease says the move to an Airbus A380 operating lessor allows the financier to reap "benefits" not afforded to it as an asset manager. However, the Offenbach, Germany-headquartered Doric, which has a portfolio of 38 A380 aircraft valued at $7.8 billion, will independently maintain its asset management role.
"In many respects, it is an enhancement of what we have been doing... but this gives us benefits we didn't have access to before," says Paul Kent, chief commercial officer of Doric Lease.
"There are things I can do in this arrangement that I couldn't do in a sale and leaseback," he adds. "There are certain risks I can invite the manufacturer to be part of, for example, that I couldn't achieve in a sale and leaseback agreement where the purchase agreement has been done with the airline before I even get to the table."
Doric Lease expects its memorandum of understanding with Airbus to expand the A380's operator base.
"Absolutely, this [the MOU] will [broaden the base]. It is a fundamental goal of what we are trying to do – to expand the base," says Kent.
He dispels a "market myth" that Doric Lease is involved in a sweetheart deal to front a 20-aircraft order for Emirates: "That's absolutely not the purpose behind what we have done."
Kent says he has some "clear candidates in mind" who have expressed interest in the A380 and are not of the existing operating base.
Recent consolidation in the operating leasing market will favour airlines looking to expand their leased fleet in 2014.
AerCap's purchase of ILFC in December will give the combined lessor greater financing options for purchasing aircraft and supporting future growth plans, says its chief executive Aengus Kelly.
"We expect the company to have deep access to all funding markets," says Kelly.
Greater financial strength is a welcome sign for global airlines looking to increase their sale-and-leaseback financings to boost their internal cash positions.
AerCap and ILFC have raised more than $39 billion of financing in the last several years, he says, "many times the expected financing need of the combined company over the next few years".
Although AerCap has avoided speculative aircraft orders recently, ILFC comes equipped with more than $20 billion in orders, including key aircraft such as the Boeing 787 and Airbus A350.
The transfer of ILFC's assets to Ireland as part of the purchase will produce a reduction in tax expense, and that should also help boost the combined lessors' spending power on airline leasing.
Further aiding carriers in search of leasing is a joint venture signed between Aircastle and an affiliate of the Ontario Teachers' Pension Plan, the largest single-profession pension plan in Canada.
The deal, which was signed the same month of AerCap's purchase of ILFC, brings an additional $500 million to $1 billion of aircraft investments to the leasing market. Aircastle will source and service these investments.
Already the joint venture has two Airbus A330 family aircraft that are on lease to Indonesian flag carrier, Garuda Indonesia.
The agreement further strengthens Aircastle's capital structure, following the recent strategic investment in the lessor by Japan's Marubeni Corporation, its largest shareholder.
Operators of used aircraft will finally have better luck in sourcing financing this year, after that end of the market experienced a dramatic reduction in funding as bank credit committees have preferred newer and lower-risk equipment following the financial crisis.
In September, New York-based Fifth Street Finance created First Star Aviation to fill a gap in the funding market for mid-life and older aircraft that are being passed up by existing financiers.
"With larger banks and financial institutions scaling back on lending activities to older aircraft, we see an opportunity to fill a void in the under-served segments of the markets," says Pradeep Hathiramani, managing director of First Star Aviation.
The lessor plans to grow its portfolio during the next few years through a disciplined and value-oriented investment approach. "The rate of our growth will depend on market conditions and available transactions," he says.
First Star will not target a specific aircraft size or type. Instead, each transaction will be evaluated for its returns on a risk-adjusted basis with appropriate diversification goals for the overall fleet portfolio, says Hathiramani.
"We think of the sector as an attractive place to deploy patient capital and capitalise on dislocation," he says. "The rapid growth of the leasing industry is poised to continue, given the growing preference of leasing versus owning equipment by capital-constrained carriers."
The lessor has already completed the purchase of three Boeing 757 aircraft on lease to United Airlines.
The three 1991-build aircraft will be managed by Kahala Aviation Leasing. Fifth Street provided First Star with debt and equity capital to finance the purchases.
Source: Airline Business
