BOC Aviation continues to diversify its funding exposure as the operating lessor embarks looks to expand its owned portfolio by 30% during the next three years.
At December 2010, BOC Aviation had 140 owned aircraft with more than 60 aircraft on firm order, after placing orders for 30 Airbus A320s last year along with eight Boeing 777-300ERs.
In an interview with CAO, managing director and CEO Robert Martin says BOC Aviation continues to explore different sources of financing. Having secured $200 million in equity from Bank of China at the end of last year, BOC Aviation has tapped the capital markets along with traditional export credit agency-supported financings to fund its growth.
The operating lessor also has raised debt guaranteed by the US Export-Import Bank. In 2010, it mandated Citigroup for $520 million in Ex-Im Bank financing covering two Boeing 777-300ER and seven 737 Next Generation aircraft. The mandate followed an earlier appointment in which BOC selected Citigroup to arrange up to $597 million in export credit agency financings with an optional capital markets issue for the Ex-Im portion.
BOC Aviation acknowledges that it faces a tough domestic finance market.
"In China, the domestic cost of funding is becoming an issue. The central bank is tightening the market and for the remaining of 2011, it will remain a tight market. We see no signs of improvement for the balance of this year," says Martin.
"It will affect the competitive landscape as other Chinese lessors finance themselves with other Chinese banks," he comments.
Martin explains that parent company Bank of China supports the lessor, but BOC Aviation always raises financing externally. "This is why the Singapore bond market is important for us. A lot of demand is coming from private sector for our papers and we will increase our current medium-term notes programme to approximately $500 million," he adds.
Martin says that BOC's medium-term notes programme covers 10% of the lessor's funding requirement. "We use the proceeds from the bonds to fund pre-delivery payments as well as for corporate use," he says.
He also anticipates an "artificial boom" in ECA-supported financing this year with more financings expected to close under the old terms of the aircraft understanding sector (ASU) agreement as well as grandfathering rights.
Martin adds that the ECAs will record their biggest year in 2011 as pricing is set to "double" under the new ASU. But he points out that European banks are under pressure as a result of the Greek crisis. "Banks are facing an uncertain environment," he comments.
At the Aviation Finance Europe conference in London, BOC's deputy managing director and CCO Steven Townend highlighted Asia as a source of liquidity.
"In volume terms, liquidity is not coming from the European and US capital markets but more increasingly from Asia," he says adding that it is "happening in pockets" such as Hong Kong and Singapore.
According to him, 77% of BOC Aviation's funding requirements now originate from Asian financial institutions.