IN FOCUS: Longer-term investors step up for Avolon Capital Partners

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London
Source: Flightglobal.com
This story is sourced from Flightglobal.com

Lessor Avolon's plans to form a joint venture with Well Fargo is another example of more long-term money entering the leasing market.

On the way out are short-term investors hoping for overly optimistic returns. Quickly replacing this money are financial backers with staying power that do not frown upon moderate profits.

"More capital in the aviation market is always a good thing, no matter whether you are a manufacturer, a bank, a lessor or an airline. And if this money has a view for more than one cycle, even better," says a banker.

A financier source believes the joint venture is a "sign of the times".

"Airlines want more leased aircraft, export credit has become more expensive, so backing the leasing market is the way to go," he says. "And it is a safer investment than putting cash directly into the airlines."

Wells Fargo is also a good choice for Avolon as it is based in the USA, and therefore has cheap access to the greenback and automatically avoids any possible US dollar funding issues.

The two companies are targeting a $500 million portfolio in a joint venture called Avolon Capital Partners, which would grow through sale and leaseback transactions involving new aircraft. The new business, which would be based in Dublin, is subject to a number of regulatory approvals, according to Avolon, which confirms the move.

Wells Fargo would be the majority shareholder and provide banking and debt financing facilities for the business.

Avolon's chief financial officer, Andy Cronin, will serve as a director on the board of ACP. Daire O'Criodain, an executive at Avolon, will serve as ACP's managing director.

Avolon was launched in May 2010 with $1.4 billion in equity and debt backing from the private equity firms of Cinven, CVC Capital Partners, Oak Hill Capital Partners as well as bank partners DVB and UBS. Since then, Avolon has raised a total of $3.7 billion of debt capital from a range of financial institutions, including Wells Fargo. The lessor has a fleet of 167 aircraft including 76 orders, according to its website,

Meanwhile, Wells Fargo completed its first aviation deal in 2010 - a secured financing with Air Lease Corporation. Two other secured deals with Avolon and AWAS followed in 2011 and 2012, respectively.

Through September 2012, Wells Fargo had completed approximately $675 million in financings, excluding legacy transactions originated by Wachovia, which it acquired in 2008 for $15.1 billion in an all-stock deal.

Last year a spate of lessor deals signalled a changing investor base in the operating leas market.

In December, American International Group negotiated to sell up to 90% of International Lease Finance (ILFC) in a deal valuing the lessor at about $5.3 billion to a Chinese consortium led by New China Trust, a Chongqing-based trust company that is 19.5% owned by Barclays Bank. Other investors include China Aviation Industrial Fund and P3 Investments. The buyers have agreed to acquire 80.1% of ILFC for $4.23 billion, with an option to buy an additional 9.9% stake.

Upon receipt of the required Chinese regulatory approvals, the investor group is expected to be expanded to include New China Life Insurance and an investment arm of ICBC International.

The deal follows the October sale of Jackson Square Aviation to Japanese financial heavy weight, Mitsubishi UFJ Lease & Finance Group.

But it was RBS Aviation Capital's sale to Sumitomo Mitsui for $7.3 billion in January that kicked started this show of longer-term investment in the leasing market.

Meanwhile, shorter-term investors, such as private equity firms, have been reducing their presence in the market.

In August 2012, private equity firm Fortress Investment Group ended its investment in Aircastle through the lessor's 9.25 million common shares offering. The Ontario Teachers' Pension Plan purchased 6.2 million common shares, while undisclosed investors assumed the remaining amount.

Aircastle repurchased 2.5 million common shares from Fortress Investment in a separate transaction at a cost of $28.5 million.

In the same month, AerCap repurchased an additional $120 million common shares from Cerberus Capital Management, reducing the private equity firm's holding to 10% of outstanding ordinary shares.

AerCap, which is backed by private equity firms Waha Capital, Cerberus Capital Management, Wellington Management and Oppenheimer Funds, disclosed in May 2012 that its board of directors decided to "explore a range of strategic alternatives to enhance shareholder value, including continued execution of operating strategies, further share repurchases, aircraft portfolio sales or a sale or merger of the company."

Operating lessor AWAS has also seen a change in its investor base. Last year, Canada Pension Plan Investment Board provided $266 million to help bankroll expansion at the lessor, increasing its stake in AWAS to 25% from 16%. Private equity firm Terra Firma owns 60% of AWAS and co-investors own the remaining 15%.