More Japanese liquidity on tap for aircraft funding: Boeing

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Boeing expects more aircraft funding from Japan, fuelled by recent lessor purchases by local banks, an ageing population and the country's ambitious new monetary policy.

"Japanese banks in the 1980s were one of the premier aircraft financiers and they are coming back to this space, as aircraft offer a predictable investment and a better return than what they can achieve in their domestic market," said Kostya Zolotusky, Boeing Capital's managing director of capital markets and leasing during a finance briefing today in London.

The country has an ageing population, so a lot of investments are being "repatriated back into Japan", and a lot of investments that had been in long-term products are being deposited into the banks, Zolotusky explains. "So there is a lot of liquidity that is desperately looking for ways to be deployed."

The Bank of Japan said last month said it would increase its purchase of government bonds by yen (Y) 50 trillion ($520 billion) per year under its new monetary policy. The bank added that it would buy longer-term government bonds as well as riskier assets such as exchange-traded funds and real estate investment trusts.

The move is intended to weaken the local currency, but aviation financiers such as Mitsubishi UFJ Lease & Finance and Sumitomo Mitsui (SMBC), which signed agreements last year to enter the leasing market under a strong yen, still find themselves in favourable positions with already established US dollar revenue platforms.

"This [lessor purchases by Japanese banks] lines up neatly with what the Japanese central bank is doing, where in essence it is trying to rebalance the currency as part of the quantitative easing programme that the financial institutions are participating in, and holding dollar-denominated assets is very attractive for them," he says.

In October 2012, Mitsubishi UFJ Lease & Finance inked a deal to acquire San Francisco-based Jackson Square Aviation. That deal followed the sale of RBS Aviation Capital to SMBC in January.

According to Zolotusky, following the lessor deals, a lot of people were "snickering at conferences" that Japanese banks were buying into the leasing market during the top of the cycle and paying top dollar to do so.

However, he believes there are more to the deals than the headline purchase prices.

"If you look at it [the lessor purchases] from the Japanese perspective, and consider a normal leasing business generates a 12-14% return on equity long-term...if the Japanese paid a premium...they could assume maybe an 8-10% yield," he explains. "Not only is an 8-10% yield an attractive investment for Japanese banks, given their alternatives, but look at the value of the yen relative to the dollar."

When SMBC purchased RBS Aviation it did so for $7.3 billion at Y76 to the dollar, but now the yen is at 99.7 to the greenback, he notes.

"Any investor in the world will tell you that buying the RBS portfolio for $6 billion, or less, is the bargain of the century...SMBC's acquisition of RBS is probably going to be one of the best deals it has done this decade," he says.