Airlines and lessors continue to benefit from a "wall of liquidity" and relentless appetite for aviation credit from the institutional market.
"Despite rates coming up, there's no dampening effect on the market at all because there's still a wall of money coming in from the east but also institutional money moving into the sector," Will McCallum, managing director of aviation finance at Standard Chartered Bank, told an audience at ISTAT Europe in Prague on 24 September.
Co-panelist William Graham, a managing director at Morgan Stanley, agrees, noting that a lot of money is chasing assets, driving yields to an all-time low. "Lessors are getting paid to migrate to unsecured," he says, noting that airline leasing is "really the darling of the market in the corporate markets because you have discrete heavy assets that people can understand the value of with a contracted cash flow, so it's a really strong corporate funding market".
Graham says "the absolute yields have not moved" despite rising rates. "In this space where people are focused on yields vs spreads, you've seen spreads collapse so that yields on an aggregate basis haven't really moved despite the pressure of treasuries."
There is so much competition to deploy capital from the institutional market for credit, particularly in the aircraft leasing space, that the investment-grade and high-yield market are offering more competitive funding compared with the secured loan market.
While the yield curve is flat and the market remains frothy lessors may not get a significant premium to cost of capital between investment grade and high yield. However, if the cycle does evolve and spreads widen, Graham says, it will be a cost advantage will be to be investment grade.
One critique that Graham offers is that leasing companies' capital structures are too short-dated. "They should be seeking longer-dated bonds."
On the other hand, the bank market has typically provided funding matched to the asset and lease term, though it was not always available to lessors.
"The bank debt market for us feels a little bit like the A330, which is that it's around a very long time but it's continuously evolving and changing," says Andy Cronin, chief financial officer at lessor Avolon. He notes that 10 years ago, banks didn't really lend to lessors except on a non-recourse basis or for single-aircraft deals.
The advent of extending recourse loans to the lessors around 2009-10 has allowed banks to grow their exposure to lessors.
Cronin adds that the bank lending to lessors looks much more like the capital-markets term loan market which focuses more on the collateral rather than the lessor's specific credit.
As McCallum points out, liquidity remains strong, particularly Japanese investment. "Japan is on fire and the JOLCO market is very powerful," says Eelco van de Stadt. "We've only seen the start," he adds, noting that Japanese leases – which offer 100% funding – have become so attractive that even US carriers reliant on the efficiency of the EETC market have begun using JOLCOs to fund aircraft.
"It has to do with the super liquidity in the market, and that risk is becoming less and less of an issue," says van de Stadt, noting that he can't remember when the market faced serious risks.
Van de Stadt does however have some concerns, "even in this credit climate that is so green, where airlines have managed to post consistent profitability".
He warns that while airlines are profitable, in a rising-interest-rate environment with increasing oil prices and currency risk in certain regions, carriers should be using their profitability to pay down debt.
"The combination of a super-liquid environment that has allowed them to buy a multitude of aircraft – particularly widebody aircraft – is where we see some risk."
Source: Cirium Dashboard
