Earlier this week, Irish lessor Orix Aviation made a surprise minority investment in another Irish leasing company, Avolon.
It's immediately clear why this is a good deal for Avolon, which has suffered due to its affiliation with indirect parent HNA Group's exploding debt, but the benefits to Orix are less obvious.
While the deal is still subject to approval, Orix announced yesterday that it will pay $2.2 billion for a 30% minority stake in Avolon, which is wholly-owned by publicly-listed Chinese company Bohai Capital. HNA Group, the Chinese debt-laden conglomerate, is the majority shareholder in Bohai Capital.
"We have not ordered aircraft new from the manufacturer," Orix Aviation chief executive David Power tells FlightGlobal. "It takes a number of years for purchase order positions to come on-stream, usually five to seven years accordingly our acquisition gives us immediate financial return from a company specialising in placing new aircraft."
Avolon has over 300 aircraft on order with Airbus and Boeing scheduled to deliver through 2026, according to Flight Fleets Analyzer.
On the other hand, Orix, which was established in 1991 and is a wholly-owned subsidiary of Japan's Orix Corporation, specialises in mid-life to older equipment with an average age of 8.9 years, Flight Fleets Analyzer shows, for the owned and managed fleet.
"By making this investment in Avolon we’re benefiting from their purchase orders through our equity investment," says Power.
The new shareholder, however, is hasty to point out that those orders will not be transferred to Orix. "There’s no question of taking over order positions," says James Meyler, chief executive of Orix Hong Kong and chief commercial officer of Orix Aviation. "Our investment in the company gives us a 30% exposure to their order positions and activities as they perform with those aircraft."
An informal dialogue began between management at the two companies earlier this year.
"The key metric Avolon were looking to was to get to investment-grade, and what we knew was we as Orix, buying into that story, we could assist and enhance the position for Avolon," says Power.
In order to compete with the top dogs over time and through the cycles, lessors need the lowest and most competitive cost of debt available and being investment-grade (IG) helps to deliver that.
"We are not investment grade – so I'm not quite at the cost of debt I'd like to be, but I'm tracking to that," Avolon's chief executive Domhnal Slattery told FlightGlobal in October. "It's an inevitability in my mind."
This was before it became apparent that indirect-parent HNA's troubles would overshadow the extensive efforts Avolon had put into strengthening its credit profile.
"We needed to fix the balance sheet, and the Orix deal does that," Slattery told FlightGlobal in an interview yesterday.
The two companies have conducted a significant amount of business over the past three years, comprising about $2.4 billion worth of equipment sales from Avolon to Orix. But becoming a minority stakeholder adjacent to Bohai, the company that wholly owns Avolon, required assurances that Bohai would not use Avolon as an ATM for majority-shareholder HNA.
"With the proper shareholder framework in place – proper board framework and the protections to shareholders and bondholders – it is an attractive proposition," says Power.
Through minority protection provisions, voting and board membership, Orix will have legal rights over Avolon's budget and business plan, any dividend policy, any material related-party transactions and any changes to corporate structure or officers of association.
Whether there could be a potential merger down the road between the two companies is at the top of everyone's minds, but Power remains coy.
"We bought a 30% share and we’re happy with that. We can’t know what happens in the future."
Source: Cirium Dashboard