Aircraft leasing yields may have been driven down by abundance of capital, but liquidity is here to stay, opined lessors attending the ISTAT Asia conference that took place in Hong Kong on 9-11 May.

Investors searching for yield amid low interest rates have migrated to aircraft leasing, finding good returns in comparison with other asset classes. Fierce competition among capital providers and lower funding costs have established a more disciplined tender process, says Merx Aviation Finance managing director Gerry Butler, noting that almost every mid-life transaction goes to RFP today, which was not the case a decade ago.

"I've never seen the amount of liquidity come into this market in the cycles I've seen," says Butler, adding that there is more sticky money available as investors seek longer-term opportunities.

Participants in the ISTAT mid-life panel generally agreed that returns on equity had fallen, with Butler of the view that they will never return to the 20%-plus typical of yesteryear. But with interest rates low, aviation still provides a good opportunity for investors looking to deploy capital.

"We expect that the money will to a large extent stay because they've been converted to the merits of aviation," says Michael Howard, chief financial officer at Kahala Aviation.

While some investors with higher cost of funds, such as private equity and hedge funds, may migrate to other asset classes as interest rates rise, lessors are hoping that institutional investors will pick up the slack.

"We are at the tip of an iceberg," says Butler. "If you look at the number of institutional investors in real estate, we [in aviation] are a drop in the ocean in terms of that capability."

Aircraft asset-backed securities and private placements over the past few years have increased in volume, expanding the network of institutional investors.

"We as an industry are opening more debt channels than we've ever considered before," Butler says. "We're at the infancy as an industry in terms of capital, which is going to take off in considerable fashion."

And for an industry that will require over $100 billion per year to fund new equipment as well as refinance older assets, building up a deep and diversified pool of capital providers is critical.

Butler remains convinced. "If you have the ability to drive the cost of funds down and you have access to capital, you'll do well."

Source: Cirium Dashboard