After months of uncertainty around its parent HNA, the world's third-largest aircraft lessor Avolon has found stability in a new partnership.
Orix announced today that it would take a minority stake in the Bohai Capital-owned lessor. HNA Group, the Chinese debt-laden conglomerate, is the majority shareholder in Bohai Capital.
Under the deal, which is still subject to approvals, Orix will pay Bohai $2.2 billion for a 30% stake in the Dublin-based aircraft lessor – the largest-ever payment for a minority stake in an aircraft leasing company. The proceeds from the sale will go towards paying off debt at the Bohai level.
"We needed to fix the balance sheet, and the Orix deal does that," Domhnal Slattery, chief executive of Avolon, tells FlightGlobal.
"We were 100bps wider than our peers because we weren't investment-grade [IG] so we had to fix that. But the rub was that as long as we were owned by Bohai/HNA – even though our underlying credit metrics were IG metrics – Avolon was never going to get to IG because we were linked to our shareholder's credit rating. That was a structural impediment," he says.
Currently, Avolon is rated BB by Fitch, Ba2 by Moody's and BB+ by S&P Global Ratings.
Top-tier aircraft leasing companies typically need two things to compete from a strong and sustainable position. One, the price they're paying for aircraft has to be the absolute lowest.
"We feel comfortable that, strategically, we're buying our aircraft well," says Slattery, who notes that HNA businesses like Avolon buy as a block and in bulk, for which they receive substantial discounts on equipment.
Secondly, to compete with the top dogs over time and through the cycles, lessors need the lowest and most competitive cost of debt available.
While Avolon's credit metrics have been good, the company has not been able to obtain that coveted IG status bestowed upon competitors like AerCap, BOC Aviation, GECAS and SMBC Aviation Capital, which gives them access to the cheapest and deepest capital.
"In Fitch's opinion, Avolon's ability to execute on its business objectives over the past year has been constrained by the highly speculative credit-risk profiles of Bohai Capital and its majority owner HNA," says Fitch Ratings in a report published today.
But with the Orix deal announced today, the lessor appears to be moving closer to that prized position. In fact, since the announcement, both Fitch and Moody's Investor Services have already upgraded their outlooks to positive.
"Moody's review of Avolon's ratings is based on the significant investment commitment by Orix, a strategic investor with a strong credit profile, as well an expected reduction in Avolon's governance risks relating to financially weaker parent Bohai Capital and its controlling shareholder HNA Group, as Orix exerts influence on Avolon's strategy and operations through its appointed directors on Avolon's board," Moody's writes in its 8 August report.
As part of the transaction, 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
"That suite of minority protections means the rating agencies will de-link Avolon from our parent's credit rating and effectively removes that problem," Slattery tells FlightGlobal.
The transaction still remains subject to necessary approvals and is expected to close during the fourth quarter.
For Avolon, the relationship with Orix gives the company access to new financing markets like Japan, where Orix has actively built an asset management business on behalf of Japanese investors.
Avolon is now looking strategically and structurally more sound than it did merely one day ago. The Dublin-based company will continue to benefit from shareholder HNA's bulk-buying, and the lessor appears to be back on track to win an IG rating with the credit improvements or protections brought by new minority stakeholder Orix.
Instead of having to bail out the water, Avolon has found wind in its sails.
Source: Cirium Dashboard
