In November 2015, delegates gathering at the aircraft leasing conferences in Hong Kong were pondering a new phenomenon: the "Bohai boost".
Coined in the aftermath of Bohai Leasing's successful takeover offer for Irish lessor Avolon, the "boost" refers to the price – which many perceive as a premium – that the Shenzhen Stock Exchange-listed lessor had paid for the fast-growing Irish outfit.
Following a short bidding war involving a third party – widely rumoured to be fellow Chinese company AVIC Capital – Bohai's $31-per-share takeover offer was accepted by the Avolon board. That valued the entity at $7.6 billion, including an enterprise value of $2.6 billion.
At the time, the target's chairman Denis Nayden said the deal would "enhance Avolon's profile, positioning and relationships in the Chinese aviation market" thanks to Bohai's strong relationships in the nation.
Bohai completed its acquisition of Avolon in early January, and the Dublin-based lessor assumed management of its new owner's subsidiary Hong Kong Aviation Capital (HKAC).
HNA Group – Bohai's parent – now has a portfolio of owned and managed aircraft in excess of 500 units.
The deal represents China's first successful takeover of a Western aircraft lessor, following the failure of the ILFC bid in 2013 and a previous tilt at Avolon by AVIC in 2014.
For those in Hong Kong, the talk centred on the premium that Bohai paid, especially as Avolon's share price had been lagging at around $25 per share beforehand.
A number of sources say the premium represents the price of experience, given that most Chinese lessors have not had to deal with the challenges of lessee insolvency and repossessions that are an everyday occurrence outside of China.
However, Astro Aircraft Leasing chief executive Johnny Lau believes this may be a harsh judgment.
"'Premium' is a very subjective term," he says. "In a perfect bidding situation, the bidder always pays a premium."
With the ink on the Avolon deal barely dry, Bohai was also linked to a possible sale of slimmed-down lessor AWAS, alongside old sparring partner AVIC and China's largest aircraft lessor, ICBC Leasing.
Bohai was also seen as a potential bidder for CIT Aerospace, after CIT signalled in October that it was looking at options for the business as it focuses on becoming a US commercial bank.
In a panel discussion at the Airline Economics Growth Frontiers conference in Hong Kong in November, Transportation Partners chief operating officer John Duffy posited that the renewed frenzy of possible merger and acquisition activity was positive for the industry.
"You could argue that we have waited 30 years for leasing companies to be decoupled from where institutional investors viewed airlines," says Duffy.
He adds that there is a lot of capital in mainland China that "wants to get out of China", and that the strong US dollar cash flows of aircraft leasing are attractive for a number of institutions and high-net-worth individuals there.
Similarly, Orix Aviation chief executive David Power said at the same conference: "There is now a marketplace where there wasn't five years ago."
In part, the overseas interest from Chinese lessors has been driven by intense competition in the domestic market. Competition for sale-and-leaseback transactions with Chinese carriers – which have been the primary form of growth for local lessors – has been cut-throat, as still more players enter the field.
The other key driver has been political, as Beijing pushes both state-owned and privately held companies to become more internationalised as part of its wider ambitions to be a major player in global finance.
"The Chinese institutions are all encouraged by the government to do more in the international market," says Lau. "So this kind of outbound investment is driven by both the commercial need for further growth and also political dimensions."
BEHIND BOHAI
Although little-known outside China, Bohai has been quietly building itself into a multidisciplinary lessor and has shown a strong desire to expand its aircraft leasing business.
Bohai unites HNA Group's financial and operating lease platforms into a single, listed entity. The company is still controlled by HNA Capital, but has been able to build strong links with mainland banks, investors and other institutions. Rarely has it been short of capital to deploy in priority areas.
Indeed, Bohai's takeover offer for Avolon came amid a flurry of HNA deals, such as its $2.8 billion acquisition of ground handler Swissport and, in December, a $450 million deal to take a 23.7% stake in Brazilian carrier Azul. HNA already had links to Azul as HKAC leases Embraer 195s to the David Neeleman-helmed carrier.
Unlike other Chinese lessors, Bohai has diversified its asset and customer base. Apart from its aircraft leasing units, it owns two of the world's largest shipping-container leasing companies – Cronos and Seaco – as well as other businesses involved in equipment leasing and real estate, in China and beyond.
That foreign exposure has proven a positive over the past year, following devaluations of the yuan. After one such event in July, Bohai announced to the stock exchange that, as most of its subsidiaries' cash flow was in US dollars, the devaluation represented a "net positive" for the company.
Until the Avolon acquisition, its primary aircraft leasing unit with international exposure was HKAC, which has its fleet of around 75 aircraft deployed in markets primarily outside China.
Bohai still has a strong presence in China through its local units Changjiang Leasing, Yangtze River Leasing and Tianjin Bohai Leasing. Flightglobal's Fleets Analyzer database shows that the majority of aircraft owned by those units are leased to HNA carriers such as Hainan Airlines, West Air and Capital Airlines.
As such, some argue that Bohai primarily serves as an in-house lessor and financier to HNA. Even HKAC, which has a more global footprint, has not been immune to such criticism. In 2014, four HNA-linked airlines took options to lease or purchase some of the Airbus A320neos HKAC had on order, while Tianjin Bohai completed sale-and-leasebacks on four Airbus A330s with Hainan Airlines last year.
HKAC chief executive Donal Boylan last year told Flightglobal the lessor had been heavily involved in negotiating Boeing 737 Max orders for Hainan Airlines and a separate order by Tianjin Airlines for Embraer 190s.
In an interview with the South China Morning Post in October, Bohai's chief operating officer Ren Weidong said the company had established a new joint venture, Tianjin Air Capital, to deal with asset management and provide consultancy services to other lessors.
Despite its broad portfolio, Bohai has made no secret of its plans to bulk up its aviation businesses. In April 2015, it disclosed its intent to raise CNY16 billion ($2.4 billion) through a rights issue, of which half was dedicated to investment in aircraft. At that time, the majority of those funds appeared set to flow into HKAC to allow it to gain more scale by adding to its portfolio.
Bohai had backed HKAC's bid for AWAS's Skyfin portfolio, but in the end was pipped to the post by Macquarie Group.
THE NEXT STEPS
This year more Chinese companies could step up their acquisition opportunities.
Johnny Lau believes the natural targets will be mid-tier Western lessors with portfolios of more than 100 aircraft.
"After the success story of Avolon, I think people in China are saying that it can be done. With the right team and the right investment banker, deals could happen," he says.
"They may not be as big as ILFC or Bohai-Avolon, but they will be there."
With AWAS in play, the other two bidders apart from Bohai – ICBC Leasing and AVIC Capital – are likely to be the next players sizing up acquisition opportunities.
ICBC, while already active globally, seems likely to look at opportunities to diversify its portfolio further through a Western acquisition. Having been part of the failed bid for ILFC in 2008, the company has for many years focused on organic growth through sale-and-leasebacks, while it also has a strong stream of speculative orders.
Some point out, however, that ICBC has yet to show that it has reached the level of being a true, full-service lessor. Detractors point to the recent example of an A330 returned to the lessor by Singapore Airlines – which sat dormant for the best part of nine months in 2015 without a new operator – as a sign it has yet to master the art of marketing used aircraft to other operators.
The other AWAS bidder, AVIC Capital, is less globally focused but has shown it is keen to expand its portfolio and target more customers outside China.
Like Bohai, AVIC Capital is tied to a larger entity – state-owned AVIC – and describes itself as a "full-licence" financial holding company. As well as holding stakes in a number of other AVIC-linked companies, it finances ships and general aviation aircraft.
Subsidiary AVIC International Leasing has had a reasonably busy year, acquiring Boeing 737s from Air Berlin and SMBC. It has also agreed to finance an order for 30 737 Max aircraft from start-up Chinese carrier Ruili Airlines, a deal disclosed at the Paris air show in July.
Those have added to what is seen as its more traditional role of supporting other AVIC-made products, such as the Xian Aircraft MA60 and forthcoming MA700 turboprops.
Having been beaten twice for Avolon, it appears that AVIC Capital will explore other opportunities to buy Western lessors. That could involve partnering with sovereign wealth fund China Investment Corporation, which sources say is also on the lookout for acquisition opportunities. The two companies teamed up in 2014 to make a takeover offer for Avolon that was rejected by management, clearing the way for the lessor to proceed to an IPO.
At the November event, there were warnings for potential takeover targets being sized up by cash-rich Chinese investors.
"This may sound unkind, but the valuation you get from a Chinese buyer may not be the value that is in there," says Transportation Partners' Duffy.
Expanding further on the point, CIT's president of commercial air, Tony Diaz, expresses concern the high valuations some Chinese companies are willing to put on Western lessors would place impossibly high expectations on the management team once a merger or acquisition is closed.
"I don't know if, as a management team, you can manage the business to achieve a certain multiple," he says.
While mergers and acquisitions are a tantalising prospect, other investment opportunities are set to open up this year, with at least two Chinese-linked lessors poised to list on the Hong Kong stock exchange in what are likely to be IPOs worth up to $1 billion.
Bank of China disclosed in October that it plans to take BOC Aviation public with a listing on the Hong Kong Stock Exchange. BOC Aviation would become the second lessor on the exchange after China Aircraft Leasing (CALC). The Singapore-based lessor plans to sell a 20% stake in the float, while a further 20% will be used to raise new capital.
Although no timetable has been given, shareholders approved the IPO in November, signalling it could launch in early 2016.
Despite the merger and acquisition activity around, BOC Aviation's chief executive Robert Martin says his company will not be going down that path.
"Are we a buyer? The answer is no," he says. "We tend to be counter-cyclical and so for us the timing is not right, but for someone who is looking to go in and buy a platform, there are opportunities out there."
Although less advanced in its plans, market sources say China Development Bank is also pursuing a listing of its CDB Leasing unit, in 2016.
As well as the usual sale-and-leaseback activity of Chinese lessors, CDB Leasing signed on to take 30 Boeing 737-800s as part of a 300-aircraft order by China Aviation Supplies Holdings disclosed in September.
The acquisition activity and IPOs in the pipeline reinforce just how quickly the Chinese leasing sector has grown since Beijing allowed banks to establish leasing operations, in 2008.
Thomas Kaplan, a senior analyst at Flightglobal's Ascend consultancy, notes the industry has grown at a phenomenal annual growth rate of 37% over the past five years, although around two-thirds of the leased fleet are operated by Chinese carriers.
BOC Aviation's Martin says for most of the Chinese banks with leasing arms, it is merely an extension of their existing business.
"In the leasing market, people see it as an alternative way of lending to their customers, particularly through finance leasing," he says.
Over the past year, carriers such as Juneyao Airlines, Spring Airlines and even China Eastern Airlines have also been setting up and operating their own leasing platforms, usually based in one of China's free-trade zones.
"So far, they are setting up finance leasing, more for tax purposes, but some may be interested in operating leasing too, so they are ones to look out for," says Kaplan.
Overall though, Astro's Lau says Chinese lessors still have a lot more growing to do before they can be truly global players.
"I think they are still maturing," he says. "Maybe, like Bohai, if they can jump those big hurdles to make a major acquisition and become international, they will speed up their own growth path, but that's not easy."
Source: Airline Business
