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Leasing special report: Through the haze

As the impact of the financial crisis begins to abate, the mist is clearing over the aircraft leasing market. But what shape is the sector in as we enter 2010?

The lessor industry found 2009 to be every bit as rocky as the airlines did. Several leasing companies found themselves dragged down into a financial morass through no fault of the fundamentals of the business, or even from problems with lessees. Rather, parental difficulties emanating from the global financial market meltdown, which began in September 2008, was the culprit.

445 (c) Rex Features

 ©Rex Features

This was evident in several examples. Take International Lease Finance Corp, which went from a AA credit rating to junk bond CCC within a year. Its ability to tap commercial paper markets and unsecured debt collapsed. Traditionally a driver of new aircraft orders, ILFC had all it could do to finance the ones it had on the books, pushed into humiliating terms and conditions segregating lease income by the European Credit Agencies that support Airbus aircraft. And all this because of the financial meltdown of its parent, AIG. ILFC went on the for-sale block early, but could not find a buyer in the 2009 marketplace.

Problems at the Royal Bank of Scotland, which became nationalised by the UK Government, resulted in RBS Aviation Capital having to pull in its horns. The company cancelled orders for 25 Boeing 787s. It retained orders for Airbus A320s and Boeing 737s and remained active in the purchase/leaseback market. But it is for sale.

CIT Group's financial problems resulted in bankruptcy for itself and a few of its subsidiaries, but CIT Aerospace managed to avoid the pre-packaged Chapter 11 filing at the end of last year. Nonetheless, Aerospace had to rely mainly on financing its new aircraft orders from the export credit agencies. CIT Group acknowledged that the future of its Aerospace unit within the group is questionable. Aerospace is for sale, according to market sources. CIT does not confirm this.

Problems at Babcock & Brown of Australia, another victim of the sub-prime financial meltdown, meant that Babcock & Brown Asset Management and the interest in Babcock & Brown Air were for sale. BBAM manages more than 250 aircraft and BBAir owns more than 60. The sale of BBAM has been delayed for reasons which are said to be failure to obtain the necessary consents.

Even GECAS was initially affected by problems at parent General Electric. GE obtained rescue funds from the US government and stabilised. GECAS resumed its role as an active player in new aircraft financings in 2009.

Genesis Lease, AirCastle and AerCap all found challenges in tapping the capital markets. Genesis was reduced to largely managing its own portfolio, while AirCastle and AerCap had to rely on export credit financings for their Airbus orders. Genesis began shopping itself early last year and finally struck a stock deal with AerCap to be acquired by the latter. Australia's Allco was for sale throughout last year; a deal was finally struck in January with Chinese interests.

As 2010 begins, the future of mega-lessor ILFC remains uncertain. At the time of writing market sources report that founder and chief executive Steven Udvar-Hazy has submitted his "best and final" offer to acquire about 100 of the 1,000 aircraft. But this would cover only about 10% of the fleet - leaving more questions than answers about ILFC's future.

CIT Aerospace, the third largest lessor by fleet value in 2009 after GECAS and ILFC, notes that despite industry turmoil its business remained stable. "Although 2009 was indeed a challenging year, we did not witness a collapse of the operating lease business," says Jeff Knittel, president of the Transportation Finance unit that includes the Aerospace subsidiary. "In fact, almost all leases continued to perform normally. The availability of export credit-supported financings certainly helped fund new deliveries. The airline industry is realising a temporary benefit in the form of greater availability and greater choice of aircraft, lease rates, and terms allowing the airlines to upgrade their fleets with newer and more efficient aircraft."

Only AWAS, Aviation Capital Group and BOC Aviation were considered throughout last year to be largely immune to the travails that faced the lessors. AWAS is an indirect subsidiary of the Terra Firma investment groups in Europe. ACG is a wholly-owned subsidiary of PacificLife, a US insurance company whose conservative business practices enabled it to avoid the need to seek a government bailout. BOC Aviation is a unit of the giant Bank of China and was fortunate to have a billion-dollar warehouse facility in place before the financial markets collapsed.

BOC Aviation began 2009 with 17 of its own deliveries on the books and carried out 45 purchase/leasebacks with seven airlines. There were 10 Boeing 777s with Cathay Pacific Airways and Air France; 32 Boeing 737s with Alaska and Southwest Airlines, Virgin Blue, Air Berlin and TUIfly; and three Airbus A320s, also with Air Berlin. Total value was $2.5 billion. This brought BOC Aviation's portfolio to 118 owned and 24 managed aircraft by the end of December.

AWAS called 2009 the most successful year in company history "from a financial performance perspective", chief executive Frank Pray tells Airline Business. AWAS completed the integration of Pegasus Aviation, took delivery of new aircraft and had "virtually" no repossessions. "Even from a credit perspective, we had a good year," Pray said. "Things we thought that would hit us from liquidity perspective and credit perspective did not hit us. Does this mean this will happen in 2010? I don't have an answer."

ACG began taking delivery of its direct orders from Boeing last year, as well as delivery positions purchased in 2006 from then-bankrupt Delta Air Lines, both for the newest 737 versions. ACG also became the first lessor to use a new US Ex-Im Bank bond-based financing structure for approximately $900 million. The deal was put together at the same time as a similar bond-wrapped deal for Emirates Airlines, which had the honour of closing its transaction first.


These were among the few bright spots for lessors in 2009, a year which is perhaps best summarised by BOC Aviation chief executive Robert Martin. "Last year there were three things going on: export credit solved a lot of problems; new players, BOC being one of those, did deals mostly into home countries where export countries couldn't play; and most leasing companies had already placed deliveries, so sale/leasebacks were filled by export credit and BOC," he observes.

CIT Aerospace found its operations continued normally last year, despite troubles at the parent, and funding proved available. "ECA support has been a very reliable and competitive financing source," says Knittel. "We used ECA financing for a number of our aircraft deliveries in 2009 as was intended when the aircraft were ordered. We could have used outside funding for some other deliveries, but it proved to be more advantageous to fund non-ECA eligible aircraft internally."

For all the talk of lessor industry consolidation and the number of companies for sale, Martin was surprised no combinations were concluded. That could change in 2010, though. AerCap-Genesis, originally planned to close in December, was delayed only by regulatory approvals. The long-delayed Allco transaction closed in January. RBS Aviation Capital hopes to see a sale this year. CIT Aerospace is on the market, with serious lookers. BBAM's sale may resurrect this year.

As 2008 closed, doomsayers predicted there would be a funding gap of between $10 billion and $25 billion on the $65 billion worth of aircraft to be delivered by manufacturers last year. Boeing Capital predicted a "manageable" funding gap of up to $5 billion. Airbus later concurred. Both airframers faced much skepticism and derision, but proved to be correct. The export credit agencies in Europe and the US proved to be the saviours.


AWAS' Pray, a former CIT banker, was sharply critical of the banks that promoted the funding gap, charging that they were simply manipulating the market to drive up fees. Boeing forecasts a funding gap this year of up to $2.5 billion and predicts lessors will play a smaller role this year than in 2009 because access to unsecured debt will be reduced. BOC's Martin believes that only his company, GECAS and ACG will be able to tap unsecured debt this year, but he - along with Pray - notes that lessors have fewer new aircraft coming from Airbus and Boeing this year than last. As a consequence, the question remains how active lessors will be in the purchase/leaseback market.

CIT's Knittel believes the 2010 "funding gap" will be largely addressed as it was in 2009. "In addition to the Export Credit Agencies, we are starting to see banks providing loans and I would expect the manufacturers to also provide some financing again."

Martin says his company has 27 aircraft scheduled for delivery plus four others, committed in 2009, for purchase/leaseback this year. The company can do an additional $1 billion this year if it chooses. "With 27 deliveries of our own, which are all placed, plus four left over from 2009, we don't need to do a lot more," he says. "We can do another $1 billion in PLBs if the right deliveries come along. We see pre-delivery payments as a problem for some airlines, so we can play in this market, and we are actively taking a look at this now." Martin said BOC Aviation will also consider small portfolio purchases.

For all the hand-wringing about funding last year, there was one start-up company that obtained $500 million in equity: Sky Holding, founded by the former management group and owners of Pegasus Aviation. One of the integration factors at AWAS of Pegasus was the spin-off of the old PALS asset management portfolios back to Richard Wiley, founder of Pegasus and Sky Holding.

While in charge of Pegasus, Wiley teamed with Oak Tree for financing and equity. In December, he re-teamed with Oak Tree for the equity investment in Sky Holding. Wiley plans to execute purchase/leasebacks this year through 2012, with little-to-no interest in speculative orders.

How does the lessor industry perspective compare to a year ago? Look back to 2009 at:

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