Concerns that aircraft leasing is headed for a downturn appear to have given way to a more immediate challenge for the industry: cheap Chinese capital, or the three Cs.

At the recent ISTAT Asia event in Hong Kong, the "three Cs" term came up during a panel discussion, and was uttered more than a few times in meetings and around the hallways.

It appears, for Western lessors at least, that there is a challenge with the seemingly unending pool of low-cost debt and equity that Chinese lessors have been tapping to drive aggressive deals, especially in the sale-and-leaseback market.

That apparently cheap debt has seen Chinese lessors price deals aggressively, with sale-and-leasebacks being done at lease rate factors of below 0.6%. At the same time, the greater pool of lessors in the market now has also driven up the number of responses to financing requests for proposals issued by carriers.

Assuming that there is credence to those rumours of low lease rate factors, many in the industry feel the availability of cheap Chinese capital is causing a distortion in the market, with some lessors making very aggressive assumptions about their ability to refinance and the residual risk on their aircraft. Others simply call them "undisciplined", and are hopeful that a rise in rates, or an eventual downturn, will force a return to more disciplined practices.

HOW CHEAP?

While there is a perception that the debt and equity being provided by Chinese lessors to the market is "cheap", it is hard to get a handle on how cheap that may be in a market where the top lessors have an average cost of debt already below 5%.

In many cases, the Chinese lessors receive strong backing of both debt and equity from parent banks, supplemented by bond issues and other facilities. Many also have strong ratings, thanks to their bank and other state-owned parent companies.

In some cases, debt is being funnelled as equity into lessors, making it difficult to distinguish between true debt, and true equity. As a case in point, Avolon's parent company Bohai Capital has been the beneficiary of HNA Group's ability to raise debt which is then invested into Bohai – and subsequently Avolon – as equity. That caused Fitch Ratings to express some concern about HNA's likelihood that it could try to extract that equity at a later date.

Nonetheless, data on the cost of capital for Chinese leasing companies is sparse, with few willing to discuss it. Thus, one can only assume that the capital must be cheap, or lessors are entering into deals with razor-thin margins that could see a shake-out if (or when) a downturn hits.

At ISTAT, Century Tokyo joint general manager of aviation finance Takamasa Marito was a little more sanguine, noting that the same "cheap capital" players have existed for some time.

"To be fair, the Japanese were bashed in the '80s for being a source of cheap money in the international loan markets. I think we're just taking turns," he said.

OPPORTUNITY IN CHALLENGE

While Western lessors may bemoan the presence of the three Cs, they are also helping to fuel stronger sales in the secondary market.

Most lessors are now selling aircraft not to the carriers that operate them, but to other investors – both with leases attached and without. In many cases, that also includes the Chinese lessors or other investors.

Anecdotally, there is also evidence that some deals backed by cheap Chinese capital have fallen down close to aircraft delivery. That has opened the way for bigger players with the ability to move quickly to step in. Their upside is that, in those circumstances, they can often command premiums over the low lease rate factors available in the market.

While the three Cs may present a challenge to some, it is an opportunity for others.

Source: Cirium Dashboard

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