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  • SINGAPORE 2010: Chinese lessors look to expand internationally even as local lending eases

SINGAPORE 2010: Chinese lessors look to expand internationally even as local lending eases

Chinese operating lessors will continue to step up their presence in the international market this year, despite a likely slowdown in lending by the region's banks that will call for a focus on the domestic market.

Early this month the People's Bank of China raised the interest rates on its one-year and three-month treasury bills, in moves that are largely seen as attempts to curb aggressive lending by the nation's banks.

State media reported just a day earlier that banks extended 600 billion yuan ($88 billion) in loans in the first week of this year, or nearly twice as much as the monthly average in the second half of 2009.

Air France 777-300ER, John M Dibbs/Air France
 © John M Dibbs/Air France
Financing by BOC Aviation, a lessor with a Chinese parent, includes two Air France 777s 

In a further move to halt economic overheating, China's central bank has increased the reserve requirement ratio, or the amount banks must set aside in reserves, by 0.5% to 15% of their deposits.

The People's Bank of China says it will maintain a moderately loose policy this year, with new loans expected to total $1.03 trillion, down from $1.46 trillion in 2009.

But despite this lower level of expected liquidity, and therefore a narrowing of focus to the domestic market, Robert Martin, managing director and chief executive of BOC Aviation, anticipates certain lessors will be active in the international market this year.

"Chinese leasing companies are learning very quickly about international markets and will be significant players very soon," says Martin. These companies have capital to invest "at a time when the market needs it, which is a big difference when availability of liquidity is tight".

In March 2007, the China Banking and Regulatory Commission granted approval for commercial banks to have finance leasing companies, which resulted in the growth of local aircraft lessors.

However, due in part to regulatory issues that make it difficult for local leasing companies to do business abroad, much of the focus has been on the Chinese market.

BOC Aviation, which considers itself a global lessor with a Chinese parent, will grow its fleet by 20% this year.

That level of growth is certainly impressive considering certain lessors will face refinancing issues this year that will likely limit their desired growth plans.

"We will continue to pursue a counter-cyclical strategy and focus on growth areas in Asia, Middle East and commodity exporting countries, says Martin.

"We aim to continue growing at a sustainable pace, generating returns that meet targets set by our parent company."

The lessor has seen a doubling in the size of its portfolio to 142 aircraft since being acquired by Bank of China three years ago. Cash-rich BOC Aviation has managed to fund $2.5 billion in sale and leasebacks since December 2008.

Those financings include 43 aircraft with international airlines: 16 Boeing 737-700s with Southwest Airlines; six 737-800s with Alaska Airlines, two Boeing 777-300ERs and two 777-200LRFs for Air France; four 737-800s with Virgin Blue; three Airbus A320s and one 737-800 with Air Berlin; six 777-300ERs for Cathay Pacific and three 737-700s for TUIfly.

Southwest Airlines 737-700, Southwest Airlines
 © Southwest Airlines
BOC has financed Southwest 737-700s

Martin expects the market will see "one or two more new lessors" this year as some Chinese banks have earlier indicated strong interest in the aviation industry

Industrial and Commercial Bank of China Leasing's (ICBC Leasing) global head of aviation finance, Johnny Lau, says the Chinese government is planning to issue another 10 licences during the next two years. "There could be 10-15 leasing companies in China with commercial banks parents," he adds.

In a recent presentation to financiers, Boeing identified ICBC Leasing as a company that is "moving to establish a global presence". Last year ICBC Leasing completed sale and leasebacks on two 777-200ERs with British Airways. The lessor also sealed finance leases with Korean Airlines on two 777-200ERs.

ICBC Leasing, which was established in 2007, is in expansion mode after its parent approved a $439 million capital injection in 2009. As of September, ICBC Leasing managed $3 billion in assets.

Another lessor that is actively moving ahead with plans to expand its border is Hong Kong Aviation Company (HKAC), a consortium that includes HNA Group and Bravia Capital Partners.

The company recently completed the acquisition of Allco Aviation, which gave it access to 68 aircraft on lease to international airlines. Before the purchase, HKAC closed 18 aircraft transactions exclusively in China, but the lessor is in discussions with airlines in Germany and India.

It is also looking to acquire another operating lease platform. "We are in the second round of discussions on all three lessor portfolios currently for sale in the market," says Bharat Bhise, chief executive of Bravia Capital Partners and special adviser to HKAC.

He adds: "It is much easier to grow through portfolio purchases than to go on to the market and do several sale and leaseback transactions."

Bhise stresses the key to any portfolio purchase is credit quality. "We would only be interested in good credit airlines such as those in the Allco portfolio," he says.

The financier plans to grow through narrowbody and widebody aircraft, but will also consider turboprops.

HKAC has committed financial support from Chinese banks including the Agricultural Bank of China and the China Development Bank. The lessor has $2 billion in financing available in 2010, but says "some of that" may be used to pay down existing lenders. Bhise says the time is right for HKAC to be in the market due to the liquidity crunch. "There is no liquidity in Europe and North American market," he explains. "Financing will have to come out of China and Abu Dhabi as the rest of the Middle East doesn't have money."

Going forward, he says the key financial players will be BOC Aviation, ICBC Leasing, HKAC and "one more Chinese player that will enter the market."

Another lessor tipped to grow its international scope is Shenzhen-based CDB Leasing, which is an asset management arm of China Development Bank.

CDB Leasing recently acquired 12 more unidentified aircraft from US lessor GECAS, a deal that follows an earlier agreement for three aircraft. Under an agreement signed between the two sides, CDB is taking a mix of Airbus and Boeing types.

CDB Leasing also has signed an agreement with Embraer to provide aircraft financing and leasing services to the airframer's potential customers.

The memorandum of understanding could cost as much as $2.2 billion over the next three years, says the Brazilian airframer.

"The deal is designed to enhance financing opportunities for acquiring Embraer aircraft in China and abroad, focusing on developing regional aviation in China," says Embraer. The lessor may also consider purchasing aircraft directly from Embraer for future leasing opportunities, it adds.

Parent company China Development Bank recently provided funding for four new Airbus A330s belonging to operating lessor AerCap. AerCap is a player in the China market and owns 25% of Beijing-based aircraft lessor Dragon Aviation Leasing, whose other shareholders include China Aviation Supplies Holding Company and French bank Calyon.

Dragon Aviation Leasing signed a $230 million long-term commercial facility with the Export-Import Bank of China in June. The transaction covers the financing of six new Airbus A320-200s scheduled for delivery through 2010. Chief executive Jean-Louis Chevrot says: "This is another reflection of the growing importance China is having in the international aviation sector."

The venture expects to build a portfolio of $1 billion worth of aircraft in the next few years. To date the lessor has taken three A320s: one aircraft is on lease to Air France (MSN 3795), the second delivery was placed with Aigle Azur (MSN 3852) and the third aircraft is the first A320 (MSN 3591) from Airbus's Chinese assembly line in Tianjin. The aircraft is on lease to Sichuan Airlines.

Airbus and Boeing have signed financing agreements with the Chinese banks and their leasing arms to co-operate on financing and leasing but, to date, this has covered domestic airlines only.

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