The sale of Asia Aviation Capital seemed like a challenge from the outset, but BBAM's purchase of AirAsia Group's leasing company's assets is nothing short of brilliant.
BBAM can avoid the concentration risk issues that other potential bidders may have had due to the portfolio's single aircraft type and regional exposure by spreading the assets across its multiple platforms: BBAM, FLY Leasing and newly formed fund Incline Aviation.
That said, FLY Leasing will still face concentration issues. The listed lessor's purchase of 34 Airbus A320s and seven engines on lease to AirAsia Group airlines has increased the company's net book value of assets by 21% on closing, and up to 66% upon completion of future deliveries in the transaction.
In an investor presentation today, FLY stated that it will target $150 million sales annually. The company says in the presentation that it plans to reduce leverage "underpinned by significant contracted amortisation, a sales strategy to reduce AirAsia Group exposure and manage FLY's debt/equity ratio".
After the acquisition, the company's leverage will rise to nearly 5x. "You typically only see this post-transaction for the USA listed lessors," says one industry analyst. "They're going to have to sell aircraft to get it down if they want their balance sheet to be where it should be."
The market can expect to see FLY in the market selling AirAsia-leased aircraft soon for a few reasons.
One, as stated above, the company will sell aircraft to pay down debt going forward.
Two, while the company may not break airline concentration limits in their various debt instruments, the equity market will expect FLY to operate within regularly diversified norms. About 68% of the lessor's book value will be held in Asia-Pacific (pro forma for the deal), according to the investor presentation, with AirAsia Group comprising 24% of lessees.
By comparison, Air Lease's highest exposure is to Europe at 32%, according to its fourth-quarter earnings released on 22 February, while AerCap's is 33% to Europe, according to Flight Fleet Analyzer based on total indicative market value.
Three, FLY will take on an additional 21 A320neos on lease to AirAsia airlines from 2019 to 2021. These will be on 12-year leases as stated in the deal announcement. FLY will need to make room in the portfolio for these acquisitions by selling off the older AirAsia A320 aircraft, or risk even further concentration issues.
Growth has been a major question for FLY shareholders, and that appears to have been answered today. So far, FLY's investors have responded positively to the news, with the stock up nearly 11% at 13:30 EST on 1 March, a day when the market has fallen about 2%. And, given BBAM's marketing platform, it shouldn't be too hard for FLY to move these aircraft when the time comes.
Source: Cirium Dashboard