Over 20 years since Guinness Peat Aviation’s collapse became a defining moment in the aircraft leasing industry, the prospect of General Electric hiving off the world’s largest lessor, GECAS, could do the same.
Despite GE claiming an end to its GE Capital exit plan last May after selling off French subsidiary GE Money Bank, sources tell FlightGlobal that the industrial conglomerate has hired Goldman Sachs to undertake a strategic review of the world’s largest aircraft lessor.
GECAS, which emerged from the collapse of Guinness Peat in 1993, has played a strategic role in supporting GE Aviation, often placing cornerstone orders for GE or CFM International-powered aircraft. By extension, that also makes it strategically important to Airbus, Boeing, Embraer and – albeit to a lesser extent – China’s Comac.
In recent years GECAS appears to have found that bigger is not necessarily better.
FlightGlobal values data show that its portfolio was worth $34.1 billion in 2012, but the latest data puts that at $23.6 billion – reflecting a programme of portfolio sales and ABS transactions that have unlocked some of the value in its huge portfolio.
The lessor has faced increased financing costs since GE Capital sold its bank unit, thus limiting its access to cheap funds. There are some shades of ILFC’s travails after the loss of its former parent AIG’s once rock-solid credit rating, although the circumstances are markedly different.
A spin-off of GECAS could be an option for GE, but one fraught with danger. With most US-listed lessors’ market value below book value, convincing retail and institutional investors to pay higher multiples may be a hard sell. Add to that the strong orderbook and capital expenditures required to fund those future deliveries, and it would be a tough sell on Wall Street.
That likely leaves a full sale, or a break-up of the company as the most likely options if GE decides to dispose of its aircraft lessor.
TOO BIG TO BUY
The strong merger and acquisition activity among lessors in recent years has seen some pundits point to that as a likely scenario – either through a full or partial sale of its equity to another investor.
The complicating factor is coming up with a short-list of investors willing to acquire the company lock, stock and barrel, or even invest to take a significant stake.
Chinese equity has been a party to most M&A in recent years, but has slowed down of late. HNA’s trials and tribulations suggest that it – and by extension, Avolon – is all but out.
DAE’s successful integration of AWAS could make it a party, but it would need significant support from Dubai Inc to make that happen.
Bloomberg has reported that Singapore’s sovereign wealth fund, GIC, held informal discussions with GE about a potential GECAS sale last month, although FlightGlobal has not been able to confirm this.
That prospect may have legs, given that GIC is no stranger to the aircraft leasing market, having previously been a shareholder in Avolon.
A sovereign wealth fund would also be the kind of player with enough of a balance sheet to take on GECAS as a whole, or hold a large equity portion in association with private equity or other investors.
But as GIC has been reported as a potential buyer, it is likely to bring out some other sovereign wealth funds to play. Middle East or Chinese funds appear to be the most likely alternatives, although the latter has had a mixed history when it comes to executing lessor buyouts.
Politically, a Chinese acquisition of GECAS could be tricky. Given the lessor is one of the largest customers for Boeing, it would give Beijing some leverage over the US aerospace industry – something that may be useful in an era of Trump and trade wars. For the same reason, regulators and lawmakers could block such a deal through a CFIUS review, which the current administration has weaponised in recent months regarding trades of business to China.
BREAK IT DOWN
Even assuming that a party does make a bid to take over the whole of GECAS, it seems that the greater value of the company could be the sum of its parts.
Trading and the ABS market both remain frothy, and could prove profitable channels for disposing of aircraft at a profit to GE.
Not to mention, a separation of GECAS’s helicopter leasing unit, Milestone Aviation, appears inevitable given the challenges that lessors focusing on the offshore service market have faced in recent years.
In a breakup scenario the parallels with Guinness Peat seem apparent. Its collapse came out of a failed listing, but it was the breakup of its assets and portfolio that created a number of other lessors. It also saw the dispersal of a number of well-trained aircraft finance professionals into the market – many of whom are nowadays helming lessors, financiers and investment funds.
Assuming GE – or a new parent company – proceeds with a breakup of the fleet, there are a number of new equity players that could acquire smaller aircraft portfolios to get them started, or bring their businesses up to scale.
Similarly, a slimmed down version of GECAS would lead to a new dispersal of human talent, potentially to the benefit of some of that new equity.
While nowhere near as painful as the collapse of GPA, a ‘Guinness Peat 2.0’ scenario from the break-up of the world's largest lessor could be a sensible option for such a behemoth.
Source: Cirium Dashboard