Lessor DAE Capital has improved its cash collection rate since a low point in April, but is now having to contend with rental deferral requests that are longer, bigger and more complex than before.
The Dubai-based lessor’s cash collection rate, which it reported as a percentage, improved to the “mid-70s” in June and July from a low of being in the “high 50s” in April, chief executive Firoz Tarapore said during a 5 August results call.
He brought the topic up unprompted within the first five minutes of the nearly 43 minute call, saying that it is a “topical item that people seem to want to know, so I’ll get it out of the way now”.
DAE measures its collection rate by looking at how much it collects against every dollar of rent that a lessee was expected to pay it in any month or quarter, Tarapore explains.
“Not prior month’s rent, not that month’s maintenance, not prior month’s maintenance – none of the other stray items but straight up rent on rent,” he says.
Tarapore says DAE, “just like everybody else”, had an “extremely fabulous” start of the year before the Covid-19 crisis hit. April was the lessor’s “low point”, but cash collection has now “recovered nicely” to be in the low- to mid-70% range.
While DAE has been seeing more lease rentals coming in every month, the rental deferral requests it is having to deal with are getting more complicated.
As at 30 June, DAE has granted rental deferral requests to 29 customers, with the rent deferred representing 12.9% of its annual reported revenue. It is also currently evaluating deferral requests from 28 customers, whose rent collectively account for 6% of total annual revenue.
Tarapore says requests have gone from simply asking for three- or six-month extensions, after which the lessee will repay what is owed under the commercial agreement, to “much more complicated requests”.
“I would say the requests are becoming larger in quantum, they are becoming longer in tenor, and they also have a level of complexity that is beyond the, you know, ‘Give me three months and I will pay you back at some period after that’.”
He adds that power-by-the-hour agreements seems to be “the flavour of the day” in terms of requests from airlines.
“We consider it within the context of the overall situation with each airline, so we have no fixed formula in how we approach every request. Every request is based on the aircraft, its condition, the security package, the airline’s condition and so on and so forth, but power-by-the-hour is becoming more and more a part of the vernacular in the discussion with our clients,” he says
Tarapore seems keen to show DAE’s sympathy for its airline customer base, arguing that those who could not meet commitments were not “bad people” but simply victims of circumstance in an environment that is “materially different than what they had contemplated when they entered into what relief they thought they needed”.
About a quarter of lessees who should have been paying by now are “back at the door asking for more relief”, he says. “We are evaluating it just in the same way that we would have had they come for the first time.”
In addition, a “small percentage” of lessees are not honouring their commitments in the middle of their relief periods. For these lessees, DAE has had to go “back to the table with them, trying to work out something longer, or otherwise they are dropping into arrears”.
He also hinted that some lessees may never be able to make up their deferred payments, and therefore DAE will need to look at alternative ways to recoup what is owed.
“I think the complexity now is people are realising that it’s not as simple as ‘Oh yeah, you know, just if I don’t pay you for three months, all of a sudden four or seven months down the line I will have the ability to kind of make up’. So it’s getting more complicated in terms of, how do we trade value in terms of the forgiving of something, what can we get back for it, if it’s not just outright commercial settlements for it. So it’s a commercial discussion that is ongoing, and I think will be ongoing for quite a while.”
He says that some airlines, mostly in China, are now paying again.
“There is a good number that is keeping up to their commitment, in some cases because traffic is back and in other cases because they needed the time to sort out their own affairs, whether it’s governmental support or shareholder support or whatever,” he says, referring to airlines both in and outside China.
Tarapore stresses that DAE has a strong liquidity position, and has always maintained more liquidity than required, in line with rating agency metrics.
“You should expect us to kind of keep inside that metric and expect us to outperform that metric for the foreseeable future,” he says.
“I will just warn a little bit ahead to say that because our next-month maturity is not until November, the liquidity [coverage] ratio in September will spike to some absurdly high levels, but then they will return to normal in the fourth quarter and show proper adequacy with a good cushion when that November 2021 bond comes into the 12-month bucket, if you will.”
DAE entered the pandemic with a “large” liquidity position, which Tarapore considers “a bit of a luxury”. The lessor now has access to $2.8 billion of available liquidity, a position Tarapore says is unchanged since it announced its first-quarter results. In addition, during the first half of the year, it repurchased $187 million of its bonds and has $229 million in remaining repurchase authorisation.
He says this has allowed the company to “focus on what our customers needed and how to provide solutions to our customers as opposed to spending a lot of time trying to restructure commitments”.
It also means that DAE could avoid having to go after “low-hanging fruit” and deals where it would be difficult to add long-term value.
“Liquidity remains the most important item from our perspective,” he says, “because as you yourselves look at the news events around the world and recognise that this virus is not really under control – or not really under control in a way that airlines can plan predictably – we know that our clients actually will need a whole lot more assistance than they’ve needed so far.
