Insurers are increasingly looking at providing senior debt for aircraft finance as part of their wider hunt for yield in the current low-interest-rate environment, financial sources indicate.
North American and German life insurers have thus far shown the most interest in providing senior debt, FlightGlobal understands.
"We have been contacted by US and German insurers, and even German industrial firms, looking to invest in aircraft through supplying senior debt. Their interest ranges from single aircraft deals to quite large transactions," says AerCap's chief executive Aengus Kelly, who noted that the stable nature aircraft assets is attractive to institutional investors like insurers.
For new aircraft debt, insurers are looking at deals of $25-50 million, with roughly 12-year tenors attached. Insurers also prefer fixed-rate deals, allowing them to lock in cash flows and therefore efficiently match their assets with their liabilities.
Insurers are predominantly interested in proven assets, such as Airbus A320s and Boeing 737s, and good credits, whether airline or lessor.
In the past, banks would syndicate aircraft debt between themselves, but regulatory pressures such as Basel III following the global financial crisis have made this increasingly hard.
Insurers are therefore seen as a potential source of liquidity for aircraft loans by banks.
WHY AIRCRAFT?
Insurers' traditional investments, such as sovereign bonds, are currently not offering them the historical returns they expect. Thus, in recent years they have started to broaden the assets they will invest in, including student housing funds, REITs and privately placed Middle Eastern bank bonds.
As an asset or investment, aircraft are very attractive for insurers. With the asset valuation, and often the revenues, denominated in US dollars, and often all its revenue denominated in that same currency, insurers are essentially lending on an asset that is in the world's reserve currency. Additionally, aircraft are moveable assets, which protects against any country or credit risks.
Indeed, in the 1990s insurers were active in aircraft finance, but for various market reasons they then reduced their presence – until recently.
SUITABLE INVESTORS
Insurers can approach aircraft financing in a different way to banks, as a consequence both of how they obtain investment capital and of how they treat their assets, says Goldman Sachs' director of structured finance Eric Meyers.
"A key point of differentiation between banks and insurance companies is their respective sources of funding. Banks rely primarily on a combination of deposits and capital markets, in contrast with insurers, who rely on the policies they write, which tend to be longer duration. The ability of insurance portfolio managers to hold investments to maturity allows them to avoid income-statement volatility, from an accounting perspective, allowing them to underwrite and better participate in aviation structured products," Meyers notes.
Meyers says Goldman Sachs used to work with about five to 10 institutions buying aviation credit but that pool has grown to approximately 25 institutions participating in transactions in recent years.
"Banks and investors have collaborated to fortify transaction structures, utilising mechanisms and technology originating in EETCs and other types of secured asset financing to reduce risk and improve deal performance," he adds.
NEW AND OLD
Insurers are also eyeing up the mid-life aircraft space, says a mid-life aircraft lessor source.
These types of transactions offer insurers potentially higher returns than new aircraft deals do, the source adds.
Low oil prices have led to a buoyant secondary aircraft market, as airlines are more willing to take older jets as the running costs have lessened, meaning there is less incentive to look to replace older aircraft with newer, more efficient equipment.
SMBC Aviation chief Peter Barrett recently told FlightGlobal that his firm had seen far more lease extensions arising from this.
"We are seeing a lot more airlines re-lease an aircraft whereas before they’d have sent it back for a newer, more efficient one. I'd estimate we see around two-thirds of our aircraft on lease get a lease extension now and one-third sent back. When oil prices were higher, the opposite applied," he says.
The mid-market lessor source says they are in talks with several insurers directly about debt but also currently investing money on behalf of vehicles into which insurers already plough their money.
It is lengthy process to convince insurers to make the initial investment but, once they do, the deals are easy to replicate, says the source.
"It takes time for them to sign it off initially. But once you get over that hurdle, that's when you can get that good flow of liquidity," the source adds.
READYING FOR TAKE-OFF
The phenomenon of insurers returning to providing debt for aircraft loans is still very much in its infancy, but how much liquidity they will provide and for what length of time are still unclear.
However, insurers already have substantial exposure to aviation as an industry and asset class. For example, US insurer Pacific Life owns lessor Aviation Capital Group and AIG-owned ILFC for nearly two decades.
Since it seems unlikely that central banks will raise interest rates dramatically in the USA or Europe, a low-interest-rate environment is likely here to stay. Therefore, aircraft debt provided by insurers – and indeed institutional investors – is likely to increase.
Additional reporting by Sophie Segal
Source: Cirium Dashboard
