There has been a spate of mergers and acquisitions among aircraft lessors, with cash-rich Asian business entities entering a sector increasingly viewed favourably by yield-hungry long-term investors.
During 2015 there was an increase in merger and acquisition lessor activity, and the landscape among different platforms is gradually changing.
Many believe that momentum will continue this year.
Last year brought the fragmentation of the AWAS platform through the sale of a 90-aircraft portfolio to Macquarie AirFinance, an asset-backed securitisation (ABS) deal with the sale of E-notes covering 30 aircraft. The remaining 200 or so aircraft, and its platform, have been subject to sale speculation since the final quarter of last year.
Speculation as to its future has also been on the cards for US lessor CIT Aerospace, after its parent company CIT Bank announced it was exploring "strategic alternatives".
On the back of the sale of 24 aircraft through an ABS transaction that included the sale of equity notes, BOC Aviation surprised the market with the disclosure that parent Bank of China had approved a proposal to spin off on the Hong Kong Stock Exchange. The leasing unit will raise funds by selling a stake of up to 40% through the listing of old and new shares. Bank of China will remain a majority shareholder of BOC Aviation, which will sell 10% of the offering to Hong Kong investors and 90% to international investors.
TIME TO CASH IN?
One entity that keeps growing is China's Bohai Leasing, which is majority owned by HNA Group.
Avolon's sale to Bohai completed earlier this month. The Dublin-based lessor will be merged with Bohai unit Hong Kong Aviation Capital.
In addition, Bohai emerged as a possible buyer for AWAS in the final quarter of last year. ICBC Financial Leasing and Chinese manufacturer AVIC have also expressed interest in the Dublin-based lessor, sources say.
The purchase of AWAS would allow Bohai to further expand its aviation leasing scope, a strategy it has been working on since 2013 through wholly owned subsidiary Tianjin Bohai Leasing.
The combination of the three lessors AWAS, Avolon and HKAC would propel Bohai into the top five biggest, just behind SMBC Aviation Capital in terms of the number of aircraft.
Avolon chief executive Domhnal Slattery believes consolidation will be a theme in the leasing sector for the next few years.
"Our thesis is: consolidation is either driven by distress or strategic scale. We don't see any distress, and we don't foresee any distress any time in the near future. So the consolidation that has occurred, or is occurring, or potentially [will], is driven by strategic scale and the desires to achieve scale," says Slattery.
"I suspect there will be quite a bit of M&A activity in the sector over the next 12-18 months," he adds.
In the last quarter, Aircastle chief executive Ron Wainshal said there appeared to be "increasing momentum" for change and consolidation. "Some of this may be driven by the desire by some for sheer size, while others look for exits and strategic repositioning. Others still might be motivated by needs to enhance their capabilities."
He agrees that consolidation has been a theme for years but in the last year or so there have been two big deals. "Maybe we're on the cusp of a third," he says.
"What I had observed is when you look at the top 10 leasing companies right now, there is a lot of change going on and all these things could give rise to something.
"Avolon is in the process of being acquired by a Chinese company. CIT just announced that its aircraft leasing business is exploring strategic alternatives. We're seeing AWAS for sale. GECAS just replaced its leader and Bank of China announced that it's going to take its aviation group and put it on the Hong Kong Stock Exchange. These are all pretty big deals. It's all happened in a fairly short timeframe."
Slattery says it will be interesting to see where the CIT franchise ends up, whether in public markets or otherwise.
"I think they've still got to decide where they're going there," he says.
AerCap chief executive Aengus Kelly says that when whole portfolios have traded from public to private or private to private, they have seen a significant "premium over" where public stocks are trading.
He does not make a bet on the future of CIT but points out the more participants that are listed, the better it will be. "We do believe that is what we saw in the debt markets, where initially the debt market was similar to the equity market [and consequently charged very wide spreads] but as more and more volume came into the debt market, then spreads aligned with comparable credits and other industries. This was due to the volume that came into the market."
He adds: "We would be very supportive of any additional public equity companies, particularly a reasonable sized one like CIT."
Jeffrey Knittel, president of CIT Transportation & International Finance, sees no "huge catalyst" for consolidation in the fragmented aircraft leasing industry.
"Consolidation is a function of opportunities around," he notes. "People have been talking about consolidation for 15 years in this space."
He adds: "There has been one major trade in which the seller [AIG] was getting out at the bottom... That was a unique trade that created a very large leasing company."
Knittel says consolidation is a function of sellers and buyers, and whether there is a strategic fit. "There is not necessarily this huge catalyst for consolidation in the space," he argues.
"What are the catalyst for consolidations? If you find people having troubles borrowing, who don't feel they have leverage in terms of costs, leverage with manufacturers... then that may be a catalyst for consolidation, but eventually it depends on the owners of the specific companies."
Guggenheim Aviation Partners' chief executive Steve Rimmer believes consolidation is "inevitable" as efficient financing of the liability side of the balance sheet is essential in today's competitive market.
"Size matters when you are financing your balance sheet," he says.
"New entrants into the leasing space want to have the platforms to allow them to grow and grow fast, so acquisition of platforms and then portfolios are top of their lists."
MORE MEGA LESSORS?
AerCap and GECAS continue to dominate aviation leasing, with committed balance sheets in excess of $45 billion each – but a large majority of delegates at the recent ISTAT Europe conference expected additional mega-lessors to emerge in future.
In a poll, 37% of voters predicted the number of aviation leasing players of the size of AerCap and GECAS would increase to four by 2025, while 26% went for five or more, and 22% for three. Only 15% believe the market will stay the same, with two superpowers.
Knittel says we will see the potential for an "opportunistic trade" that could begin to close the gap.
"Once you get to be a certain size, the growth is all about opportunity," he says.
Air Lease chief executive Steve Udvar-Hazy, recalling his days at ILFC, argues that there is a crossover point that is below 1,000 aircraft "where the workload, the administrative aspects, the human resources, the people problems, can be a disproportionate utilisation of management's talent and time".
He adds: "Financial size is one thing, but the number of aircraft units – as each one is like a separate child that you need to manage – is more significant than the dollar value. Once you get above 700 or 800 airplanes, you do have a lot of sleepless nights and a lot of challenges. And a higher probability that airlines are going to default and so there are a lot of things that derail your focus on the core business."
But no one can deny that the industry as a whole is growing.
Slattery recalls the "key and positive message" to institutional investors, be it equity or debt, is: there continues to be a very strong bid for well-run platforms that are strategically relevant.
"It is a growing sector in a growing industry," says a leasing source.
"Looking back: selling a large portfolio as well as another portfolio with a platform was viewed as a risky strategy," he adds, referring to AWAS.
"They seem to have achieved that hard sale. Maybe CIT could do a similar thing."
Another leasing source says: "You will also see CIT's aviation unit on a lot of people's target list, and possibly to fuel growth. GECAS is probably also something that one should consider as a potential for change, given Norm Liu's retirement and the stated intent to reposition the larger General Electric."
Source: Cirium Dashboard
