Although new players from Asia were expected to compete hard for AirAsia's sale of Asia Aviation Capital, it was relative veteran BBAM that won the race – albeit to buy a portfolio rather than a platform.
The $1.18 billion deal will see entities managed by BBAM and FLY Leasing acquire 84 aircraft and 14 engines from AirAsia and its leasing unit Asia Aviation Capital for cash consideration of $1.085 billion, plus $50 million in FLY stock. AirAsia will also subscribe to $50 million worth of shares in two Incline funds managed by FLY.
The deals will see Incline, FLY and BBAM's Herondrill SPV gain a number of new AirAsia lessees, and limited third-party lessees, including Longjiang Airlines, Pakistan International Airlines and Norwegian.
In addition, Incline will acquire 21 future aircraft deliveries, and FLY 27, from AirAsia's orderbook for lease to the carrier and its affiliates. The two parties will also have options to collectively buy up to 50 additional jets from AirAsia's orderbook, which will not have to be leased to AirAsia.
Flight Fleets Analyzer shows that the AirAsia group's orderbook is comprised of 14 A320ceos, 278 A320neos and 100 A321neos. All of its baseline A320s are powered by CFM International CFM56 engines, while the Neos are powered by Leap-1A engines.
Incline and FLY will also purchase seven CFM56 engines each that are leased to AirAsia group carriers.
Curiously, a stock-exchange disclosure by AirAsia shows that limits have been put in place on how many of the future aircraft can be leased to AirAsia’s various affiliates, with Inodnesia AirAsia and AirAsia India capped at five aircraft. All A320neos due for delivery this year, meanwhile, will be leased to AirAsia and Thai AirAsia.
Closing is expected to take place by the end of the third quarter bringing to an end a two-year sale process. This originated after group chief executive Tony Fernandes revealed on a Bloomberg TV interview that the budget carrier had received an unsolicited offer of $1 billion for the portfolio of its then-nascent aircraft leasing unit, Asian Aviation Capital.
Given the strong interest at the time from Asian capital seeking a position in the aircraft leasing market, it was expected that Chinese lessors Ping An, Minsheng Financial Leasing and the ever-acquisitive Avolon and its parent Bohai Capital could be the most likely bidders.
Competing against it however were much larger prizes in CIT's spin-off of its aerospace leasing business, which went to Avolon in October 2016, and the sale of AWAS, which went to DAE Capital in August 2007. The view during both of those campaigns was that one of losing bidders in these deals would wind up as the buyer of AAC.
It came as some surprise, then, when in March 2017 it was reported that Korea Transport Asset Management (KOTAM), which is a joint venture between KMARIN Group and KEB Hana Bank, was leading the race for the carrier. While it was reportedly lining up the finance, the sale appeared to have stalled with a number of deadlines passing and no deal announced.
Late last year, a Bloomberg report suggested that China Everbright had become the favoured bidder. Everbright is no stranger to leasing, as a major shareholder in China Aircraft Leasing Group, and has also signed as a joint venture partner with AirAsia to establish a Chinese affiliate.
In the end, however, it was the wily dealers at BBAM that triumphed, even in the face of supposedly emboldened investors from Asia.
AIRASIA WINS THE LONG GAME
While it has indicated that MYR788 million from the sale will be used to pay down bank borrowings, moving the debt associated with the aircraft off its balance sheet will be the main upside for the carrier.
It expects that its gross gearing ration will fall from 1.6x to only 0.4x, which will give it "opportunity for more tailored capital management initiatives".
Officially, around MYR2.62 billion – or 75% of the cash consideration – has yet to be allocated. Previously the airline has indicated that it will use some of the funds from the AAC sale to issue a special dividend to shareholders, while some may be retained as cash on hand or for future investments in AirAsia's digital ventures.
Even with the portfolio sale, AirAsia will continue to play in the leasing space as a 10.2% shareholder in FLY Leasing. It states in its stock-exchange disclosure that the equity deal "enables [AirAsia] to invest in a leading global aircraft lessor with a diversified lessee portfolio and participate in the future growth of FLY".
Its shares will be subject to a lock-up period expiring in 2021, clearly showing that it is comfortable with maintaining exposure to the leasing market.
As for Asia Aviation Capital, the entity will hold FLY's shares, but it appears that it will no longer be an active lessor.
TRADING AHEAD
With the deal announced at the start of the trading day in Asia, there was relatively little reaction from the market in North America. Wells Fargo, however, released a brief research note which stated that although FLY will raise additional equity from BBAM and Onex to complete the deal, its leverage will rise from around 4.2x to an unsustainable 5x.
On a more positive note, it sees upside for FLY in selling out some of the aircraft to lower its "AirAsia overexposure". With the airline perceived as a strong credit, it expects that there will be multiple interested bidders for any sales with leases attached, especially given the carrier has not tapped the leasing market often.
It also sees upside from the access that FLY and its affiliates in the deal will gain to AirAsia's huge orderbook – especially at the keen pricing that the airline negotiated with Airbus's former sales chief, John Leahy.
"This is a creative way for FLY to get highly-desirable new A320neos in the near term and potentially at-or-around airline bulk pricing," it adds.
Source: Cirium Dashboard
