Rumours have been circulating within the aircraft leasing community that Avolon could be up for sale to raise liquidity for its shareholder, HNA Group – which has gone on a four-year international shopping spree, taking stakes in some 23 companies or real-estate investments over the past four years.
But one source familiar with how HNA operates tells FlightGlobal: "There is zero likelihood that Avolon will be sold."
FlightGlobal contacted HNA for comment, but has not yet received a response.
Despite all the speculation on Avolon's fate, it seems unlikely that HNA would part with a profit-making, cash-flowing business that is strategically aligned with the Chinese government's commitment to aviation and aerospace.
On 29 November, S&P Global downgraded HNA's group credit rating from B+ to B, citing "significant debt maturities over the next several years" and "funding costs meaningfully higher than that of a year ago".
The previous day, Bloomberg had quoted HNA Group chief executive Adam Tan as saying: "If some sectors are now restricted by government, I will consider selling assets I bought in these sectors." He added: "We will not invest in anything the government does not support."
FlightGlobal understands that HNA will look to sell multibillion-dollars' worth of stocks and bonds to raise capital. However, Avolon appears to be one of HNA's more liquid assets, and in any case the group cannot just click its fingers and sell the aircraft leasing company, for a series of regulatory-related reasons.
For one thing, HNA can't sell Avolon because it doesn't own it. Avolon is 100% percent owned by Bohai Capital, which is a publicly listed on the Shenzhen Stock Exchange, and while HNA owns 52% of Bohai Capital – through its own direct investment and a couple affiliate companies – the remaining 48% of shares are owned by other investors.
HNA has control of Bohai Capital through its presence on the board of directors, but under Chinese regulations board members would have to recuse themselves from any vote to sell Irish-based leasing company Avolon because they would be considered related parties to the transaction.
Therefore, any vote to sell Avolon would be made by the three independent board members, who would represent the shareholders' interests. Given that Avolon is a dollar-denominated asset, not to mention cash-flowing and continuously lowering its cost of debt, there would be no reason for Bohai to part with this asset. Ultimately, there is nothing systemically wrong with Avolon to compel shareholders to divest of the business.
Should the Bohai board vote to sell Avolon, they would face a second hurdle. Because Avolon represents a significant amount of Bohai's total assets and revenues, a sale would be subject to approval by the Chinese Securities Regulatory Commission, two sources confirm.
Chinese capital has become a major force in aircraft finance, with several state-owned banks allocating resources to build their aircraft leasing platforms, and therefore it would seem odd that Beijing would sanction the sale of the world's third-largest lessor.
ONE BELT, ONE ROAD
Beyond the technical and regulatory reasons that prevent HNA selling Avolon, there is the political context. The Chinese government has signalled its commitment to aviation time and again, with investment in state-bank-owned leasing companies as well as its commitment to aerospace with Comac's ARJ21 regional jet and C919 narrowbody.
A number of Chinese leasing players see aircraft finance is a key part of premier Xi Jinping's "one belt, one road" strategy, through which China is trying to project soft power along the Silk Route and maritime trade routes to Europe. Thus, HNA may have a political interest in ensuring that Avolon is at the forefront of that market, which has already been identified as a major opportunity by rivals such as BOC Aviation and ICBC Leasing.
Moreover, Avolon looks to be a strategic asset for the HNA, providing a number of aircraft for its carriers with its own orderbook as well as financing options through sale-and-leasebacks.
Flight Fleets Analyzer shows that Avolon has 16 aircraft on lease to HNA Group carriers Hainan Airlines, Tianjin Airlines and Capital Airlines. Another three on-order aircraft – two Airbus A350-900s and one A321 – are allocated to Tianjin Airlines.
A further 30 aircraft are leased to airlines in which HNA has stakes, including Virgin Australia, Azul, Hong Kong Express and TAP Portugal.
By virtue of its merger with Hong Kong Aviation Capital, Avolon also inherited a deal struck in 2014 by the former company that gave three HNA-linked carriers – Tianjin Airlines, West Air and Capital Airlines – first right of refusal to lease or purchase 55 A320-family jets from the lessor.
The prospect of an Avolon sale to service HNA's upcoming debt maturities looks highly improbable and, at the very least, problematic. As illustrated by recently disclosed plans for bond offerings by both Hainan Airlines and Tianjin Airlines, the group has other options it could pursue to raise liquidity before a sale of Avolon was even possible.
Additional reporting by Ellis Taylor
Source: Cirium Dashboard
