capital markets and financing 3 november 2015 wui jin woon senior director, capital markets
TRANSCRIPT
Capital Markets and Financing3 November 2015
Wui Jin WoonSenior Director, Capital Markets
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Agenda
• Airline funding of aircraft deliveries• Delivery financing options for lessors• Operating lessor funding
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Airline funding of aircraft deliveries
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How are aircraft financed?
Source: Boeing
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Airline Financing Considerations• Cost v Diversification
• Manage financing risk• Financial markets change over time and a particular
source might be unavailable at a point in time• Balance
• Relationship• Execution risk• Flexibility• Regional v Global Banks
• Lease v Buy
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Consider the various cycles
Aviation Cycle• Aircraft Values• Airline Profitability
• CMV ≥ CBV• 6th consecutive year
Debt Cycle• Bank Sentiment• Bond Market Appetite
• Margins at historical lows• All eyes on the Fed
Equity Investor Cycle• Return Requirements• Long Run Appetite
• Strong interest • TBD
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Delivery financing options for lessors
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Capital markets an increasingly significant financing source
Source: Boeing
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Lessor Financing Considerations• Cost v Diversification
• Cost is key to leasing competitiveness• Similar diversification considerations to airlines
(financing risk, market risk, balancing other issues)• But a wider scope to diversify due to portfolio of lessees
• Trading flexibility• Fleet strategy• Liability management• Ratings considerations
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Financing strategy is connected to fleet strategy
Portf
olio
Size
0-50
50-100
100+
Growth Rate (aircraft added per year)0-10 10-20 20+
Bilateral (non-recourse)
Bilateral (full-recourse)
Secured portfolio financing
Unsecured debt
Note: box sizes are not strictly representative. Chart excludes export credit financing
Warehouse facility
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Operating lessor funding
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Lessors have a constant need for funding
• Aircraft are depreciating assets, so lessors have to buy aircraft just to stay the same size
• To achieve IRR targets, aircraft under 15 years of age need to be financed
• Aircraft usually need to be re-financed at least once while they are owned by a lessor
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Lessors must adapt to changing financial markets
1990 2000 2010 2015
Post Gulf war and GPA• GPA workout refinancing• First ABS transactions• Many banks in market
Post 9/11• FI backed lessors• ABS markets re-opened• Banks re-entered as market improved
Financial crisis and recovery• Increased ECA borrowing• Use of recourse• Portfolio finance in bank market• New capital markets issuance
Currently• ABS for debt and equity• Growth of capital markets• Diversity of banks
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Lessors need to pay attention to the liabilities side of the balance sheet
Recipes for trouble:• Borrowing short/lending long
• Excess leverage leading into a downturn
• High refinance risk
• Unmatched funding
• Concentration of relationship banks
• Dependence on capital markets
• Structures that are difficult to unwind
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Credit Rating Considerations• Rating agencies differ in the sector teams that
cover lessors (S&P: corporates, Fitch, Moody’s: FIG)• While the rating methodologies are different, there
are some common considerations: Like Dislike
Diversified fleet by customer Concentrated fleet
Mainstream liquid aircraft Out of production aircraft
Unsecured debt /Unencumbered assets
High proportion of secured debt
Large and well-positioned in industry Small and relatively new in industry
Diverse earnings Monoline businesses
Shareholder has a positive influence on financing (support, franchise)
Shareholder treats business as non-core / short term