It is this tight credit market that has borne out Greenstone’s proposition. And it is the very elements that makes the market so difficult for some players in the aviation finance industry that has given a start-up like Greenstone such an opportunity.
The opportunity, says Slattery, results from a funding gap in the commercial aviation industry. Annually, the industry requires the delivery of $68 billion (in 2009) of planes at the trough of the cycle. Added to this is a sizeable secondary market which Slattery says is roughly the same size. ‘$200- 210 billion will be delivered at the trough of the cycle at a time when funding is at its most stressed’. The cycle, Slattery estimates, was at its peak in May/June 2007 and that the cycle in aircraft finance from peak to trough lasts roughly 7 years.
Aircraft leasing is a ‘big sandpit’, and in the sandpit is a mismatch, a ‘funding gap’. Greenstone ‘by focusing its efforts exclusively to the airlines in the form of sale and leaseback deals can be one of the institutions that can help fill this gap’, he says.
The funding gap exists because of the difficulty there is in ‘accessing leverage or senior debt on reasonable terms and conditions.’ Yet, despite these difficulties, there still is the demand of ‘financiers focusing on directing their balance sheet to financing the best assets in the world operated by the best airlines in the world.’ Greenstone can offer financiers this focus with its a lower risk proposition.
What makes Greenstone a lower risk proposition is that the company can deliver new planes to the market without distractions, whereas incumbent firms in the industry have portfolios of existing planes to refinance. Slattery points out that ‘Greenstone do not have these legacy issues’. Instead they have a clean slate to buy planes at the trough of the cycle when airlines don’t want to buy them. ‘Financing partners do not want these distractions,’ he says. Greenstone want to deliver capital when it is most needed. ‘When one or two airlines were in the lobby in the past now there are 15 - 20. Everyone is more engaged to make sure the deal is consummated’
As the legacy factor is a non-issue for a start up like Greenstone, it allows the company to focus on the best and youngest assets. He lists top of the range planes such as the Boeing 737 and 800 and the Airbus A320 as primary on the company’s shopping list. Slattery explains that these newer planes offer the best proposition to investors. With newer planes there is also something of a ‘maintenance honeymoon’: the planes do not need any major overhaul. The logistics of dispatching an old airplane is much higher than that of a new airplane, and the cost of fuel burn is much lower for a new airplane than for an old airplane. He says that the cost of operating a new plane is 28 per cent to 29 per cent cheaper. He says that ‘any competitive advantage you can take in commercial aviation you should take.’ He also says, that airlines want to have a younger fleet and they need new aircraft, so the demand is there. He says, ‘the customer is more savvy and they know the aircraft they are flying in and from a safety and comfort perspective they are looking to new planes.’ And Greenstone also gains in that manufacturers are being forced to sell their planes at discounts in present market conditions.
Against this backdrop and with its business model, Slattery is confident that Greenstone will receive the backing it needs from financiers, investors, manufacturers and airlines. He says they are in discussion with aerospace banks and also less obvious regional banks from the Middle East and Asia and others ‘outside the usual banks in Europe.’ He says that from a financing point of view, there is a flight to quality being adopted by the banks. This fits in with Greenstone’s plans where he says ‘a disciplined deployment of capital on the buy side over a period of 2 to 3 years should generate returns.’ He says that having already executed this business plan in the past it gives ‘a platform through the trough which reduces risks, improves returns and creates the best possible franchise for the company.’
At this point, Greenstone, which has been over 12 months in the making, has received $100 million in equity capital from investment bank Jefferies and is in the process of raising $400 million more by the end of 2010, some of which Slattery says is already at the due diligence stage. The offering for ‘a number of private equity and sovereign wealth firms that are highly educated in the sector, our proposition to these sources of equity is that it is a better strategy to dollar cost average through the bottom of the cycle as opposed to a singular multi billion dollar trade.’
Slattery the entrepreneur behind the firm has ‘kerosene in his blood’. From County Clare, Slattery who was a co-founder of RBS Aviation Capital and the former head of its Americas business based in New York, brings his years of experience to the company. His brother Domhnall was co-founder of International Aviation Management Group (IAMG) which was acquired by the Royal Bank of Scotland. Like Slattery the rest of the team in Greenstone are all experienced professionals with mileage in the industry, such recent appointments as John Burtz who is managing director-marketing with Greenstone and was formerly head of aviation finance in the Americas for HSH Nordbank in New York, Ruth Kelly who is chief financial officer at Greenstone was formerly head of investor markets at RBS Aviation Capital, and Joseph Shanahan, vice president-finance at Greenstone who was previously an originator at RBS Aviation Capital. Slattery predicts that the company will generate up a $2 to $3 billion business book over the next 3 years with relatively few professionals. Most of the 35 professionals he intends to recruit will be based in Dublin. The business will keep its costs down as it requires less credit people, marketing people and technical people. It plans to open offices in New York, Beijing, and Singapore as well as its Dublin headquarters. He says that the company will create jobs and will be ‘based here for the next 30 to 40 years.’
Locating Greenstone in Ireland was not a fait accompli, Slattery says. Greenstone had considered other jurisdictions. But certain factors weighed in that made the decision easier, such as the support they received from both the IDA and Enterprise Ireland. This support along with a ‘reasonable corporation tax environment creates a cultivating environment’ for businesses. He refers, specifically to Ireland’s bilateral withholding tax agreements around the world as a pull factor.
However, Slattery is concerned about the Government’s drive of increasing personal income tax. ‘This makes the job of attracting the best talent or to even keep the best talent here more difficult’. ‘We are a human capital intensive business at the individual level.’ ‘When potential employees look at Ireland’s income tax and they see what their take home pay is they are visibly quite shocked.’ If the Government is not careful companies will vote with their feet, he says. And he warns, ‘You can tax entrepreneurs out of the country.’
The IFSC is something for Ireland to be proud of, he says. He has been told by international banks and manufacturers how impressed they have been by the level of sophistication in Ireland. ‘It was such foresight of bringing financial services companies’ to Ireland. He says that ‘a lot of business can be done in Ireland in a 24 hour business trip, which would not be feasible elsewhere.’
‘Our Irishness is a unique selling point. People enjoy dealing with the Irish. Ireland is open. And we are easy to do business with.’ Yet, he says, we also ‘have an ability to negotiate well that is respected around the world.’ ‘What a great legacy Dr Tony Ryan has left behind and how the pioneers, such as Aer Lingus who sent their management to the four corners of the world, have created a commercial aviation industry that has Irish DNA’. He calls the commercial aviation industry an ‘Irish dominated family.’
As far as growing this ‘Irish family’ goes, Slattery welcomes other start ups into the ‘big sandpit’. He recognises opportunities right throughout the range of aircraft. He says the more leading companies that are based in Ireland the better the service providers will become. ‘Companies supporting companies can grow together and all of the companies can be successful’.
‘Ireland’s competitive advantage is people based - not tax.’ It is imperative we keep the transaction flow through here ‘because in Ireland we already have some of ‘the best service providers in the world.’
Slattery says that ‘Ireland is not a tax haven’ even though it is ‘at the lower corporation tax rate.’ ‘We are an island nation on the periphery of Europe and any little bit of competitive advantage needs to be protected.’ ‘I will be voting a very strong Yes to Lisbon again because, Ireland outside of Europe is a scary proposition.’ In order to progress and recover, Ireland will ‘need more entrepreneurs’; he lists the likes of Denis O’Brien, Michael O’Leary and Dermot Desmond as key components to Ireland’s future. He is however, ‘very excited by the opportunities there are’ and he believes the ‘difficulties will be the making of us’ . We have a ‘mark to market opportunity that will hold us well’ He says we should look to the youth and ‘what we have are people.’ ‘We can be innovators at the leading edge of the world and says all the Irish need do is to look at the creation of the IFSC which, he he says, was ‘way ahead of the curve.’