YEARBOOK & DIRECTORY
Finance Dublin Yearbook 2023
Irish aircraft financiers unfazed by series of ‘black swan’ events
The COVID pandemic, the two year grounding of Boeing’s game changing MAX aircraft, Russia’s invasion of the Ukraine, rapidly rising interest rates and fears of recession have all played havoc, in their different, ways with global commercial aviation writes JOHN STANLEY. But they have also demonstrated, beyond any reasonable doubt, two startling truths. The industry as a whole is far more than a business, it is a robust infrastructure that has become intrinsic to the social and economic fabric of the modern world. And the international aircraft leasing industry, which conducts the majority of its business from Ireland, has certainly come of age.
Over the past three years, in particular, Irish-based and headquartered lessors have played an enormous role in supporting the world’s airlines through the biggest crisis they have ever faced. Most of those carrier’s became dependent on government loans to survive the pandemic, something that has compromised their balance sheets.
During the pandemic the world’s airlines increased their debt burden by about $220 billion to $650 billion, while net losses over the three-year period 2020 to 2022 erased profits made in the preceding nine years. At the same time many airlines have used the opportunity afforded by the pandemic to restructure extensively their cost structures to create competitive advantage as demand recovers, with low cost carriers in particular setting themselves up for growth.
Against this background, the largely Irish-based leasing industry has played a vital role in assisting their clients with short and long-term revisions of lease terms and with funding deliveries of new aircraft. Already responsible for close to half of all commercial aircraft flying in 2019, that proportion has increased to an estimated 53 per cent of all new aircraft and is widely expected to increase further.
Demand fuels strong recovery
The extent to which commercial aviation recovered over the past year is evident from full-year data from IATA, which shows passenger traffic recovered from 41.7 per cent of 2019 volumes in 2021 to 68.5 per cent last year. What was especially significant was the acceleration in the pace of recovery, which helped to allay fears that the initial surge in demand might be a temporary post-pandemic phenomenon.
This is all exceptionally good news for Ireland as the location of choice for primary business activities for the majority of participants in the aircraft leasing industry.
Industry consolidation
Consolidation remains one of the main themes evident in the aviation financing sector today, fuelled in part by the continuing success of the AerCap takeover of GECAS. This transaction alone has demonstrated that visionary teams within a strong and disciplined sector can create their own good fortune, not just seize opportunities. It is heartening for Ireland to see a team such as AerCap – led by Irishman Aengus Kelly and involving a large number of Irish professionals, both as direct employees and as outside providers of financial and legal expertise – execute such an effective merger of the two largest lessors at a time of widespread uncertainty for commercial aviation.
That deal was simply not available to any other players – the underlying business imperative would have been missing and the balance sheet strain would have been too great. But despite the pandemic woes and taking a net $2.4 billion charge in Q1 in respect of assets trapped in Russia and the Ukraine, AerCap is expected to report a net income of at least $1.6 billion this year, compared to a previous forecast of $1.0 billion.
Furthermore, following the merger Aer Cap expects to return to its target of a 2.7x adjusted debt-to-equity ratio before the end of this year and is now flagging a new target of 2.3x by 2024. That truly is an exceptional performance.
Two other ambitious new platforms arose directly as a consequence of that transaction. High Ridge Aviation was launched by the former GECAS CEO Greg Conlon in partnership with fixed income investment manager PIMCO, while a team of predominantly former GECAS executives led by CEO Nel Jonty established a new leasing platform based in Shannon, FWCAS.
In another very large deal, which only closed at the end of last year, SMBC Aviation acquired Goshawk from NWS Holdings Limited and Chow Tai Fook Enterprises at an enterprise value of $6.7 billion. The deal, involving two Dublin-headquartered companies, secured the purchaser’s position as the world’s second largest aircraft leasing company after AerCap.
One of the world’s largest sovereign wealth funds, Saudi Arabia’s Public Investment Fund (PIF), launched a new aircraft leasing venture, AviLease, with the aim of becoming ‘a leading institution across the aviation leasing value chain’. In other substantial deals, Dubai Aerospace Enterprise acquired a portfolio of 36 managed aircraft, SKY Fund I, from SKY Leasing. SKY subsequently closed its fifth fund at $770 million. This attracted a wide variety of new investors, including global insurers, sovereign and pension funds, endowments, foundations and family offices.
Meanwhile Castlelake raised a total of $1.6 billion through its fourth and largest ever fund, while German investment firm KGAL’s APF5 raised €150 million and BBAM raised $1.5 billion from a diverse group of institutional investors for its Incline Aviation II Fund. These are all positive signs for the future.
Sources of funding
Traditionally bond markets have generally been the main providers of non-bank funding for airlines and aircraft lessors. That continued to be the case for investment grade lessors, even at a time of increased bond market volatility. By the start of 2022, with none of the investment grade lessors having been downgraded by the rating agencies – a huge vote of confidence of itself – aircraft leasing had become a $100 billion bond sector, with the six largest issuers accounting for 87 per cent of notes in issue.
The growth in the need for additional capital to support growth in deliveries saw leading lessors continue to successfully tap bond markets last year. Air Lease Corporation began the year with an offering of $750 million 2.20 per cent five year senior unsecured medium-term notes and a similar volume of 2.875 per cent 10-year notes.
As the year drew to a close Air Lease Corp tapped the bond market for $700 million by way of a five-year senior unsecured medium-term note offering. Reflecting the rising level of rates during the year this was issued at a nominal rate of 5.85 per cent.
Banks are also continuing to support lessors, with Dubai Aerospace Enterprise closing a new four-year $1 billion RCF, CDB Aviation obtaining a $530 million unsecured syndicated term loan from a consortium of seven banks, and SMBC Aviation taking advantage of its investment grade rating to close a five year $2.5 billion syndicated facility with a consortium of 32 Asia-Pacific, European and North American banks.
CDB Aviation secured a seven-year facility agreement for a $650 million financing secured on a portfolio of 15 narrowbody and widebody aircraft while BOC Aviation obtained a five-year $500 million unsecured term loan facility from a consortium of seven banks. Aircastle, too, was in the market with a new $450 million bank seven-year secured facility to support its aircraft acquisition plans.
Focus on sustainability
Along with industry consolidation, sustainability and ESG are topics that have come increasingly to the fore within the world of aviation finance. Here the Irish commercial aviation finance sector has played a leading role in identifying, highlighting and pursuing solutions to the important challenge of reducing CO2 emissions.
Perhaps the single most important contribution being made by Irish-based lessors to the reduction in emissions is the provision of finance and aircraft that are supporting the world’s carriers in their fleet replacement programmes. The new aircraft achieve average savings of around 20 per cent on fuel burns and emissions.
They are also showing a strong willingness to work together and with other industry participants to achieve change. Aircraft Leasing Ireland (ALI), representing over 30 of the world’s largest aircraft lessors – including 18 of the world’s top 20 – committed to supporting the airline industry’s Fly Net Zero pledge to achieve net zero carbon emissions by 2050. Now accounting for more than half of new deliveries, lessors are determined to play an active, collaborative role in driving progress.
The leasing industry commitment to support the pledge was set out in a new document, ‘Aviation Sustainability – Our Future’, which provides an overview of the pathways to achieve this goal through aircraft design changes, operational improvements, Sustainable Aviation Fuel (SAF), electrical/hydrogen propulsion, and recycling. The document also outlines how ALI and its members can use their influence as owners of the majority of the global leased aircraft fleet to lead and drive aviation towards a sustainable future through tangible actions.
Lessors are also taking a direct hands on approach. Avolon and ORIX Aviation, for example, are collaborating with Boeing, SFS Ireland and SkyNRG, on a feasibility study into the production of SAF in Ireland. The study, led by SFS Ireland and SkyNRG, has the goal of identifying market level opportunities for an investable commercial-scale SAF production facility in Ireland. The study is scheduled to be completed in 2023.
SMBC Aviation Capital has also launched a sustainability solution for its airline customers, including an initial $53.3 million investment in high quality carbon credit programmes that align with the United Nation’s Sustainable Development Goals.
Ireland as a legal centre for aviation
The potential value of Ireland as legal centre for the resolution of international disputes in respect of aviation-related contracts was brought further under the spotlight last year by the disputes between the owners of assets trapped in Russia as a result of the Ukraine war and their insurers.
Some lessors, such as Aircastle, Carlyle Aviation Partners and Aviator Capital, have opted to take their proceedings in US courts in New York and Florida and others, including the lessor with the single largest claim, AerCap, and Dubai Aerospace Enterprise have opted for the London High Court.
But other actions, including those taken by SMBC Aviation Capital, Avolon Aerospace (Hamilton) AOE 1, BOC Aviation (Ireland), CDB Aviation Lease Finance DAC and JetAir 1, have been initiated in the Irish legal system. Here lessors have sought to expedite resolution by having their cases admitted to the Irish High Court’s fast track commercial list, arguing that is in the interest of all parties that the court determine quickly, for example, the differences between the meanings and effects of policies described as ‘war risks’ and ‘all-risks’ policies.
The Norwegian Air Shuttle examinership, which has also highlighted the effectiveness of Irish Courts in complex cross-border restructurings, has also been supportive of the Ireland’s emergence as a legal centre for aviation disputes.
Conclusion
Looking to the future, it is evident that the volume of activity within aviation finance over the past year has demonstrated the continuing optimism around opportunities in the financing of commercial aviation – despite not just one but a number of ‘black swan’ events.
It would be all easy to see this as merely tangible evidence of people’s seemingly insatiable demand for air travel reflected in the continuing recovery in routes, capacity, traffic and future bookings. Such a view however, would fail to take into account the depth of knowledge and expertise that has developed within the industry, especially in Dublin, over the past two decades, and the level of professional discipline and acumen that has brought the aircraft financing industry to this level of maturity.
What was especially significant was the acceleration in the pace of recovery, which helped to allay fears that the initial surge in demand might be a temporary post-pandemic phenomenon.
During the pandemic the world’s airlines increased their debt burden by about $220 billion to $650 billion, while net losses over the three-year period 2020 to 2022 erased profits made in the preceding nine years. At the same time many airlines have used the opportunity afforded by the pandemic to restructure extensively their cost structures to create competitive advantage as demand recovers, with low cost carriers in particular setting themselves up for growth.
Against this background, the largely Irish-based leasing industry has played a vital role in assisting their clients with short and long-term revisions of lease terms and with funding deliveries of new aircraft. Already responsible for close to half of all commercial aircraft flying in 2019, that proportion has increased to an estimated 53 per cent of all new aircraft and is widely expected to increase further.
Demand fuels strong recovery
The extent to which commercial aviation recovered over the past year is evident from full-year data from IATA, which shows passenger traffic recovered from 41.7 per cent of 2019 volumes in 2021 to 68.5 per cent last year. What was especially significant was the acceleration in the pace of recovery, which helped to allay fears that the initial surge in demand might be a temporary post-pandemic phenomenon.
This is all exceptionally good news for Ireland as the location of choice for primary business activities for the majority of participants in the aircraft leasing industry.
Industry consolidation
Consolidation remains one of the main themes evident in the aviation financing sector today, fuelled in part by the continuing success of the AerCap takeover of GECAS. This transaction alone has demonstrated that visionary teams within a strong and disciplined sector can create their own good fortune, not just seize opportunities. It is heartening for Ireland to see a team such as AerCap – led by Irishman Aengus Kelly and involving a large number of Irish professionals, both as direct employees and as outside providers of financial and legal expertise – execute such an effective merger of the two largest lessors at a time of widespread uncertainty for commercial aviation.
Irish lessors have been at the heart of aircraft leasing industry consolidation with SMBC Aviation Capital's $6.7 bn acquisition of Goshawk the latest major deal.
That deal was simply not available to any other players – the underlying business imperative would have been missing and the balance sheet strain would have been too great. But despite the pandemic woes and taking a net $2.4 billion charge in Q1 in respect of assets trapped in Russia and the Ukraine, AerCap is expected to report a net income of at least $1.6 billion this year, compared to a previous forecast of $1.0 billion.
Furthermore, following the merger Aer Cap expects to return to its target of a 2.7x adjusted debt-to-equity ratio before the end of this year and is now flagging a new target of 2.3x by 2024. That truly is an exceptional performance.
Two other ambitious new platforms arose directly as a consequence of that transaction. High Ridge Aviation was launched by the former GECAS CEO Greg Conlon in partnership with fixed income investment manager PIMCO, while a team of predominantly former GECAS executives led by CEO Nel Jonty established a new leasing platform based in Shannon, FWCAS.
In another very large deal, which only closed at the end of last year, SMBC Aviation acquired Goshawk from NWS Holdings Limited and Chow Tai Fook Enterprises at an enterprise value of $6.7 billion. The deal, involving two Dublin-headquartered companies, secured the purchaser’s position as the world’s second largest aircraft leasing company after AerCap.
One of the world’s largest sovereign wealth funds, Saudi Arabia’s Public Investment Fund (PIF), launched a new aircraft leasing venture, AviLease, with the aim of becoming ‘a leading institution across the aviation leasing value chain’. In other substantial deals, Dubai Aerospace Enterprise acquired a portfolio of 36 managed aircraft, SKY Fund I, from SKY Leasing. SKY subsequently closed its fifth fund at $770 million. This attracted a wide variety of new investors, including global insurers, sovereign and pension funds, endowments, foundations and family offices.
Meanwhile Castlelake raised a total of $1.6 billion through its fourth and largest ever fund, while German investment firm KGAL’s APF5 raised €150 million and BBAM raised $1.5 billion from a diverse group of institutional investors for its Incline Aviation II Fund. These are all positive signs for the future.
Sources of funding
Traditionally bond markets have generally been the main providers of non-bank funding for airlines and aircraft lessors. That continued to be the case for investment grade lessors, even at a time of increased bond market volatility. By the start of 2022, with none of the investment grade lessors having been downgraded by the rating agencies – a huge vote of confidence of itself – aircraft leasing had become a $100 billion bond sector, with the six largest issuers accounting for 87 per cent of notes in issue.
The growth in the need for additional capital to support growth in deliveries saw leading lessors continue to successfully tap bond markets last year. Air Lease Corporation began the year with an offering of $750 million 2.20 per cent five year senior unsecured medium-term notes and a similar volume of 2.875 per cent 10-year notes.
As the year drew to a close Air Lease Corp tapped the bond market for $700 million by way of a five-year senior unsecured medium-term note offering. Reflecting the rising level of rates during the year this was issued at a nominal rate of 5.85 per cent.
Banks are also continuing to support lessors, with Dubai Aerospace Enterprise closing a new four-year $1 billion RCF, CDB Aviation obtaining a $530 million unsecured syndicated term loan from a consortium of seven banks, and SMBC Aviation taking advantage of its investment grade rating to close a five year $2.5 billion syndicated facility with a consortium of 32 Asia-Pacific, European and North American banks.
CDB Aviation secured a seven-year facility agreement for a $650 million financing secured on a portfolio of 15 narrowbody and widebody aircraft while BOC Aviation obtained a five-year $500 million unsecured term loan facility from a consortium of seven banks. Aircastle, too, was in the market with a new $450 million bank seven-year secured facility to support its aircraft acquisition plans.
Focus on sustainability
Along with industry consolidation, sustainability and ESG are topics that have come increasingly to the fore within the world of aviation finance. Here the Irish commercial aviation finance sector has played a leading role in identifying, highlighting and pursuing solutions to the important challenge of reducing CO2 emissions.
Perhaps the single most important contribution being made by Irish-based lessors to the reduction in emissions is the provision of finance and aircraft that are supporting the world’s carriers in their fleet replacement programmes. The new aircraft achieve average savings of around 20 per cent on fuel burns and emissions.
Lessors have sought to expedite resolution by having their cases admitted to the Irish High Court’s fast track commercial list, arguing that is in the interest of all parties that the court determine quickly.
They are also showing a strong willingness to work together and with other industry participants to achieve change. Aircraft Leasing Ireland (ALI), representing over 30 of the world’s largest aircraft lessors – including 18 of the world’s top 20 – committed to supporting the airline industry’s Fly Net Zero pledge to achieve net zero carbon emissions by 2050. Now accounting for more than half of new deliveries, lessors are determined to play an active, collaborative role in driving progress.
The leasing industry commitment to support the pledge was set out in a new document, ‘Aviation Sustainability – Our Future’, which provides an overview of the pathways to achieve this goal through aircraft design changes, operational improvements, Sustainable Aviation Fuel (SAF), electrical/hydrogen propulsion, and recycling. The document also outlines how ALI and its members can use their influence as owners of the majority of the global leased aircraft fleet to lead and drive aviation towards a sustainable future through tangible actions.
Lessors are also taking a direct hands on approach. Avolon and ORIX Aviation, for example, are collaborating with Boeing, SFS Ireland and SkyNRG, on a feasibility study into the production of SAF in Ireland. The study, led by SFS Ireland and SkyNRG, has the goal of identifying market level opportunities for an investable commercial-scale SAF production facility in Ireland. The study is scheduled to be completed in 2023.
SMBC Aviation Capital has also launched a sustainability solution for its airline customers, including an initial $53.3 million investment in high quality carbon credit programmes that align with the United Nation’s Sustainable Development Goals.
Ireland as a legal centre for aviation
The potential value of Ireland as legal centre for the resolution of international disputes in respect of aviation-related contracts was brought further under the spotlight last year by the disputes between the owners of assets trapped in Russia as a result of the Ukraine war and their insurers.
Some lessors, such as Aircastle, Carlyle Aviation Partners and Aviator Capital, have opted to take their proceedings in US courts in New York and Florida and others, including the lessor with the single largest claim, AerCap, and Dubai Aerospace Enterprise have opted for the London High Court.
But other actions, including those taken by SMBC Aviation Capital, Avolon Aerospace (Hamilton) AOE 1, BOC Aviation (Ireland), CDB Aviation Lease Finance DAC and JetAir 1, have been initiated in the Irish legal system. Here lessors have sought to expedite resolution by having their cases admitted to the Irish High Court’s fast track commercial list, arguing that is in the interest of all parties that the court determine quickly, for example, the differences between the meanings and effects of policies described as ‘war risks’ and ‘all-risks’ policies.
The Norwegian Air Shuttle examinership, which has also highlighted the effectiveness of Irish Courts in complex cross-border restructurings, has also been supportive of the Ireland’s emergence as a legal centre for aviation disputes.
Conclusion
Looking to the future, it is evident that the volume of activity within aviation finance over the past year has demonstrated the continuing optimism around opportunities in the financing of commercial aviation – despite not just one but a number of ‘black swan’ events.
It would be all easy to see this as merely tangible evidence of people’s seemingly insatiable demand for air travel reflected in the continuing recovery in routes, capacity, traffic and future bookings. Such a view however, would fail to take into account the depth of knowledge and expertise that has developed within the industry, especially in Dublin, over the past two decades, and the level of professional discipline and acumen that has brought the aircraft financing industry to this level of maturity.