Cracks emerge in global aviation finance boom
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[November 05, 2018]
By Anshuman Daga and Tim Hepher
HONG KONG (Reuters) - An unprecedented boom
in the $280 billion aircraft finance industry is showing signs of
faltering as rising interest rates, cut-rate competition and higher oil
prices trigger a shakeout in a sector that has attracted a flood of
Chinese funding.
Conferences in Hong Kong last week saw more than 1,000 financiers,
lawyers and airline bosses talk up the fundamentals of an industry that
has emerged as a flourishing asset class globally, but in contrast to
previous years the mood was one of subdued optimism even as corks popped
on new deals.
Concerns about central bank tightening, trade rows and currency swings
could blow some froth, they cautioned.
"I think the party is over in terms of lower interest rates," said
Robert Martin, CEO of Asia's largest-listed aircraft lessor BOC Aviation
<2588.HK>.
The sector veteran of three decades noted that smaller players who had
not matched their funding needs to liabilities, unlike larger ones like
his company, would find it difficult to ride out any volatility.
The failure to do so has caused some high-profile collapses, such as
Guinness Peat Aviation (GPA) in the 1990s.
The former GPA executives who now dominate the industry say the sector
has matured and is backed by diversified sources of funding as aviation
finance sits proudly alongside property and infrastructure as
alternatives to traditional market bets.
Yet danger signals have emerged, such as stronger dollar hitting the
coffers of many airlines just as they must adjust to a spike in oil
prices.
That could land unwanted aircraft back into the laps of lessors needing
to find new takers.
In a sign of turbulence ahead, global airlines have already slashed
profit forecasts due to high oil prices.
A few leasing companies are also quietly giving airlines rental
'holidays' to help their cash flows, sources said.
And some airlines are increasing traffic only by cutting prices, which
will hurt all but those with the lowest costs, said Rob Morris, chief
consultant at Flight Ascend.
According to Stuart Hatcher, chief operating officer of asset managers
IBA: "The market is poised for the start of a correction. There are too
many signals."
"When airlines feel pain, lessors feel pain."
DEALS DRIVE DOWN YIELDS
The industry, however, remains in better shape than in previous cycles,
driven by consolidation in the United States.
Airlines have begun to recoup their costs of capital in the past four
years after decades of value destruction, according to the International
Air Transport Association.
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A bird passes in the foreground as a passenger aircraft makes it's
final landing approach towards Heathrow Airport at dawn in west
London Britain, April 18, 2016. REUTERS/Toby Melville/File Photo
Demand for financing for new commercial aircraft deliveries is expected to rise
almost 7 percent this year to $139 billion, Boeing <BA.N> has said.
Last week, financiers were busy doing deals overlooking Hong Kong's Victoria
Harbour at conferences hosted by Airline Economics and Euromoney's Airfinance
Journal.
Lessors say liquidity is abundant and that financial strains in one part of the
globe can be offset by demand elsewhere.
Currently, Chinese capital accounts for about 30 percent of the funding deployed
by leasing firms worldwide, up from 5 percent about nine years ago.
But while the carousel continues, the flood of new money chasing deals has
lowered returns for most in the industry.
Goshawk Aviation, a venture of Hong Kong conglomerate NWS Holdings <0659.HK> and
Chow Tai Fook Enterprises, says the sector's low yields are not feasible for
long.
Brian Cheng, executive director at NWS that bought Dublin-based Sky Aviation
Leasing this year, said he had seen funding bids from companies that are
prepared to accept returns of 3-5 percent on their aircraft investments.
"Insurance companies or banks can achieve (these rates) because their borrowing
costs are so low ... but for us there's no way to compete with that."
"SOMETHING HAS GOT TO GIVE"
Against that backdrop, opportunistic M&A is also picking up.
Japan's Orix Corp <8591.T> struck a $2.2 billion deal this year for a 30 percent
stake in leasing firm Avolon Holdings.
SMBC Aviation Capital, Sumitomo Mitsui Banking's leasing arm, expects to receive
an extra $1 billion from shareholders in a couple of months, Peter Barrett, CEO
of the world's No. 5 lessor said.
But with air pockets in sight, industry executives increasingly point to an
expected shakeout among smaller lessors. Some smaller Chinese players are
already pulling back.
"It's like driving a car on the expressway. Everybody is on the gas pedal right
now. No one is going to the gas station or taking a break. Everybody is full
throttle but something has got to give. Some cars will just head off to the
exit," Cheng said.
(Reporting by Anshuman Daga and Tim Hepher; Editing by Himani Sarkar)
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