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At the start of the pandemic crisis in March, when aircraft were essentially grounded, commercial aviation finance banks shouldered the immediate financial burden when airlines and lessors drew down on their committed lines of credit at the earliest stage.

Figures show that banks have provided more than $110bn in liquidity in 2020, mainly to airlines but also to lessors and OEMs. As a result, long-term funding for aviation companies are being restricted by certain commercial banks to relationship plays and then only secured deals – blind warehouses and non-recourse financing will be in short supply for some time to come or at least until the bulk of that liquidity has been refinanced elsewhere, which again requires the return of air travel demand. Airline treasurers report that in the early days of the crisis, bilateral loans were getting all the way to banks credit committees before being rejected as banks pulled back from increasing their exposure to the sector. 

Before the crisis, some banks could have been accused of having lost discipline in extending credit. The pandemic has demonstrated the need for stringent underwriting due diligence. One veteran banker in the aviation finance world bases all aviation transactions on three pillars – the issuer/credit, the asset and the structure. “You can afford to have one weak pillar if the two others are strong enough, but in the last quarter of 2019 to the beginning of 2020, we turned down some transactions such as non-recourse and blind-portfolio warehouses because the issuers asked us to accept loose terms and conditions with a concentration of weak lessees, less liquid aircraft and more importantly loose structures in term of advance rate, amortisation, cash flow protections, maintenance cost assumptions, etc., only because they gambled that the warehouse would be refinanced in ABS markets. When we finance a portfolio, our policy is to behave as if the ABS refinancing may not happen as scheduled, and we must be comfortable holding the asset in our books for longer time than expected.”

The banking market has returned to a much more conservative state, with funding limited to “top tier” credits – ideally those with access to funds via state support or capital markets, and new technology aircraft or liquid classic narrowbody aircraft. Lower rated credits are being considered but only when transactions are well secured with high quality assets, including strategic routes, slots and gates, low loan-to-value ratios (LTVs) and if there is the reasonable expectation of refinancing in capital markets.

The more traditional bank private financing market essentially closed post COVID and activity was limited to a just a handful of players including Deutsche Bank.

Richard Moody
MD, Global Head – Transportation Finance, Global Credit
Deutsche Bank

“The more traditional bank private financing market essentially closed post COVID and activity was limited to a just a handful of players including Deutsche Bank,” says Richard Moody, Managing Director, Global Head – Transportation Finance, Global Credit Trading at Deutsche Bank. “Many banks had their own challenges managing their portfolios and dealing with amendments and restructurings and coupled with the sentiment in the industry effectively ceased lending apart from a few specific situations like supporting core clients or national airlines. With institutions now holding loans that are in default, the challenge is to know how to work these out. Given the relatively benign nature of the aviation industry over the last few and especially for institutions who are relatively new entrants, there may be insufficient experience or expertise to do this and this is often made even more challenging where there are large lending syndicates with differing views operating to different timescales. 

“It is likely that the volume of bank lending that has traditionally been seen in the past will not return. Some banks have already started to exit the space and others likely to follow, although timing for provisioning for loan losses will be a key driver here, and capital that continues to be available will, certainly in the near term, be more selective and strategic. COVID has also distracted from some challenges that the banking community already faced such as BIS IV/capital floors and an agenda to become more ESG focused and these combined with the current aviation environment will mean that alternatives to bank lending will continue to evolve like debt funds and private placements .”

Some banks are also still working with airlines that have the full backing of their respective countries, although this perception has been dented by carriers like Thai Airways entering restructuring. “Airlines, even with government and private support, are facing challenging times,” says one financier. “Nevertheless, no one expects any flag carrier to fail at this point, with low- and ultra-low-cost carriers expected to survive. In the US, however, there are still some concerns that Chapter 11 will be used as a financing tool.”

Assessing airline survivorship has become an essential skill for lessors and lenders alike. One aviation banker says that in this stressed environment, the bank’s primary concern is airline liquidity and cash burn per day. Added to this calculus is an assessment of the available amount of unpledged assets the airline has in order to raise new debt and increase its liquidity cushion, and the level of liquidity below which the airline will have no alternative but to file for bankruptcy protection. A further consideration is the amount of leverage the airline already has and its debt/bond maturities, as well as the percentage of its fleet that is under operating lease since they are generally considered much easier to renegotiate than bonds or bank debt.

“For tier one airlines with strong balance sheets and liquidity pre-Covid and/or which have proven state support or that are strategic for their country, commercial bank debt will still be available but structures will be more conservative with a focus on new technology aircraft,” says the banker. 

For lessors, even though the asset remains the key assessment metric for investment, counterparty credit quality has gained additional significance. 

“As far as new transactions are concerned, you need to have a razor-sharp focus on assets and credit,” says Ramki Sundaram, CEO, Airborne Capital. “What used to be very asset oriented-lending – as long as the asset is right, you were able to go down the credit tier – is no longer the case and won’t be for months, maybe a year or two years, until the market recovers, simply because no one wants aircraft on the ground at this time. This is driving a flight to quality. Nimble airlines, with a strong business model, which have enough liquidity and a dominant market position, are expected to come out stronger after the crisis, and so there is a drive to identify those ‘winners’.”

For Aengus Kelly, CEO of AerCap, the quality of the asset is the primary metric, even in a distressed scenario. “It all starts with the right assets, at the right price,” he says. “For a large operating lessor, that is the most important part. Only then do you want to get stronger credits on a relative basis. No airline is as strong today as they were nine months ago, that’s a given. So everyone is weaker and you want to try and get as strong a credit as you can. But frankly, if you pay too much or you buy the wrong assets, the third part is irrelevant because you’re going to lose money anyway.”

Lessors are assessing airlines ability to not only survive the crisis but if they are conditioned to take advantage of the recovery. “The major airline metric is cash – access to cash and how much they are burning. We have been conducting more analysis on airline cash management during the crisis and their predicted cash position for the next number of months and several years into the future,” says Peter Barrett, although he adds that fundamentally the company’s focus remains on acquiring “good aircraft with good counterparties, with thought-out strategies that will help the airline to survive and thrive for the long term”.

The expectation of further airline bankruptcies and restructurings has impacted bank debt pricing, which prior to the crisis was at historically low levels. When pricing a new deal, banks are factoring in future internal rating downgrades since all airlines will show significant losses for full year 2020 as well as higher leverage. Banks internal credit modelling will lead to a rating downgrade for airline clients, and they will also take a more conservative view on the asset, again favouring liquid new technology narrowbodies, with faster amortisation and full pay out structures. 

For lessors, banks are considering more carefully the quality of the franchise, the quality of management and the quality of the portfolio. One banker says: “We would support a high-BB rated lessor if we feel that they are smart in managing their liabilities on the principle of diversifying their funding sources in addition to be a good asset manager. During the Covid-19 crisis, the lessors which have diversified their source of funding instead of relying only on warehouses to ABS have better chance to overcome this crisis.”

Airlines’ ability to top up liquidity from a diverse range of sources is paramount for financiers, but specifically their ability to raise equity. “Access to equity – be it from government or private investors – will be vital for airlines since debt needs to be re-paid,” says another banker, who adds that “arguably, any and all unencumbered assets should be valued and considered”.

The major airline metric is cash – access to cash and how much they are burning. We have been conducting more analysis on airline cash management during the crisis and their predicted cash position for the next number of months and several years into the future.

Peter Barrett
CEO
SMBC Aviation Capital

Airlines have been creatively leveraging any and all assets in a bid to boost liquidity. The largest airlines first tapped their bank facilities, then those that were able tapped the debt and equity capital markets and then sought to raise secured financing, using an array of products on a range of assets from the more usual aircraft, engines and spare parts, to the more intangible assets including slots, gates and routes. But also, for the first time, loyalty programmes have been leveraged to raise significant amounts of liquidity in the capital markets.

For years airline and investment banks have thought about ways to extract the value from airline loyalty programmes. The problem is that in the past its always been thought on in terms of raising equity rather than debt.

Gerry Laderman
CFO
United Airlines

Capital markets

The real saviour of airlines, lessors and OEMs during 2020 has been the robustness of the capital markets. Following the global financial crisis, there was a drive for airlines and lessors to build up their presence on the capital markets, getting rated – publicly or privately – and educating potential investors. 

“We’ve been pushing airlines to get access to the capital markets for years,” says one US banker. “Everyone credits government support, but each airline in the US is expected to make it through the crisis primarily because they accessed the capital markets at a time when there was substantial liquidity swashing about. It is a big indictment on airlines that do not have access to the deepest market. Banks can support BAU acquisition of aircraft and BAU corporate finance needs, but bank capacity is not deep enough to deal with this kind of crisis. Part of the reason so many airlines have been thrown onto the largesse of governments is because they didn’t have another credible alternative. Those that did, including some that are outside of the United States, had many more options to deploy than others.”

As mentioned above, airlines have needed to access every and all sources of capital they can to weather this crisis. Airlines that had not previously accessed the capital markets were at a significant disadvantage to those that are regular issuers but the full picture is much more complex. Access to capital markets alone has not been sufficient. Airlines issuing such large amounts of debt in the capital markets were compelled to ensure they also went to the equity markets and could show government backing before investors were willing to participate at reasonable pricing levels. 

Investment banks, while marketing recapitalisation packages for airlines, were frequently asked by investors how the debt tranches/offerings would sequence with concurrent equity issuances. “Debt investors wanted reassurance that there was going to be some equity support below the debt to support the transaction,” says one investment banker. 

Two examples of these interdependent recapitalisation packages are Southwest and America Airlines. 

In April, Southwest issued a $2bn senior unsecured notes offering and a $3.683bn 364-day bridging loan with a $1.6bn stock offering and $1bn convertible bond. Few doubted investment grade-rated Southwest’s survival prospects, or its ability to refinance the bridging loan in the capital markets, but it was a different picture in June when American Airlines followed a similar deal pattern. The airline went to the market with a $2.5bn secured bond offering in conjunction with a $1.2bn stock offering and $1bn convertible notes issuance. All of which came to the market at the same time as doubts around the carrier’s long-term viability was making headlines in the US. The ultimate success of this package was a validation of American’s access to the markets, which enhanced perceptions of the airline’s survivability. 

Although both packages are similar, the airlines went to the market for very different reasons, explains one source. “Southwest wanted to demonstrate that they were going to maintain a fortress balance sheet throughout the crisis, while at the time American badly needed the liquidity to shore up its rapidly depleting balance sheet,” says one investment banker. “The steps airlines take in the next year to either show that they can generate enough operating cash flow to repay the debt they have taken on or by taking a capital markets decision to rebalance the balance sheet through equity issuance, are going to be the critical to securing future bank support.”

Southwest’s unsecured bond in April is widely credited for reopening the “floodgates” of the unsecured markets for airlines. 

United Airlines and Delta Air Lines have also had well publicised success raising capital in the capital markets, with both airlines – as well as Spirit Airlines – leveraging their frequent flyers programmes to raise additional funding. American has one of the largest and most valuable loyalty programs but rather than wager on untested collateral on wary investors, the airline opted to use its loyalty program and IP as collateral for a US Treasury loan, rather than privately placed financing. Officially, after examination, American decided that its Advantage loyalty program was integral to its business – and importantly wasn’t in a separate entity – and, concerned about data confidentiality and security, preferred to trust the US government with its crown jewel asset. It was also much less expensive than other methods open to the airline at the time. Another important factor to consider was the sheer amount of American paper investors have already booked and the doubts over the airline’s future, meant that not only were investors much more full on American than United when it issued its loyalty deal, they were also more wary and had other options to invest in.

United opened up the market for loyalty program finance in June 2020, raising $6.8bn in a transaction backed against its MileagePlus loyalty programme.

United’s wholly-owned subsidiaries, Mileage Plus Holdings (MPU) and Mileage Plus Intellectual Property Assets (MIPA) issued the $3.8 billion of 6.50% senior secured notes due 2027 and also secured a $3bn term loan B facility. The proceeds replaced United’s existing committed term loan facility. 

Goldman Sachs was the sole structuring agent and lead arranger, with joint arrangers Barclays and Morgan Stanley. 

In the innovative structure, the MileagePlus financing is secured on a first priority basis by the assets of the Mileage Plus program and subsidiary companies, which includes specified cash accounts into which MileagePlus revenues are, or will be, paid by its marketing partners and by United. The deal also pledges the equity in MIPA, MPH and certain additional subsidiaries. All intellectual property has been transferred to a special purpose company, which has a licence agreement between MPU and United, providing an additional level of comfort for investors.

MileagePlus

MileagePlus has 100 million members and over 100 program partners – an essential asset for United. Multiplying MPH 2019 EBITDA by a factor of 12 equates to a MileagePlus valuation of about $21.9 billion.

Although the airline went to market with a $5bn target for this deal, the book raised was in excess of $16bn. On the back of such substantial demand, the deal was upsized to $6.8bn from $5 billion, which was the limit agreed with the credit rating agencies to maintain the BBB- investment grade rating. The demand is even more impressive considering the week in which it went to market, which was crowded with large-scale deals from two other airlines.

United’s MileagePlus transaction monetises the company cashflow – a first for the industry. 

“For years airline and investment banks have thought about ways to extract the value from airline loyalty programmes,” Gerry Laderman, United’s CFO, told Airline Economics at the time the deal closed. “The problem is that in the past its always been thought on in terms of raising equity rather than debt. Any debt transaction has been generally limited to prepaid miles purchased by the airline’s co-brand credit card partner. The biggest drawback is the relatively small amount that the co-brand bank is usually willing to do.”

Delta Air Lines and Spirit Airlines followed suit. Spirit raised $850 million – upsized from $600 million – in a privately placed deal, issuing 8.00% senior secured notes, rated BB+ to by Fitch and Ba3 by Moody’s, due 2025 through two newly-formed subsidiaries: Spirit IP Cayman (the Brand IP Issuer) and Spirit Loyalty Cayman (the Loyalty IP Issuer). The notes are guaranteed by Spirit and secured by Spirit’s customer loyalty programs, including revenues from its co-branded credit cards and $9 Fare Club, and associated intellectual property along with its brand IP. According to independent appraisals, the total value of the loyalty program and IP is $2.9 billion. 

Barclays acted as sole structuring agent and joint lead bookrunners with Citi, Deutsche Bank Securities and Morgan Stanley.

Delta by far raised the most funds using these assets. The airline secured $9bn in an upsized private offering with SkyMiles IP to issue $2.5bn of 4.5% senior secured notes due 2025 and $3.5bn of 4.75% senior secured notes due 2028. Concurrently with the issuance, Delta and SkyMiles IP closed a $3bn term loan B facility, priced at L+375, with a 1% Libor floor.

Together, the notes issuance and new credit facility raised gross proceeds of $9bn for Delta, which is an increase of $2.5bn from the anticipated original $6.5bn deal size, at a blended average annual rate of 4.75%. Joint lead bookrunners were Goldman Sachs, Barclays, JPMorgan and Morgan Stanley. 

EETCS

An ever-popular source of debt finance for airlines, the enhanced equipment trust certificate (EETC) product, has surged in popularity. Some 12 EETC deals closed in 2020 to date, worth above $9.4bn in total. The last time the volume and number of deals was that high was 2013 when there was a flurry of international deals from Air Canada, Virgin Australia and Doric. In 2020, new issuers, such as Alaska Airlines, and re-entrants into the market, like Hawaiian Airlines, JetBlue and FedEx, tapped the airline EETC product to raise debt, and raise it successfully with attractive pricing for both the issuer and investor. 

One banker says: “Generally we’re seeing anything that has fixed wing can be financed no matter if it’s a brand new asset or an older vintage, the EETC structure can be adjusted so that it makes sense for everybody as we have seen with freighters with the FedEx EETC, and with more vintage assets like with the Air Canada deal, or brand new assets as seen in the Delta and JetBlue transactions, for example.”

In this stressed operating environment, however, the buyer base for EETCs has shifted slightly, with alternative capital showing more interest in more subordinated tranches but nonetheless this market is described as “remarkably well bid” compared to other aviation finance products. “It is almost surprising the amount of interest that we’re getting given everything else that it’s happening in this sector,” says the banker. “So there is still more money to be deployed in the space; we just need collateral to finance.”

As well as new EETC issuers – or like Hawaiian airlines that haven’t played in this space for many years – existing issuers, such as Delta Air Lines, after completing one EETC in February 2020 (which was essentially in the pre-COVID period) has returned to the market to add junior tranches. In the case of Delta, it added a B tranche in the private placement space. 

The private placement market has certainly evolved during this crisis period. A panel discussion during the Airline Economics Growth Frontiers New York virtual conference in late 2020, noted that private market investors initially pulled back from smaller credits hoping to issue in this space, preferred higher tier airlines with more robust collateral pools. High quality collateral is significantly important, now more than ever before, as asset values are called into question as trading drops off and utilisation has collapsed. 

The EETC cross-collateralisation structure traditionally provides comfort to investors that the portfolio is a safer investment because an airline is unlikely to reject an entire portfolio in a bankruptcy scenario. Equally, over-collateralisation is also paramount since the ability to sell the aircraft is the “last line of defence, but arguably the most important line of defence for these transactions” in the opinion of one rating agency expert speaking at the Airline Economics Growth Frontiers New York virtual conference, who highlighted that if all the aircraft were rejected by the airline, at least there were liquid assets that could be easily traded. But as values decline, the level of over-collateralisation decreases and that that safety cushion goes away. There have been some rating actions for some EETC portfolios to date but nothing significant as yet at least for the senior tranches. This does not mean that this won’t happen in the future, however, and rating agencies are stressing their methodologies in light of the current situation.

No US airline can treat EETC investors this badly because it is a very important source of funding.

Banking source

As previously referred to in this report, following its filing for US Chapter 11 bankruptcy protection, the decision by LATAM in May to reject the 19 aircraft leases in its EETC portfolio came as a shock to the market. At the time, one aviation banker commented: “No US airline can treat EETC investors this badly because it is a very important source of funding.” 

Some months on from the LATAM decision, the market is taking a more pragmatic view. “The likelihood for aircraft to be affirmed in a bankruptcy situation, will be an airline by airline decision, and certainly not a wholesale change,” says one rating agency expert. “There are transactions and portfolios out there with older fleet types for example or aircraft that are not going to be core to the airline in this new environment that could be rejected. But for many EETCs, especially the most recent transactions with new delivery narrowbodies, they should still have a place in an airline’s fleet, and particularly if they were closed in the last several years, they were probably financed at very low rates. Those are the types of assets that would stick through a bankruptcy.”

Ultimately, fleet decisions will drive a decision on the life of a EETC transaction. Although the LATAM EETC pool included all new assets, it also contained two A350s – an aircraft type the airline decided to abandon as a strategic decision. “In the LATAM case, considering their post-restructuring situation and fleet size as well as their need for future financing, you could understand their decision because they didn’t access the market as frequently as the US airlines do.”

In the current environment, investors would be very reluctant to take back any aircraft – even very good aircraft – due to the fall in demand, which leads many to suggest that in any bankruptcy situation there will be negotiated outcomes, which would technically involve the rejection of the leases but keeping the planes with the airlines and compromising the junior tranches. 

Steven Chung, partner at Hughes Hubbard, suggests that the cross-collateralisation structure puts the airline in a strong negotiating position. “An airline that only wants to keep five of a 10-strong EETC portfolio, they have some leverage because they either have to accept or reject them all. You could see a situation where airlines negotiate and barter with their various financiers to keep all those planes but with lower lease rates for the whole pool.”

Lessors debt raising

Until now the focus has been on the airlines raising record amounts of capital in the debt markets but the real stars of this capital pool have been the leasing companies, which have raised substantial funds at competitive prices in the second half of 2020 in particular. 

Perhaps the most significant issuance, was in June 2020 from AerCap, which came to the market with $1.25bn of five-year senior notes at 6.50%. 

Citi, Deutsche Bank, HSBC, Mizuho and Morgan Stanley were joint bookrunners on the deal, with CA-CIB, Goldman Sachs, MUFG, Société Générale, and TD Bank were passive joint bookrunners. 

This transaction has been described as “remarkable” by one banker because it was launched at a time when there was a legitimate question mark regarding whether these independent lessors could issue debt at competitive levels in the midst of the crisis. “The AerCap bond was pivotal because it was the first true vote on an independent, unsupported company that had leasing exposure in the aviation sector,” says the banker. “Its success, opened up the market for other leasing companies.”

S&P Global’s Betsy Snyder, agrees, commenting: “After AerCap’s initial post-pandemic unsecured debt issuance at a relatively high price, we’ve seen most of the other lessors successfully issue unsecured debt at increasingly lower pricing, at times even at historically low rates.”

AerCap’s Kelly is rightly proud of the company’s success in the capital markets. “We have raised approximately $7bn as of 1st December over the course of the last eight months, using the secured and unsecured markets mainly, but the majority of the debt has been issued in the unsecured markets. Overall our cost of funds is coming in less than four percent. Given that at the height of the pandemic in March and April spreads were all over the place and the market was closed, that is a very competitive level for unsecured funding. Especially considering that airlines were failing to get deals done at 11% coupons in May. There are very few – maybe seven or eight – leasing companies who can access the unsecured market on a standalone basis. We came into the crisis with $10bn of liquidity, which gives investors substantial confidence.”

That renewed investor confidence was demonstrated again in July by the success of a $500 million five-year unsecured bond, maturing July 1, 2025, from ALC. Due to the six times oversubscription, attracting all of the largest institutional investors such as Fidelity, BlackRock, GIC, Loomis, Vanguard, ALC upsized the offering to $850 million and succeeded in tightening the credit spread above the benchmark treasury from 375bps to 325bps. This is a far lower rate than achieved by some of the largest US and European airlines and other lessors. BofA Securities, JPMorgan, MUFG and Wells Fargo were joint bookrunners.

Speaking to Airline Economics at the time, Steven F Udvar-Hazy, Executive Chairman of ALC, said that the company’s liquidity position was strong with no maturities falling due until 2021 and a $6.2bn unsecured and undrawn revolver at the company’s disposal, and with capex declining due to a delay in aircraft deliveries. As a result, the issuance was not essential but Udvar-Hazy noted that it demonstrated to the market the strength of the company and the long-term industry. “This bond shows that there is still strong investor demand for quality aviation “This bond shows that there is still strong investor demand for quality aviation companies, rather than attracting high-yield investors. We felt that it was important for ALC to go to market to demonstrate that the street still places value in a quality operating lessor franchise.” Steven Udvar-HazyExecutive ChairmanALCcompanies, rather than attracting high-yield investors,” he said. “We felt that it was important for ALC to go to market to demonstrate that the street still places value in a quality operating lessor franchise.” 

The ALC bond may have been assisted – and perhaps helped to squeeze the pricing– by the company being named on the Federal Reserve corporate bonds purchase program, announced in June when the US government announced plans to purchase existing securities of highly rated, investment-grade firms on the open market. “We were gratified to see ALC included in the Fed’s list; it may have also helped to squeeze down a few basis points,” added Udvar-Hazy.

Although there was concern in mid-2020 that investors may have pulled back from aviation assets in the midst of the crisis, this deal and the earlier AerCap transaction demonstrated that investors were buying paper from quality issuers. 

Many more lessors have tapped into the deep capital markets with a high degree of success. DAE has also found demand to be high for its paper. 

“We accessed the capital markets twice in the past two months. We raised an aggregate of $2 billion and in both instances our deals were heavily oversubscribed,” says Tarapore. “This is not unique to us. There is investor demand for solid franchises like DAE that can deliver value over the long term. The capital markets are wide open, and many lessors over the years have shifted their reliance on capital markets away from the traditional bank markets. Similar to their action in previous downcycles, fair weather aviation banks have retreated RESEARCHto the sidelines – either they’ve actively reduced their exposure, or they have set pricing in a way that doesn’t make much sense.”

This bond shows that there is still strong investor demand for quality aviation companies, rather than attracting high-yield investors. We felt that it was important for ALC to go to market to demonstrate that the street still places value in a quality operating lessor franchise.

Steven Udvar-Hazy
Executive Chairman
ALC

In November 2020, CDB Aviation issued $500m of senior unsecured notes in a Regulation S bond offering, under its $3bn Medium Term Note Program.

The notes were priced at the 1.500% three-year senior unsecured fixed rate of 99.909% to yield 1.531%, or Treasuries plus 135bp, well inside the initial price guidance of 170bp area. The new bonds achieved a negative new issue premium, as well as the lowest-ever priced coupon for a China-based lessor’s fixed-rate public US dollar bond.

The bond sale attracted good demand from investors, reflecting strong interest and continued support from global funds and asset managers who like the quasi-sovereign credit of both CDB Leasing and CDB Aviation. Despite a congested primary market with 11 trades coming from Greater China on the same day, orders were over US$1.7 billion when final price guidance was announced, including US$800 million from the leads.

Standard Chartered Bank, Bank of Communications, China Citic Bank International, Mizuho Securities, ANZ, Haitong International, ICBC Singapore, Guotai Junan International, CMB International, and Natixis were joint global coordinators. They were also joint bookrunners and joint lead managers with China Minsheng Banking Corp Hong Kong branch, ABC International, China Securities International, and CTBC Bank.

CDB Aviation CEO Patrick Hannigan comments: “[Our bond] was well taken up by the markets and there was plenty of appetite, it was oversubscribed, and our eventual all-in price was about 150 basis points. This reflects our experience for the year in terms of funding. We have a good mix; mainly issuing secured funding. We use a lot of Chinese banks, but we have a good mix of international banks as well. In total our capital raising in 2020 was about $3.3bn. We also have some secured debt from a combination of Chinese banks, Asian banks, and international banks. There are traditional lenders to the sector that are definitely more cautious at the moment and are only funding existing customers and rolling over existing facilities.”

Our bond was well taken up by the markets and there was plenty of appetite, it was oversubscribed, and our eventual all-in price was about 150basis points. This reflects our experience for the year in terms of funding.

Patrick Hannigan
CEO
CDB Aviation

ABS

The aviation asset backed securitisation (ABS) product was predicted to have another record year in 2020 before the pandemic hit. ABS deals were being prepped to launch around the end of February and into March but COVID-19 suddenly shut down the market completely. One source states that two issuers actually tried to proceed in March in the hopes that this crisis was a short-term “blip” and by launching they would be ahead of everyone else in the market, but they realised by April that the market was going to remain closed for some time. 

New issuance for aviation ABS deals remain on hold, and existing deals have been downgraded as some deals had to rely on liquidity facilities to maintain payments to bondholders. However, it is worth noting that by the end of 2020, these liquidity facilities had been repaid. 

The debate now has turned to what the next iteration of the aviation ABS product will look like. The past few years, the market had been transformed by the creation of the tradeable E-Note structure. Many bankers are now convinced that those transactions are “dead and will be for some time” according to one banker. There is speculation that aviation ABS 3.0 will be much more simpler structures, with lessors retaining the equity slice or that being sold to one investor. 

One banker opines: “ABS transactions that are used by the issuer (lessor) to raise senior/junior debt only with the issuer retaining 100% equity and servicing, should have a future provided that the structuring be much more conservative (lower initial advance, etc) given the current experience of rental deferrals, pressure on the future residual values, expected deterioration of the lessees’ credit, less appetite for widebodies with high transition/remarketing costs for example.”

The timing of that return is open to debate, but one lawyer suggests this could be as far out as 2022. “My gut feeling is, based on lessons from prior crises, if the airline market doesn’t recover for the next six or 12 months, it could be well into 2022 as the earliest period for a true aviation ABS deal to come back to the market.”

Lessors are more bullish on the return of the ABS product – at least those companies that are regular issuers in the market, and which are not reliant on it for portfolio management strategies, and or asset trading, and can retain the equity. Seraph’s David Butler comments: “Several leasing companies have become very reliant on the ABS product, as its seen as a reliable financing and portfolio management vehicle for lessors and allows for a further diversification of funding sources. The challenge for those lessors, if the ABS market is not going to be available or is going to be slow to return, will be coming up with innovative solutions for portfolio management to move risk and concentrations off their balance sheet. Without this market available, those lessors will need to revert to more-traditional asset trading venues which may not have sufficient capacity to provide for the amount of trading required.”

Stephen Hannahs, CEO of Wings Capital, has raised financing in the bank market and refinanced in the ABS market, executing transactions in 2017 and 2019. “Those ABS structures have proved to be very durable and very flexible. This is by design. Wings has benefited significantly by having this kind of a long-term debt profile for our asset base,” he says.

Commenting on whether the market will return, Hannahs is confident of the demand for the product but it less certain on timing. “There are some signs that in some of the non-aviation ABS products, containers for example, that there has been some very aggressive pricing on ABS issuance. This demand will eventually spill over to aviation ABS, but this will take some time. Too many investors and lenders still have many questions around which airlines are going to survive; and what the future aviation industry will look like to be aggressively seeking investments. Nevertheless there’s a huge amount of liquidity that people need to deploy. I’m hopeful that the ABS market returns sooner but I don’t think we’ll see a reasonably financeable market until at least the second half of 2021, and even then I’m not sure what the pricing will look like.”

The improved margins for aviation assets however have been atracting more high yield investors. Butler has seen more hedge funds taking an interest, seeing opportunities for the future. He adds that there is a clear division between two different groups of lessors. “Major lessors have had excellent access to both debt capital markets and the bank market for the last few months and should continue to have such access. In recent months we have seen several successfully tap the public bond markets. Smaller lessors with more challenging capital structures will continue to struggle to raise money from both banks and bond markets and will require innovative solutions to meet their financial goals.”ALC’s Plueger appears more confident that the ABS market will come back relatively rapidly in the spring/summer period of this year. “The ABS market has largely been shut off, understandably. Many are watching how various different funds that have had ABS financing are going to perform. It’s an important product for lessors and for our own funding – we find it to be a very efficient way for us to sell groups of aircraft as they approach mid-life. We’re not dependent upon it, but its efficiency and convenience is really helpful. I do think going into the spring and the summer we will see some green shoots and the debt marketplace will come back.”

Given the ABS market funded more than $20bn of aircraft purchases over the last three years, its return (in whatever form it takes) will be important in driving the trading market. Particularly given that the traditional aviation bank market will be likely constrained for a period of time following the crisis.

Airlines that ceased operations in 2020

Rank

Loyalty Program

Associated Airlines

2020

Valuation

(US$m)

Change

2017

Valuation

(US$m)

1

SkyMiles

Delta Air Lines

25,931

21,752

2

Aadvantage

American Airlines

23,440

19,582

3

MilegaePlus

United Airlines

20,172

14,687

4

Rapid Rewards

Southwest Airlines

8,013

6,353

5

Miles & More

Lufthansa Group

7,418

5,760

6

Flying Blue

Air France-KLM, Kenya Airways, tarom

6,675

6,270

7

Aeroplan

Air Canada

6,331

-

8

Avios

International Airlines Group

5,138

4,750

9

KrisFlyer

Singapore Airlines Group

5,032

2,739

10

Asia Miles

Cathay Pacific

4,701

3,531

16

TrueBlue

JetBlue Airways

4,029

3,095

41

Free Spirit

Spirit Airlines

623

523


Get in touch

If you have any queries on any topic raised in Aviation Industry Leaders Report 2021: Route to Recovery, please contact Joe O'Mara of our Aviation Finance team. We'd be delighted to hear from you.