Finance is Getting Costlier and Airlines and Lessors Should Look to ...

?Aviation Finance ? Fasten your Seatbelts,? authored by partners Shamshad Ali and Neil Hampson, says that the sector can provide an attractive opportunity to deploy large amounts of capital efficiently in ?hard assets? and so is particularly attractive at a time when investor confidence in stocks and other financial assets is lower. It puts general demand in context by referencing demand for JOLCOs. ?An interesting barometer of demand for investing in aircraft financing is that investor demand for investing in the Japanese Operating Lease (JOL) market is at a near time high. New investors are already entering this space, but the general consensus among the experts interviewed by PwC is that more needs to be done to ensure better understanding of the sector by investor groups.?

Amongst those demonstrating interest in investing in the sector, PwC highlights sovereign wealth funds (SWFs), private equity and Far Eastern banks as growing sources of finance. ?We have already seen a number of SWF-backed funds such as China, Singapore and UAE investing in this asset class. This is unsurprising given their access to US dollar funding, longer term investment horizon and appetite for deploying larger amounts of capital efficiently. With the potential for developing new structures, we expect further involvement of SWFs going forward.?

?At first glance, aviation financing may not be an obvious investment for PE. But, we have already seen a number of financial investors backing leasing businesses with recent ventures e.g. Cinven, CVC, GIC and Oak Hill?s investment in Avolon, Carlyle?s investment in RPK, Cerberus Capital?s investment in AerCap, Oaktree?s investment in Jackson Square Aviation (now exited) and Terra Firma?s investment in AWAS. We expect to see further deal activity in this space?

?Banks from the Far East have been at the forefront of some of the larger deals, for example, the acquisition of RBS Aviation by Japanese Bank Sumitomo Mitsui, the sale of DVB?s 60 per cent share in TES to Development Bank of Japan and Mitsubishi Corporation and the recent acquisition of Jackson Square Aviation also by a Mitsubishi Corporation entity. Some Chinese banks may also be keen to expand into the sector e.g. press reports suggest CDB was the under bidder for RBS Aviation. We believe the recent trend of a shift in aviation assets from European banks to the banks in Asia is likely to continue.?

The reports finds that, despite the fact that ?it already costs more to arrange financing within the aviation industry compared to a few years ago,? the cost of financing can be expected to increase further as regulatory changes take shape, in particular Basel III and the implementation of the new Aircraft Sector Understanding (ASU) from 2013. ?What?s more, as the challenges that the banking industry faces, and in particular the European banks who traditionally have been dominant in this space, continue to play out, we expect to see some banks retreating from this market which will intensify the competition to obtain aircraft financing and the cost of financing will likely further increase.?

PWC says that airlines and lessors will have to be more innovative in the structures they use to access new investors. ?This is already attracting new investors particularly from the Far East, with a number of banks from Japan and China snapping up aviation assets. We expect this trend to accelerate. But, more of this will need to happen and airlines and lessors will need to be more inventive and work harder to find additional sources of funding and potentially develop new products. There have been recent attempts for example the Doric II (UK-listed) Emirates financing vehicle and German bond backed by an aircraft mortgage (a new product first used by Nord LB in July 2012).?

The full report can be downloaded?here.

SOURCE:?http://www.financejobs.ie/display_article.php?i=12731&n=10

Source: http://www.worldleasingnews.com/news/finance-is-getting-costlier-and-airlines-and-lessors-should-look-to-asian-banks/

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