1. Art and Diseño

10 CorporateAviation
THE IRISH TIMES
Thursday, January 29 , 2015
Market moving towards aircraft backed securities
Risk reduction: The
Cape Town treaty
Poor return on investment from cash and
bonds means ABS to feature in the future
TheCapeTownConventionis
aninternationaltreaty
designedtoreducetheriskof
lossbycreditorsinaircraft
transactions.Ithasmadeit
possibletoexpandtheEETC
structurebeyondUSairlines.In
countrieswhereithasbeen
ratifiedandenteredintoforce,
theCapeTownConvention
providescreditorsinaircraft
transactionswithprotections
similartoChapter11.10ofthe
USBankruptcyCodeinthe
eventofthebankruptcyofan
airlinebasedinthose
countries.
Irelandhascommittedto
implement“AlternativeA”of
theconventioninIrishlaw.This
willmeanthatwithin60
calendardaysofaninsolvency
orthreatenedinsolvencyofa
lessee,mortgagoror
conditionalpurchaser,the
lessor,financierorconditional
sellercangettheaircraftasset
back;theaircraftwillbe
preservedanditsvaluewillbe
maintainedduringthe60-day
period;andtheIrishauthorities
willco-operateintheexercise
ofremediessubjecttoaviation
safetyrequirements.
Thisaddedlevelof
protectionforlendersand
lessorsshouldmakeABSs
evenmoreattractivetoIrish
investorsinfuture.
EETCs have been described as the next
generation of debt financing for airlines
BARRY McCALL
The global aircraft finance market is simply vast. Over the next
15 to 20 years, the world’s airlines are going to require somewhere in the region of 30,000
new aircraft – and these all have
to be financed in one way or another. And the numbers involved are truly staggering – between $110 billion and $120 billion a year for the foreseeable
future, according toKPMG head
of aviation finance, Tom Woods.
The requirement for funding on this scale has led to a
very sophisticated aircraft finance market but with quite
pronounced differences in various parts of the world. “The
markets for new aircraft are
quite different,” explains PwC
aviation practice partner, Ronan Doyle.
“The US market is fairly well
advanced and mature and the
majority of new aircraft purchased are to replace older
ones. In China and the Far
East, demand is driven by incremental volume growth as a result of increased personal and
business travel, while Europe
is somewhere in between. Historically, the funding market in
the US and Europe has been
very different as well.”
Again, this has more than a
little to do with market maturity with the US capital markets
being that bit more advanced.
“Aircraft leasing has always
been quite attractive to US airlines,” Doyle points out. “US
bankruptcy rules make it relatively easy for the leasing company to get the asset back in the
event of a default, while from
the airlines’ perspective they
don’t have to worry about the
residuals on the aircraft – the
leasing company has to take it
back while the airline can get a
new super-duper model at the
end of the lease.”
Despite Ireland being a glob-
al centre of excellence for aircraft leasing, Europe has always been one step behind the
Americans with respect to aircraft finance, with airlines using more traditional sources
such as bank lending. But, according to Doyle, the market is
ready to move on for a number
of reasons and aircraft-backed
securities (ABS) will be a much
greater feature in the future.
Among the reasons for this
are the poor return on investment available from cash and
bonds and the requirement on
European banks to deleverage
their balance sheets.
Doyle explains that a fairly
typical ABS might involve a
leasing company putting a
number of the aircraft it owns
and has leased out into a vehicle in which investors can buy
shares. The investors benefit
from the income generated by
the aircraft with the attraction
of a very predictable return.
Deeperunderstanding
“We are seeing a broader
range of investors moving into
the space,” says KPMG’s Tom
Woods. “There is a better and
deeper understanding of the industry now and people are getting a lot more comfortable
with aircraft-backed securities. The industry’s track record is very good. There have
been very few defaults on leases and the lessors have demonstrated an ability to ride out the
storms which have hit the aviation sector from time to time.
They have also demonstrated
an ability to move aircraft on
from airline to airline at the
end of leases.”
But there are other options
for airlines wishing to fund aircraft purchases and these include what are known as enhanced equipment trust certificates (EETCs). These have
been described as the next generation of debt financing for air-
‘‘
There is a better
understanding of
the industry now and
people are getting a
lot more comfortable
with aircraft-backed
securities
lines. EETCs are corporate
debt securities usually issued
by an airline and which are secured against the aircraft and
are enhanced by elements such
as debt tranching, availability
of liquidity facilities and
over-collateralisation. They
have been very attractive to US
investors for some time.
The chief advantage to the
airline is a lower cost of finance
while the attraction to investors is the same as with other
ABSs. However, they have
mainly been confined to the US
because of the advantageous
bankruptcy regime there. This
is changing, however, with the
introduction of what is known
as the Cape Town Convention
in countries outside of the US.
This offers similar protections
to lenders and lessors as US
bankruptcy law, and the recent
Aviation Act is bringing it into
Ireland and will make this form
of finance available here.
NorthAmericanmarket
“EETC and ABS transactions
have for many years been a
very important source of funding in the North American market with virtually all rated US
airlines going to the bond markets on a regular basis to issue
asset backed or vanilla corporate notes,” says Donna Ager,
head of aviation with Maples
and Calder. “Non-US airlines
traditionally not accessing the
bond market was less to do
with their lack of credit rating
in the market, more the attraction of relatively cheap bank-
ing funding. Ironically, the European flag-carriers who have
the ratings required to attract
investment in capital markets
issues have been less active participants in that space as their
more traditional approach has
seen them more comfortable
accessing bank and ECA debt.”
She points out that the ABS
market for non-US players
grew dramatically in the years
to 2008 but since the financial
crisis the market contracted before beginning to grow again of
late. “However, the tide has begun to turn and in the last two
years we have seen both
non-US airlines including BA,
Air Canada, Emirates and lessors such as Avolon successfully launch bonds in the international markets – in some cases
■ Beijing Airport in China:
demand for new aircraft is
driven by volume growth
through increased personal
and business travel
supported by relevant ECAs,
which is a completely new development. In lessor transactions, the quality of lessees, the
value of the aircraft and the level of the revenue streams from
the asset are heavily focused
on; while in airline transactions, jurisdictional issues as
well as the airlines’ credit ratings, are the key drivers.”
Keychallenge
“In structuring the transactions, the novation of assets
into the structures (for ABS
deals in particular) is a key challenge, and timing, cost and success of this is crucial to the success of the launch and completion of the bond issuances,”
adds Nollaig Murphy, partner
at Maples and Calder.
“Formal opinions on true
sale, consolidation and insolvency risk are also important to
achieve a successful launch
and, in particular, satisfy rating agency requirements. Ireland offers the framework to
achieve successful close on
these deals and through its specialised legal and tax regime,
ensures there are efficient cash
flows from the underlying receivable assets through the issuer to note holders, in order to
service the asset-backed securities being issued.”
gecas.com
Ireland is in top position as demand for
global air financing is about to explode
KATHY FOLEY
Global reach.
Local expertise.
With over 40 years of industry experience, GECAS is recognized as
the pre-eminent commercial airline leasing company in the world.
We offer a wide range of aircraft types and financing options,
including operating leases and secured debt financing. And GECAS’
adjacency solutions include: spare engine leasing, aviation consulting
services, and spare parts financing and management. GECAS, a unit
of GE Capital, has offices in 23 cities around the world, and services
customers in 75+ countries.
Imagination at work.
© 2015 General Electric Company
Given the global order books
that have been publicly declared for aircraft and following changes in the world of
lending, Nollaig Murphy, partner and head of the finance
group at law firm Maples and
Calder, says the airline sector
being able to access the capital
markets is crucial to the industry.
“Industry commentators
suggest that normal lending
sources will not be sufficient,
or may need to be priced at a
level that could significantly impact profits and therefore potentially inhibit growth in the
global industry,” he says.
“Accordingly, the capital
markets being fully and efficiently used by the global aviation industry is extremely important to achieve, and hopefully something which policymakers and industry drivers will appreciate and embrace.”
According to Ronan Doyle,
partner at PwC, about 20,000
aircraft are in service around
the world, but by 2030, airlines
will need 30,000 new planes.
Those all need to be financed
and aircraft are expensive, but
the profile of those who can
fund these purchases is changing.
Legacybanks
One of the reasons airlines will
be less likely to access funding
from legacy banks is the changes in capital advocacy rules
that have come in or are coming in because of the financial
crisis, says Doyle.
At the moment, about three
quarters of aircraft in the US
are financed through capital
markets, whereas in Europe
that figure is about 30 per cent.
“We will see far more financing of aircraft through bonds,
securitisation and other
non-traditional bank lending
in Europe than we had before,”
he added.
“Aircraft are becoming a
much more attractive asset
class for pension funds and life
assurance companies. They offer a reasonably steady yield
over the medium term, particularly when government bonds
are at zero or less than zero in
some cases.
“When you have an asset
that is effectively backstopped
by an airline like British Airways, Lufthansa or American
Airways on an eight- to 10-year
commitment and offering a
yield of 4 to 6 per cent, that is
definitely attractive compared
to whatever else you might get.
“The yield will be closer to 4
per cent or closer to 6 per cent,
depending on the lessees. Big
airlines flying globally with
massive fleets are more stable
than smaller airlines.”
Where does that leave Ireland?
Doyle says it leaves us extremely well-positioned as not
only are we already the global
hub for aircraft leasing, but
also many of the capital market
structures the aircraft industry
can use already exist here, such
as covered bonds, asset-backed
securitisation and section 110
vehicles. Furthermore, our legal regime allows those structures to be used for aircraft.
Aircraft are
becoming a
much more
attractive asset
class for pension
funds and life
assurance companies
Aviationinsolvency
Lastly, he adds, Ireland’s move
to adopt Alternative A of the
Cape Town Convention, which
relates to aviation insolvency,
is significant. “It’s the last piece
of the jigsaw for Ireland,” he
says. “You’d struggle to think
of a better location for aircraft
financing within Europe.”
‘‘
■ Airlines will need 30,000
new planes by 2030, all of
which need to be financed