Capital Markets and Financing 3 November 2015 Wui
Capital Markets and Financing 3 November 2015 Wui Jin Woon Senior Director, Capital Markets
Agenda • Airline funding of aircraft deliveries • Delivery financing options for lessors • Operating lessor funding © HKAC | Hong Kong | 3 Nov 15 | 2
Airline funding of aircraft deliveries © HKAC | Hong Kong | 3 Nov 15 | 3
How are aircraft financed? Source: Boeing © HKAC | Hong Kong | 3 Nov 15 | 4
Airline Financing Considerations • Cost v Diversification • Manage financing risk • Financial markets change over time and a particular source might be unavailable at a point in time • Balance • • Relationship Execution risk Flexibility Regional v Global Banks • Lease v Buy © HKAC | Hong Kong | 3 Nov 15 | 5
Consider the various cycles Aviation Cycle • Aircraft Values • Airline Profitability Debt Cycle • Bank Sentiment • Bond Market Appetite Equity Investor Cycle • Return Requirements • Long Run Appetite • • CMV ≥ CBV 6 th consecutive year • • Margins at historical lows All eyes on the Fed • • Strong interest TBD © HKAC | Hong Kong | 3 Nov 15 | 6
Delivery financing options for lessors © HKAC | Hong Kong | 3 Nov 15 | 7
Capital markets an increasingly significant financing source Source: Boeing © HKAC | Hong Kong | 3 Nov 15 | 8
Lessor Financing Considerations • Cost v Diversification • Cost is key to leasing competitiveness • Similar diversification considerations to airlines (financing risk, market risk, balancing other issues) • But a wider scope to diversify due to portfolio of lessees • Trading flexibility • Fleet strategy • Liability management • Ratings considerations © HKAC | Hong Kong | 3 Nov 15 | 9
Financing strategy is connected to fleet strategy Portfolio Size 100+ Warehouse facility 50 -100 0 -50 0 -10 Bilateral (nonrecourse) 10 -20 Growth Rate (aircraft added per year) Bilateral (fullrecourse) Secured portfolio financing Note: box sizes are not strictly representative. Chart excludes export credit financing © HKAC | Hong Kong | 3 Nov 15 | 10 20+ Unsecured debt
Operating lessor funding © HKAC | Hong Kong | 3 Nov 15 | 11
Lessors have a constant need for funding • Aircraft are depreciating assets, so lessors have to buy aircraft just to stay the same size • To achieve IRR targets, aircraft under 15 years of age need to be financed • Aircraft usually need to be re-financed at least once while they are owned by a lessor © HKAC | Hong Kong | 3 Nov 15 | 12
Lessors must adapt to changing financial markets Financial crisis and recovery • Increased ECA borrowing • Use of recourse • Portfolio finance in bank market • New capital markets issuance Post Gulf war and GPA • GPA workout refinancing • First ABS transactions • Many banks in market 1990 2000 2010 Post 9/11 • FI backed lessors • ABS markets re-opened • Banks re-entered as market improved © HKAC | Hong Kong | 3 Nov 15 | 13 2015 Currently • ABS for debt and equity • Growth of capital markets • Diversity of banks
Lessors need to pay attention to the liabilities side of the balance sheet Recipes for trouble: • Borrowing short/lending long • Excess leverage leading into a downturn • High refinance risk • Unmatched funding • Concentration of relationship banks • Dependence on capital markets • Structures that are difficult to unwind © HKAC | Hong Kong | 3 Nov 15 | 14
Credit Rating Considerations • Rating agencies differ in the sector teams that cover lessors (S&P: corporates, Fitch, Moody’s: FIG) • While the rating methodologies are different, there are some common considerations: Like Dislike Diversified fleet by customer Concentrated fleet Mainstream liquid aircraft Out of production aircraft Unsecured debt /Unencumbered assets High proportion of secured debt Large and well-positioned in industry Small and relatively new in industry Diverse earnings Monoline businesses Shareholder has a positive influence on financing (support, franchise) Shareholder treats business as noncore / short term © HKAC | Hong Kong | 3 Nov 15 | 15
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