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New class of investors entering aircraft lessor sector

More private equity money and investor capital exploring resilient aviation sector

The pandemic took an enormous toll on airlines. That presents opportunities to aircraft lessors.

“Airline balance sheets have been decimated by the pandemic. The Government supports and additional debts that have been taken on will mean most airlines will be severely capital constrained for the foreseeable future. Accordingly, the flexibility that leasing can offer airlines will likely prove even more attractive,” explains Joe O’Mara, head of aviation finance at KPMG.

“The general view of lessors is that the crisis has served to strengthen the relationships between lessors and their airline customers.”

The support the leasing community provided, funding close to 60 per cent of new deliveries and also entering into sale and leaseback “has been pivotal in most airlines surviving the crisis”, he points out.

Perhaps the biggest shift has been capital markets’ appetite for aviation finance. Aercap’s blockbuster takeover of rival aircraft leasing firm Gecas last year created the world’s biggest aircraft business, with the bulk of the $30.5 billion (€30bn) price tag raised on capital markets.

That is representative of a wider shift.

“Since June 2020, investment-grade lessors have shown a remarkable ability to raise unsecured debt at reasonable rates, with bond raises in 2021 being at rates which were lower than those achieved pre-Covid. While this is reflective of the macro environment, it also highlights how aircraft leasing continues to become more mainstream and that there is a significant market confidence in the business model,” says O’Mara.

The aviation Asset Backed Securitisation (ABS) market also rebounded a lot quicker than anyone expected and saw over $8 billion of aircraft purchases funded via the ABS market in 2021. “Given these structures are predominantly located in Ireland, that was great to see and we hope it will continue to prosper,” he adds.

Up until recent years the sector traditionally relied on bank debt but patterns of change were turbocharged during the pandemic.

“We have seen sales and leaseback become quite popular, with buyers of the aircraft being private equity managers rather than your traditional aircraft lessor. It’s an interesting option, as it allows the airline to unlock immediate cash from their aircraft assets as well as reducing their monthly cash flow obligations,” explains Andy Murphy of Waystone, a provider of institutional governance, risk and compliance services to the asset management industry.

It has also seen a large number of private equity and other investment houses look at dedicated aviation funds, some with a mandate to simply provide debt financing and some with a mandate to operate a full leasing fund. “It’s an interesting development, and certainly something we think we will see more of going forward,” he predicts.

Some investors are retracting or reducing their exposure to the sector, he notes.

“However, we do see a large number of newer investor types enter the market, including large private equity firms and traditional investment managers. We have seen some partnering alongside lessors in joint venture types, others providing debt financing rather than equity, while some firms have looked to set up their own leasing platform entirely and building out their own internal aviation expertise and investment knowledge. Given the current market conditions, I would say a lot of these new investors are opportunistic by nature.”

It helps that the sector has certainly proved so resilient.

“The ultimate doomsday event – the global fleet being grounded for two years – has happened and the sector has weathered the storm. I think aviation will come back quite strongly as a sector, albeit I think airlines and lessors will need to focus on new capital avenues and sources of investment capital,” Murphy predicts.

New investors will need to come into the sector, and potentially new funding structures and strategies be devised, as banks retract.

“I think we will see more and more private equity money enter the sector, as well as investor capital managed by traditional investment managers, either as a joint venture or outsourced agreement with alongside a lessor.”

The last two years have certainly been the most challenging time the aviation sector has ever faced, says O’Mara, who adds that it is clear “a strong recovery” has commenced.

“From an aircraft leasing perspective, the resilience in the face of the wider market challenges has been extremely impressive. Lessors have managed this crisis better than anyone could have predicted, and they are well placed to prosper as the recovery continues. As the global centre for aircraft leasing, that is a huge positive for Ireland and its wider economy,” he says.