23/11/2016

How do lessors differ from their leasing sidecars?

How do lessors differ from their leasing sidecars?

Several aircraft lessors have smaller leasing joint ventures (JVS) in which they share equity over a pool of aircraft with other investors. A lessor may form a JV to manage its concentration limits, or as means to expand further by accessing additional equity. Most lessors form a JV with minority stakes, earning returns through management fees as the servicer to the portfolio and through income from their equity portion in the JV. At the same time, all risks associated with residual values and possible impairments remains with the JV sheltering the lessors (and their other parent companies) in the event of any major negative shocks. Ishka looks at the joint ventures of major lessors and their strategies and compares the portfolio of these special purpose entities with their parents’ portfolio.

 

One supposition surrounding leasing JVs is that they exist simply as a vehicle for parent lessor to transfer mid-life or older assets off the lessors’ balance sheet. However, Ishka’s findings show that the majority of these leasing JVs have a fleet of relatively younger aircraft in their portfolio compared to their parent lessors.
 

The appeal of a leasing joint venture


One of the biggest advantages of having a JV arrangement for lessors is that they can keep certain assets and liabilities separate from their own. The stated position of most lessors on forming a JV structure is that it allows them to be more “competitive” and that it opens up opportunities that otherwise would not be possible under their current structure. One of the most obvious examples of this is how JVs can be used by lessors to reduce exposure limits. Lessors can hit concentration limits easily with larger clients wishing to do follow-on deals. By using a JV, a lessor can take additional exposure on a particularly attractive (or even a perceived riskier) lessee with potentially higher returns.

 

In addition, lessors always have the option to off-load their less attractive aircraft, across the complete age range profile, on to these JVs while continuing to manage them and earning the staple management fees.

 

Below, Ishka examines the portfolios of some keynote JVs and compares them against their parent lessors. In this analysis, the average fleet age is based on each aircraft’s build date and is calculated on a weighted average basis. All aircraft data has been sourced from the CAPA Fleets Database.

 

AerCap


AerCap is the second largest lessor in the world, based on the number of owned aircraft in its fleet.  It has three major JV arrangements; namely AerDragon, AerLift and ACSAL.

 

AerDragon

AerDragon is 50% owned by China Aviation Supplies Holding Company, with the remaining 50% owned by AerCap, Crédit Agricole Corporate and Investment Bank, and East Epoch Limited. In addition to its equity interest in the JV, AerCap also guaranteed debt worth between $7 million - $8 million (as of December 2015) to AerDragon. AerDragon has two further sub-companies; AerDragon Aviation Partners and Dragon Aviation Leasing. While AerDragon’s entire fleet is managed by AerDragon Aviation Partners, AerCap also provides “aircraft- and accounting-related services” to AerDragon.

 

AerDragon’s fleet profile compares to AerCap as following:

 

 

 

Unlike AerCap, AerDragon’s strategy appears to be in favour of a younger fleet which is line with its core client base of primarily Chinese airlines which prefer to operate younger aircraft.

 

AerLift

AerCap has a 39% stake in AerLift. All of AerLift’s fleet is managed by AerCap for a fee. In addition, like AerDragon, AerCap has also guaranteed AerLift’s debt worth $169 million (as of December 2015).

 

 

 

ACSAL

ACSAL is an affiliate of Guggenheim Aviation Partners (now Altavair). AerCap has a 19% equity stake and the lessor manages all of ACSAL’s fleet.

 

 

Regional exposure

All of ACSAL’s aircraft are leased to airlines based in the United States.

 

Aircastle

 

Ontario Teachers’ Pension Fund

Aircastle has a JV with an affiliate of Ontario Teachers’ Pension Plan, in which it has a 30% equity stake. It was established in December 2013. Ontario Teachers’ Pension Plan is also a major shareholder in Aircastle owning 10% of the lessor’s equity as of February 2016. All of the aircraft in the fleet of this JV are managed by Aircastle.

 

 

 

IBJ Air Leasing Company

IBJ Air Leasing Company is Aircastle’s joint venture with IBJ Leasing Company, a general leasing company from Japan, part of the Mizuho Financial Group. It was formed in February 2016. Anfield Funding Limited, a wholly owned subsidiary of Aircastle, owns 25% of the equity while the remaining 75% is owned by IBJ Leasing Company. As of November 2016, the joint venture owned one aircraft, a 7-year-old A320 leased to Thai AirAsia, that it acquired from Aircastle. The joint venture plans to acquire one more aircraft directly from Aircastle, after which future investments (newer narrowbodies) will be made independently. All the aircraft will be serviced by Aircastle. Once again, the joint venture’s portfolio will be much younger than its parent lessor.

 

FLY Leasing

 

Fly-Z/C Aircraft Holdings LP (FLY-Z)

Unlike the other joint ventures analysed above, it appears FLY had incorporated FLY-Z in 2011 in-order to acquire and lease mid-life aircraft, more specifically four Boeing 767-300ERs that were leased to two North American carriers. Two of these aircraft were on lease for five-year terms and have now been returned off-lease. As of September 2016, the remaining two 767-300ERs has an average age of more than 22 years. Even though FLY Leasing has a 57.4% stake in FLY-Z, the lessor treats the firm as an unconsolidated subsidiary in its books of accounts. Similar to all of FLY’s fleet, both the 767s are managed by BBAM.

 

 

Air Lease Corporation

 

Blackbird Capital I

Air Lease Corporation (ALC) partnered with Napier Park Global Capital (Napier), an independent alternative asset management firm, in November 2014, to form Blackbird Capital I. The joint venture was 90.5% owned by Napier and the remaining 9.5% was owned by ALC. Blackbird had a mixture of mid-life and younger aircraft within its portfolio with some of the mid-life assets being sourced from ALC. The JV allowed ALC to manage portfolio concentration limits and age, leverage and also acted as an additional funding source. With a minority stake, ALC did not require to consolidate the JV, instead earning management fee income and accounting for its share of ownership in the JV. However, in November 2016, Blackbird issued an ABS (Blackbird Capital Aircraft Lease Securitization Limited 2016-1 (“BBIRD Cayman”) and Blackbird Capital Aircraft Lease Securitization US LLC 2016-1 (“BBIRD USA”). The portfolio will continue to be serviced by ALC and its affiliates.

 

How Blackbird’s portfolio compared to that of ALC’s prior to the securitisation.

 

Note: We calculate weighted average age based on the build date of aircraft. As per ALC, that calculates weighted average age based on net book values of aircraft, the average age of the ALC fleet was 3.7 years as of 30th September, 2016, while the weighted average age of the Blackbird portfolio was 3.3 years.

                                                                                                Regional Exposure

 

 

MC Aviation Partners

 

Vermillion Aviation Holdings Ireland Limited (Vermillion)

Vermillion is a joint venture between MC Aviation Partners (MCAP), the aircraft leasing and trading arm of Mitsubishi Corporation, and Cheung Kong Property Holdings Limited and Li Ka Shing (Overseas) Foundation. All of Vermillion’s aircraft are managed by MCAP.

 

 

 

The following are some further JVs, however, detailed fleet information particularly relating to ownership could not be sourced.

 

 

The Ishka View


Lessors, it appears, do not simply use their joint ventures as a sales outlet for the older aircraft. Instead, Ishka’s study shows that majority of the JVs have a relatively younger aircraft in their portfolio compared to their parent lessors. All of the lessors’ JVs examined, with the exception of ALCs, have portfolios of younger aircraft compared to their parent. One of the big benefits of this approach is that it allows lessors to adopt and test different trading strategies. Lessors that specialise in mid-age aircraft can embrace newer aircraft under a JV with a distinct trading strategy. Because the other JV investors often have a controlling stake in the firm, it is also likely that many investors simply insist on including younger aircraft in these vehicles to minimise risk. ALCs joint venture is the exception to the rule with older aircraft in its portfolio. However, this needs to be understood in the context of ALCs younger fleet overall.  The average age of the aircraft in Blackbird’s fleet is still only 6.4 years old, which is comparable to the other leasing JVs reviewed.

Leasing JVs are one means by which lessors can attract additional equity and expand. Crucially they appeal because lessors still pick up management fees by virtue of being the servicer to the fleet. By creating distinct JVs with different asset types lessors can also create a natural hedge for themselves. Investors in these JVs appear to be relatively risk-averse, which explains the younger average aircraft age in many of these portfolios.
 

Disclaimer: While we have tried to cover as many lessor JVs as possible, we have limited our research to those JVs which are treated as variable interest entities and are accounted under the equity method of accounting.

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