Update: Castlelake to fund lessors and airlines as banks ‘step back’ from the sector

Aviation asset manager and investment firm Castlelake, L.P has launched a new aviation private placement lending programme this month, hiring Armin Rothauser, previously at Starwood Capital and Deutsche Bank, to lead the new programme.

Speaking to Ishka, Castlelake’s co-founder, and chief investment officer, Evan Carruthers, states that retreating aviation banks have created "a window" of opportunity for Castlelake, which has been tracking the aviation lending market for several years as it considered expanding its product offering.

"There's a huge need for capital today among airlines and leasing companies as most of the traditional sources of financing, for various reasons, are gone,” says Carruthers. “That dislocation of capital is the principal reason we're starting this business. We think now's the time and we're well-positioned with our franchise and with our network to step in and add value."

In previous crises that rocked aviation – such as 9/11, SARS, or the global financial crisis in 2008 – banks increased the cost of lending and “tightened terms”, but essentially continued to lend to aviation credits, explains Carruthers. He adds, however, that Covid-19 is a unique crisis from an aviation lending point of view because a large part of the capital markets, including the aircraft ABS market, have either "completely shut down or are constrained and, at the same time, banks have stepped back from the market.”

 

Stretched senior products

 

Carruthers states that the core focus of the lending business is initially on senior secured lending, offering an “investment grade type product.” He adds that many current investors in the aircraft ABS market are investment-grade only, long buyers of fixed income. He adds that via the lending programme, Castlelake plans to focus on “stretched senior products”.

“If you can find senior debt from a bank today, it's probably a 60% to 70% LTV (loan-to-value) product. We would look to provide similar types of loans and potentially stretch that LTV up to 80% or 85%. In other words, we generally intend to offer a higher LTV product than what a traditional bank may be willing to provide in the current environment.”

Carruthers states that Castlelake as an active equity participant in the market has a “differentiated ability” to not only underwrite aircraft values in today's environment but also assess credit and manage portfolios through different cycles and economic environments. One of the benefits of being an alternative lender is that the firm can be more flexible than a traditional bank without a defined “box” that says this is the “highest LTV we can offer and this is the only product we're willing to provide.”

“Our goal is to provide a stable, long-term capital base to airlines and to leasing companies and fill the void that exists with senior secured lending. Over time, we may also opportunistically look at mezzanine lending opportunities with the same customer base,” he says.

Carruthers explains that the primary focus of the lending arm will be tier-one airlines as he warns it could take years for some airlines to repair the damage caused by Covid. Carruthers adds that Castlelake will fund both new technology narrowbodies and widebodies, arguing that some “great” airline credits have widebody deliveries that need flexible capital and solutions for those deliveries.

He adds that the firm will look at older assets, but it is not the firm's "preference" and stresses that there are some concerns around placing capital with an ageing fleet. He adds that airlines seeking to downsize their fleet by retiring older aircraft has been a "consistent theme" throughout Covid.

Financing other leasing companies

Castlelake also plans to fund lessors. Carruthers states that the deals will largely be sale-leasebacks or funding aircraft that lessors own on their balance sheet. He adds that it is not just airlines that are stressed today, but that a number of leasing companies are working through their own “liability issues”, which have been made more challenging as their traditional funding source, the banks, have retreated from the market.

Carruthers highlights that, like airlines, a lot of lessors face similar liquidity challenges. "They have a lot of financing embedded in their capital structures today and much of it probably can't be easily refinanced so we do think there will be demand for creative financing solutions. We expect that capital is going to be needed here over the next three to five years as these leasing companies also work their way through a disruptive environment. "

Castlelake is one of the most active aircraft ABS issuers and is a servicer of multiple aircraft securitisations representing billions of dollars’ worth of leased aircraft. One question is what challenges that may present given that many lessors effectively compete against Castlelake's aviation asset management arm. Carruthers explains that there will be mechanisms in place internally to make sure that information does not get shared, but admits there is likely to be some "heightened sensitivity". He highlights that many successful lenders have been set up that have also been part of a broader leasing company.

Recent examples of this include PK AirFinance, which was part of GE and which was then sold last year (See Insight: ‘Fund watch: Natixis exits Airborne Capital, PK AirFinance attracts buyers’), and CIT, which had a lessor and a lending arm before it sold its leasing business to Avolon. Another example includes DVB Bank, which was a balance sheet aviation lender but also had an active asset management arm in Deucalion (see Insight: ‘Analysis: DZ Bank mulls new sales process for DVB AIM/AM’).

“I don't think it's highly unusual and a lot of the leasing companies, if they need the capital, will get their arms around that risk because there's such a capital dislocation that they will value flexibility and the capital that we can bring to the table,” Carruthers explains.

Castlelake suggests it would be willing to fund large lessors with the “right infrastructure” to manage through the crisis, as well as leasing companies that have large order books which they're looking to finance. “We don't have much appetite to work with subscale leasing companies, or perhaps leasing companies that have challenging pools of assets, such as short-term leases or ageing airplanes that are not well-positioned to thrive," concludes Carruthers.   

Update: Castlelake partners with Boeing Capital  
 

Castlelake, announced in December that it has partnered with Boeing Capital Corporation to provide up to $5 billion of capital for new Boeing commercial aircraft deliveries via senior secured financing, mezzanine financing and high loan-to-value finance leases. Castlelake will have full discretion over which transactions to pursue and the terms of those transactions. The term of the partnership is through December 31, 2022, and can be extended for an additional two years.

The Ishka View

Castlelake’s expansion into lending is a clever and opportunistic move by the asset manager and allows it to utilise its asset expertise in leased aircraft as well as its access to investors. There is a current lack of appetite among many traditional aviation lenders resulting in higher terms and pricing for new deals (See Insight: ‘High debt costs eat into aircraft lessor returns’). At the same time, both airlines and lessors are seeking to boost liquidity to get through what many believe could be a tough winter as airline revenues are likely to remain depressed.

It will be an interesting question about whether Castlelake will be co-investing or offering any "skin in the game" through its new lending arm. Ishka hears from sources that Castlelake may be looking at offering separately managed accounts versus a closed-end fund. Castlelake has declined to comment on what the new structure might look like, but if true it would allow the firm to offer quite creative, and potentially large, financing solutions to the better airline credits it states it is targeting.

The Boeing Capital and Castlelake partnership is a win/win for both parties. It helps Boeing’s financing subsidiary preserve capital during what has been a challenging year for airframers generally and Boeing specifically due to the MAX grounding. It also avoids the OEM being lender of last resort. For Castlelake, it ensures a steady pipeline of deals which it can direct to its investors.

 

Comments:

Sign in to post a comment. If you don't have an account register here.