Aviation sustainable finance firsts: A fund, a secured loan, and an operating lease

Aviation sustainable finance firsts: A fund, a secured loan, and an operating lease

Sustainability innovation in the aircraft finance space is gaining momentum with two innovative sustainability-linked transactions announced in the past three months (Crianza Aviation in November and Societe Generale in January) as well as ongoing work by Swedish asset manager Rockton to launch the sector’s first Sustainable Aviation Fund.

In early February, Japan Airlines (JAL) also issued a transition bond which it says is a first for the aviation industry (presumably excluding the first-ever Transition Sukuk by Etihad in 2020). Proceeds from JAL’s bond will be used for upgrading to “fuel-efficient aircraft” and cited Airbus A350 and Boeing 787 as examples. More details will be available in Ishka’s upcoming airline bond coverage.

Ishka reviews initiatives by SocGen, Rockton, and Crianza and examines what they may mean for the sector.


SocGen and its Air France A350 sustainability-linked loan


The first sustainability-linked aircraft-secured term loan provided to an airline was announced by Air France-KLM and Société Générale (SocGen) last month in what the bank’s global head of aviation Finance Yann Sonnallier describes as a “final outcome” of in-depth discussions with Air France about its net-zero trajectory. Sonnallier tells Ishka that the transaction “crystalises” the airline’s decarbonisation strategy and commitments.

SocGen has been a close financing partner to Air France for several years and that relationship grew closer during the pandemic as one of the senior mandated lead arrangers for the €4 billion ($4.6 billion) loan guaranteed by the French State in May 2020. According to the French government, that aid package served more purposes than just helping the airline overcome the Covid-19 crisis – it was also designed as a catalyst for Air France to improve its environmental performance.

A French government plan in June 2020 (Plan de soutien à l'aéronautique) foresaw Air France “being able to renew its fleet more quickly, supporting the French aviation industry and reducing the impact of its activity on the environment” as a result. The main decarbonisation “levers” referenced in that document were the modernisation of the carrier’s medium and long-haul fleet and the use of 2% sustainable aviation fuel (SAF) from 2025.

SocGen’s sustainability-linked loan for an Airbus A350 announced last month happens to be built around the same “fundamental levers” – its financing conditions are linked to the achievement of Sustainability Performance Targets (SPTs) in respect of the airline’s fleet “proportion of new-generation and fuel-efficient aircraft” and its usage of SAF in daily operations. The bank also notes that Air France’s environmental framework was emboldened last November by S&P’s ESG evaluation of Air France-KLM, the first public ESG evaluation of an airline.

Air France and SocGen have not unveiled the specifics of the SPTs and the transaction did not have a second-party opinion from an external ESG rating agency, limiting visibility into its finer details, but Ishka understands the SPTs are based on publicly known targets. In terms of fleet renewal, this transaction will, in Sonnallier’s words, “make sure the airline is sticking to its fleet renewal plans,” while the SAF use targets are “consistent” with French and EU SAF blending mandates.

“Where these KPI are met, there is a bonus in terms of margins that we do apply for the financing, which is typical for a sustainability-linked loan,” Sonnallier explains. “What makes a difference with all the, let's call it, ‘Green financing’ [for aircraft] that you've been seeing is that [SocGen’s sustainability-linked loan] is very much designed on precise metrics that are measurable, observable, and which are a reflection of the commitments that Air France has been taking on its decarbonisation path.”

The transaction is supported by a Balthazar non-payment insurance policy provided by a consortium of leading private insurance companies through insurance broker Marsh France.


Rockton plans first sustainable aviation fund


Rockton, a Swedish regional-focused boutique aircraft asset manager, is in the process of launching the industry’s first sustainable aviation fund. The Rockton Sustainable Aviation Fund I (“RSAF-I”) was first announced at the end of last year with plans to close after the Summer of 2022 with a target size up to €200 million ($225 million) distributed in 20 to 30 different investments. The fund aims to reposition Rockton as a player in “aviation 2.0” and away from aircraft with conventional propulsion technologies.

Rockton began divesting from commercial aircraft in 2017. “We couldn't see [the market] going much higher and it takes time to get out and certain assets, especially turboprops,” managing director Niklas Lund tells Ishka. The asset manager’s still diminishing portfolio currently consists of six aircraft – two Bombardier CRJ-1000, two Saab 2000, one Airbus A320, and one Air Tractor Fire Boss (a firefighting aircraft, more details below) – all valued at approximately $37 million.

The other driver of that 2017 decision was an aversion to new conventional aircraft investments. “We didn’t see the risk-reward rations being very balanced,” Lund explains, citing compressing lease rates and a growing sustainability momentum among Swedish corporates inspired them.

“We made up our mind and said: ‘let’s see what we can do with that market [sustainable aviation]’ – so we spent a lot of time digging into the technologies, understanding the players,” Lund recalls. He acknowledges that there are currently “few things on the shelf” for an airline to reduce their greenhouse gas (GHG) emissions, but “the good part is that there are technologies that will come to market in the not-too-distant future.” RSAF-I is designed to start investing in those technologies and assets.

Rockton’s new fund is still in its early stages, but the firm has already closed two investments that will eventually join the fund and is looking at two more currently. One of the closed investments is a “small” equity participation in a hybrid-electric project and the other is a leased Air Tractor AT-802 firefighting aircraft in a Fire Boss configuration on lease to Titan Firefighting Company, S.L. The latter, while not directly involved in reducing GHG, is an investment in climate change mitigation.

The two investments so far represent the two types of investments RSAF-I will focus on: “one is to invest in technology developments – new aspiring OEMs basically, that is by definition higher risk but also higher reward – and on the other hand to invest in hard assets: aircraft that are coming out in the mid-2020s. At that stage, the technology risk is lower because if the aircraft is out there they have gone through certification and they are fulfilling capabilities and performance,” Lund explains.

The fund is not currently aligned with any existing green/sustainable/transition finance framework, but Lund says Rockton is keeping a close eye on market developments on that front, including the upcoming aviation Technical Screening Criteria (TSC) under the EU Taxonomy.


Crianza’s sustainability-linked leases


Crianza’s sustainability-linked operating leases announced last November are an important first milestone for the leasing sector in how it can begin to reward good environmental stewardship by lessees. Unfortunately, the Korean leasing platform has only revealed a limited amount of information on this deal, such as that it involves “certain” Boeing 787 and Airbus A350 aircraft and that it is “believed to be the first Sustainability Linked Operating Leases structured for an airline.”

The lessee is described as a “global airline” with an MSCI ESG rating – which Ishka believes could mean one of around five carriers* that operate both 787 and A350s. A press release shared by Crianza notes that “the transactions are linked to the airline’s MSCI ESG rating, which will undergo periodic review and validation” and that “the Operating Leases include a two-way step-up / step-down pricing mechanism, to incentivize improvements in the airline’s ESG performance and demonstrate commitment to its sustainability strategy.”

Banco Santander acted as the ESG Structurer of the deal.

* Ishka was able to identify 13 airlines with an MSCI ESG rating using Bloomberg BICS Airline data and company searches on MSCI ESG Ratings & Climate Search tool. Of these, only five carriers currently operate Boeing 787 and Airbus A350 aircraft simultaneously: China Eastern, China Southern, Japan Airlines, Singapore Airlines, and Air China.


The Ishka View


Societe Generale’s aircraft-secured sustainability-linked loan with Air France builds on the airline’s ongoing efforts to reduce its environmental impact and is warranted by one of the most ambitious post-pandemic fleet renewal plans among major airlines. It does not, however, set higher decarbonisation targets for the airline, which Sonnallier defends as necessary to ensure the transaction remains “ambitious but credible.” For the bank, it is also an important piece to complement its overall deep involvement in financing SAF production facilities and supporting the energy transition.

As for Rockton’s upcoming RSAF-I fund, many in the industry will observe this closely as a pioneering example of a sustainability fund built entirely around aviation investments. However, it may be a while until there are enough compelling assets and credible projects for something similar to be replicated at a larger scale. Rockton is also in the fortunate position to have the long-term backing of a main investor interested in pivoting to sustainable investments but appreciative of the time required to put together a portfolio like that – something that other asset managers may find hard to replicate.

Avid followers of sustainable aviation finance developments may also recall that Airbus and Air Lease Corporation (ALC) launched a “multi-million-dollar ESG fund initiative” last November to contribute towards investment into sustainable aviation development projects. Aviation Capital Group (ACG) also said that with its December order (although finalised on 14th February) for A220 and A320neo aircraft it will be “supporting” this ESG fund. However, details of this fund remain scant, other that it will be open to “multiple stakeholders from the aircraft leasing and financing community and beyond.”



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