24/08/2016

Stellwagen Capital’s new aviation fund explained

Stellwagen Capital’s new aviation fund explained

Dublin-based Stellwagen Capital (StellCap) is a new subsidiary of holding company Stellwagen Finance Company includes Aviation Finance Company (AFC) and asset manager Seraph Aviation Management. AFC originates and sources loans for airlines and other leasing companies. StellCap is in the market to raise a $1 billion fund in 2016 that will be used to offer financing to lessors and airlines secured against aircraft. The firm states it plans to raise up to $5 billion over the next three years.

 

Return for investors

 

StellCap is presently raising capital for a 10-year $1 billion fund which expects an average return of 8% or 9% for investors on semi-annual distributions. The fund will be on a 10-year basis with investors receiving semi-annual distributions. In addition to fees charged to airlines for the loans the fund also anticipates making a further return of around 2% by trading out its loan portfolio to other investors in the secondary market.

 

Typical terms of the loan

 

All of the loans are secured against an aircraft asset. The range of LTVs on offer depends on the credit level of the airline but should be between 80% - 85%. The loan is paid down straight down for the period of the loan with a balloon payment at the end. Most loans are expected to be between 7 to 10 years - on either a swapped or fixed basis.

 

The fund can offer loans longer than 10 years but these loans would have to be sold on at a later stage to the secondary market as they exceed the term of the fund. Stellwagen Capital loans are distinct from most bank loans by offering larger balloon payments to airlines.

 

“Generally aviation banks don’t want to provide balloon payments but typically they may give up a balloon of about 5% to 10% where we could see ourselves maybe giving a balloon of up to 20% to 25%. It would depend on the credit and the aircraft,” explains Millar. A typical StellCap balloon payment would be somewhere between 40% and 50% of the future market value of the aircraft.   The firm would rely on its own Stellwagen technology to assess the residual risk rather than using market tools such as third-party appraisers. “The reality is that if an aircraft is well maintained, the residual value risk on an aircraft is very, very low.  High residual value risk is a myth perpetrated by the operating lessors,” states Millar.  Margins on the loans vary depending on credit but are likely to be in the region of 350 basis points with upfront fees ranging between 1% and 2%. “We think that the combination of high level of balloon payments and attractive credit structures make this very, very competitive with the operating lease,” adds Millar.

 

If the airlines do not pay the on-going loan payments or if they do not pay the balloon at the end of the loan the group has the capability to repossess aircraft through its asset management platform Seraph. “So we have already the capability to repossess aircraft in every jurisdiction," explains Millar. “We have a very, very experienced asset management team, which again differentiates us from your typical aviation bank, which will have two elements: it will have capital and loan origination, but it won’t have asset management.”

 

Which assets can the fund lend against?

 

At least 85% of the portfolio will be focussed on A320 and 737 aircraft. The fund has the capability as part of the investment criteria to lend to a small portion of A350s or 787s. We look at any asset. We don’t want to rule anything out but we are mainly focussed on A320s and 737s. So the portfolio could be one 787 and 25 short-haul aircraft. There are a whole lot of investment criteria and funds,” explains Millar. “So we can’t commission more than 15% to any one airline, and we can’t have geographic concentration.  The average age on the aircraft can’t be more than 10 years. That does mean we can have some three-year old aircraft, a one-year old, and a 12-year old aircraft.”

 

The fund is strictly focused on lending against aircraft and has no plans to order new aircraft according to Millar.

 

 

Maintenance

 

StellCap will let the airline maintain the aircraft themselves but a weaker credit airline may have to offer maintenance reserves. A standard medium-sized credit would typically not be charged maintenance reserves. Part of the loan agreement is that the fund would need to be updated on the maintenance programme and the aircraft would be subjected to regular inspections to ensure that the asset is being appropriately maintained.

 

“If they don’t maintain the asset they lose their AOC, they are in breach of the loan and we repossess the aircraft. But we will be very active in monitoring. The lack of maintenance doesn’t happen for just one month it happens over a period of time. So that is why it is important to have access to the technical records and complete site inspections of the plane to ensure that everything is up to a high standard.”

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