04/09/2019

FLY chief on the hunt for the next AirAsia ‘type deal’

FLY chief on the hunt for the next AirAsia ‘type deal’

FLY Leasing CEO, Colm Barrington, says that the lessor will be looking for a second AirAsia “type deal” when asked by Ishka about the lessor’s long-term growth plans. The leasing chief says FLY has $2 billion to spend to acquire more aircraft assets but appeared to rule out the possibility of placing a forward order.

“We are looking for more transactions of a similar type,” confirms Barrington. “As you know, we are not believers in forward orders from the manufacturers, been there, done that. I think it’s fine for big [leasing] companies with strong parent companies, but I think it’s a risky strategy for independent companies, especially smaller ones. And the exposure to new orders that some of the public leasing companies have taken on, and even some private leasing companies, is a bit risky, frankly.”

Last year FLY acquired 55 Airbus narrowbody aircraft on lease to AirAsia Group airlines. The deal was part of a larger transaction in which FLY and BBAM partners Nomura Babcock & Brown and Incline B Aviation Ltd Partnership agreed to acquire 132 aircraft from AirAsia and its leasing subsidiary Asia Aviation Capital (see Insight: 'FLY Leasing takes $1.1 billion AirAsia portfolio ‘bet’').

The portfolio acquisition has had a positive impact on FLY’s top line credit metrics, with both total revenues and operating lease rentals increasing by 18% and 16%, respectively (see Insight: 'Fly Leasing reaps rewards with AirAsia bet').  

Barrington confirms that FLY is looking for popular narrowbodies but says he is sceptical of a forward order strategy because of the competition he believes lessors could face from OEMs. He argues it is “difficult” for leasing companies to compete against manufacturers and claims that one reason why MAX lease rates were depressed was because Boeing “probably sold too many [MAX aircraft] to leasing companies.”

The reluctance to place forward orders raises questions about how many of the 20 A320neos options FLY acquired as part of the AirAsia transaction will be exercised. The lessor passed up on three of the aircraft earlier this year but in the recent Q2 earnings call Barrington added that FLY intends to exercise eight of the options. “And then we'll reassess the situation, we might exercise more. But you can imagine, given the MAX situation, there's quite a bit of pent up demand for NEOs. So, we think it's a good time to exercise them,” explained Barrington.

 

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As part of the AirAsia deal FLY is set to receive an additional 21 A320neo family aircraft on sale-leaseback by 2022 on 12-year leases. The first two aircraft will deliver this year followed by nine more aircraft in 2020, a further nine in 2021, with the last two aircraft expected in  2022.

 

Sale/leasebacks market eases


FLY may be reluctant to place an aircraft order but Barrington argues that the lack of forward orders has freed up FLY to be able to be more “aggressive” than some of its rival lessors with either existing aircraft or near-term orders in pursuing sale/leaseback transactions. He also adds that the current leasing and sale/leaseback market appears to be easing.

“There is certainly an improvement in the sale/leaseback market from the lessors’ point of view,” confirms Barrington. “We are seeing some higher monthly lease rate factors than before. We certainly would never have gone near anything like 0.5% or 0.6% or even 0.7%. So we are looking at possibilities which are a little bit above that now and, hopefully, we’ll be able to pin some of those down over the coming months.”

Ishka notes what appears to be a dramatic improvement in reported lease rate factors. Financiers at Ishka’s Dublin conference said that lease rate factors have remained flat, with several lessors citing LRFs being between high 0.5s and 0.6s for new technology narrowbodies. But Barrington echoes other lessor CEOs when he argues that sale-leaseback LRFs may be picking up (see Insight: 'Lessor CEOs: hitting the bottom of the sale/leaseback market').

“I think those 0.5% monthly lease rate factors were probably one-offs - or maybe even just anecdotal - where somebody was mad keen to do a particular deal,” muses Barrington. “I don’t think there are a lot of them at those rates, but certainly there were deals at less than 0.7%, and that wasn’t a lease rate factor that is very attractive to us.”

FLY may be planning on acquiring aircraft but the lessor also recently sold a portfolio of 12 aircraft comprising of Airbus A320s and Boeing 737s with an average age of eight years. Ishka understands that the portfolio is set to be sold into an ABS to be arranged by BBAM. FLY expects the sale to generate in excess of $125 million. 

FLY is eyeing the ABS market for opportunities and appears to be poised to use BBAM as the designated servicer for any portfolio/issuance.  Barrington adds that there is a “wall of money” which is helping stimulate the ABS market. BBAM has already done three ABS deals (see Insight: 'BBAM returns to the ABS market with Horizon II') and the recent portfolio sale is an indication the asset manager is likely prepping a fourth.

 

Keeping it secured

 

Trading aircraft from the AirAsia portfolio acquisition has helped FLY delever its capital structure (see Insight: 'Fly boasts bumper Q2 quarterly results') but FLY still has one of the highest proportions of secured debt among the top global lessors. Around 80% of its overall debt burden remains in the secured market. Ratings agencies have typically favoured more unsecured debt for lessors. 

Does FLY have ambition to do more unsecured bonds? “We continue to be comfortable with the majority of our debt being secured,” explains Barrington as he explains that the unsecured bond lessor is more expensive for non-investment grade lessors. He argues that the long history of BBAM means that the lessor has been able to negotiate flexible terms and argues that the secured market has “held up very steadily during all the financial crises.” “It’s relatively long term, it’s normally amortising so you don’t have the big bullets that you might have with unsecured debt, and while it is a little bit more expensive in some cases, we’ve certainly found that it’s been attractive for us.”

 

FLY Leasing's Income Statement
Summary financials for the year ending 31-Dec-18 31-Dec-17 31-Dec-16
Revenues (USDm) 414 352 343
Increase/Decrease 17.6% 2.6% NA
EBITDA margin 91.8% 90.6% 90.6%
EBIT margin 57% 52.7% 55.4%
Net profit margin 20.7% 0.7% -8.5%
EBITDA to Interest Expenses 2.6x 2.5x 2.5x
Source: FLY Leasing

FLY Leasing's Balance Sheet
Summary balance sheet for the year ending 31-Dec-18 31-Dec-17 31-Dec-16
Cash as % of total revenues 43.6% 93.6% 151.1%
No. of months unrestricted cash to cover operating expenses 64 months 119 months 192 months
Balance sheet debt (USDm) 2,998 2,646 2,523
Net debt (USDm) 2,817 2,316 2,005
Stockholders' equity (deficit) (USDm) 702 544 593
Net debt/EBITDA 7.4x 7.3x 6.5x
Net debt/Equity 4.0x 4.3x 3.4x
Net debt to Capital 80.1% 81.0% 77.2%
Annualised average interest rate (est.) 4.8% 4.8% 4.9%
Secured debt as a percentage of total balance sheet debt 79.4% 76.7% 80.4%
Source: FLY Leasing

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The Ishka View

 

As Ishka has noted before, the AirAsia portfolio acquisition has been a net win for FLY in terms of revenue growth and trading gains, which has helped lower its leverage (see Insight: 'FLY boasts bumper Q2 quarterly results'). The lessor has been busy incorporating the AirAsia aircraft into its current portfolio while FLY has been successful in its disposals. Whether FLY will exercise more of the AirAsia A320neo options remains to be seen, but the lessor does seem reluctant to attach itself to speculative orders.

FLY has stated its interest in acquiring another AirAsia “type” portfolio. The firm may have an advantage compared to some other lessors. The AirAsia portfolio was split between three sources of capital within the BBAM group: FLY, BBAM and Incline Capital which helped ease credit concentration levels for FLY. This corporate structure also allows BBAM to more easily acquire other large leased portfolios. The only question is how many more AirAsia opportunities may be out there.  

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