in Airline trends & analysis , Lessor finances
Friday 8 July 2016
China’s growing leasing ambitions
While there have been several established lessors in the Asian market for a good number of years, 2014 could well be looked back on and seen as a definitive page in the development of global aviation. While ‘Western’ leasing companies have traditionally dominated the global aircraft leasing arena since the inception of the model, Chinese-based financiers in the last few years have turned their attention towards the international aviation leasing market; making announcements - albeit with some false-starts - about new deals, demonstrating their growing ambitions in the aviation industry.
Of course, none of this has evolved naturally, but has been rather deliberate. In 2007, policy decisions from the State Council and action from the China Banking Regulatory Commission (CBRC) encouraged state-owned banks to participate in the sector, resulting in all five state banks, as well as one of the three major ‘policy’ banks, forming new aircraft leasing companies in a space of less than 18 months. In December 2013, the central government again stated its wish for Chinese lessors to become some of the biggest in the world by 2030. Two and a half years later we have already seen the effects.
While the historical trend has been for China-based leasing companies to focus on domestic leasing, reflecting previous regulatory limitations and the availability of the free trade zones (Tianjin, Shanghai, Fujian and Guangdong), Chinese lessors have now become visible in their determined quest for assets with leases attached to foreign airlines as a means to expand their portfolios and to some degree change the rules of the game within industry. Coupled with this, their acquisition of, and investment into, established foreign leasing companies has provided, in some cases, direct access to valuable management experience.
In this article, Ishka aims to provide a summary of the major players – old and new – and to anticipate what the future may hold once the dust has settled.
We begin with Hong Kong-based Cheung Kong, which made a notable entry into the field of play in 2014, with deals totalling to the tune of around $1.89 billion. CK Hutchinson Holdings Ltd, headed by Hong Kong billionaire, Li Ka-shing, entered into an $816 million deal with GECAS to buy 21 aircraft; with BOC Aviation in a $492 million deal for 10 aircraft and with Jackson Square Aviation LLC with a $584.2 million deal to buy 14 aircraft. At the time of purchase, nearly all the aircraft were on lease to airlines for an average six to nine years. Accipiter Holdings is the Dublin-based company Cheung Kong set up to run its leasing business. It reportedly struck a deal to buy 60 aircraft from AWAS before being outbid by Macquarie AirFinance for the portfolio.
Cheung Kong, along with the Li Ka Shing (Overseas) Foundation, also formed a joint venture with MC Aviation Partners Inc. (MCAP) in November 2014, called Vermillion Aviation Services. It saw MCAP transfer to the JV a seed portfolio of 15 aircraft to Vermillion’s Irish entity (Vermillion Aviation Holdings Ireland Limited) and concluded a purchase and leaseback arrangement with Avianca Brasil for new Airbus A320-200 in August 2015. CK is believed to have paid $132 million for its stake in the venture with MCAP. Questions were raised at the time as to whether this JV effectively overlapped with Accipter’s strategy.
Now, moving on to the ‘Big Four’ - Industrial and Commercial Bank of China Ltd., Bank of China (BOC), Agricultural Bank of China (ABC) and China Construction Bank (CCB).
ICBC Leasing had already been on a strong – albeit largely quiet – growth path that has made it one of the larger lessors in the world. It has held an unusually international viewpoint since it was established in November 2007, swiftly adding overseas offices to facilitate its global reach. Its total portfolio is stated at 452 aircraft. It has 17 domestic clients and 34 overseas clients. By 2018, it is expected to corner over 50% of the Chinese market overall, up from 38% in 2013.
BOC Aviation Pte. Ltd was formed in December 2006 when Bank of China took over the established international lessor Singapore Aviation Leasing Enterprise Pte. Ltd. (SALE), offering it a ready-made global presence on a plate. The company became a wholly-owned subsidiary of Bank of China. In May 2016, BOC was converted to a public company, changing its name subtly to BOC Aviation Limited. As part of a spin-off and separate listing by the bank, BOC Aviation listed 27.3% of its total share capital, or 189,724,500 shares, on the main board of the Hong Kong Stock Exchange on 1st June 2016. Beijing Hanguang Investment Corporation holds 2.7%; while Sky Splendor, an indirect wholly-owned subsidiary of Bank of China, holds the remaining 70% stake in BOC Aviation.
Agricultural Bank of China Financial Leasing Co., Ltd. (ABC Financial Leasing) is a wholly-owned subsidiary of the Agricultural Bank of China. Since the late 1970s, the Bank has evolved from a state-owned specialized bank to a wholly state-owned commercial bank and subsequently a state-controlled commercial bank. The Bank was restructured into a joint stock limited liability company in January 2009. It remains focused on the domestic market, and is one of a number of Chinese leasing companies to have ordered the Comac C919.
Established in December 2007, CCB Financial Leasing Corporation Limited (CCBFL) is a wholly-owned subsidiary of China Construction Bank. CCB Leasing International is the primary overseas platform for CCB Leasing's aviation leasing business and established a Dublin office in October 2015, which is responsible for all aircraft leasing business outside of China. It currently has a portfolio of around 35 aircraft, although the company has set its sights at having a fleet of 200 by the end of the decade – which means they will have to be extremely active in the sale and leaseback market or they will have to acquire an existing aircraft portfolio.
CDB Leasing is arguably one of the best known of all the Chinese lessors. The company was formerly known as Shenzhen Finance Leasing Co. Ltd. and changed its name to CDB Leasing Co. Ltd. in May 2008 as the result of China Development Bank increasing its ownership stake to become the controlling shareholder. The company was established in 1984 and is headquartered in Shenzhen, operating as a subsidiary of China Development Bank Corporation, one of the China’s policy banks which is under the direct jurisdiction of the State Council of People’s Republic of China. In 2015, the state-owned bank announced it plans to list the leasing unit on the Hong Kong Stock Exchange (HKSE) with the aim of raising between $759 million and $1.1 billion (deal priced at $799 million in the end). CDB Leasing officially launched its IPO on 21st June 2016 and is expected to begin trading on the HKSE on 11th July 2016. Its prospectus indicated that aircraft leasing accounted for 45 percent of CDB Leasing’s total revenue in 2015.
China Aircraft Leasing Company Limited (CALC) is the largest independent aircraft operating lessor in China, in terms of new aircraft import under lease each year. It was founded in 2006 and is headquartered in Hong Kong. CALC was the first publicly-listed aircraft lessor in Asia, floating on the Hong Kong Stock Exchange on 11th July 2014. It is scheduled to deliver around 17 aircraft in 2016 and increase the fleet to at least 80 aircraft by the end of 2016. Based on the order commitments, the fleet is forecasted to increase to 172 aircraft by the end of 2022. It has plans to expand across Asia even though it presently relies on China for most of its business.
AerDragon Aviation Partners Limited was established in 2006 and was formed as an aircraft leasing joint venture between China Aviation Supplies Holding Company (CAS), AerCap and affiliates of Credit Agricole Corporate & Investment Bank (CACIB). The venture comprises of AerDragon Aviation Partners, based in Shannon, Ireland and Dragon Aviation Leasing, based in Beijing. It currently has 18 aircraft on lease to eight airlines. East Epoch Limited became a new shareholder in May 2013, while increasing its share capital to $268 million. CAS owns a 50% stake, while AerCap, CACIB and Epoch each own an equal remaining share in the company. As an entity, it is a relatively small player in the market.
Established in February 2008, Minsheng Financial Leasing was founded by China Minsheng Banking Corporation Ltd. (CMBC) and Tianjin Port Free Trade Zone Investment Co, Ltd. A now established name in the industry, it has been looking at developing the Hong Kong market; along with Japan, South Korea and Southeast Asia. While it is more known for leasing business aircraft, the lessor has been active in the US market, signing up to a $300 million financing of eight Gulfstream aircraft, using a US Ex-Im Bank guarantee and a Letter of Intent with Boeing for 30 737s (both NG and MAX).
A new aircraft leasing company to launch in 2015 was Astro Aircraft Leasing, although it has yet to announce any deals in the public domain. It has been established by the former Global Head of Aviation Finance and Managing Director of ICBC Leasing, Johnny Lau.
In January 2016, Avolon became a wholly-owned, indirect subsidiary of Bohai Leasing (formerly known as Xinjiang Huitong (Group) Co., Ltd), which is a majority controlled subsidiary of the HNA Group. The deal priced the publicly listed Irish lessor at $31 per share, representing a purchase price of about $2.6 billion. The transaction is reportedly to have a total enterprise value of approximately $7.6 billion. Avolon, which was only established in May 2010, is now the core aircraft leasing brand for Bohai Leasing, and also assumed management of the Hong Kong Aviation Capital (HKAC) business – an existing Bohai subsidiary.
HKAC itself was formed by the HNA Group in January 2010 following its purchase of the aviation division of Allco Finance Group, after the Australian company went into administrative receivership in 2008. Bohai Leasing acquired a majority shareholding in HKAC from the HNA Group in 2012.
Also sitting under the HNA umbrella is Changjiang Leasing Co. (formed in 2000), Yangtze River International Leasing Co. Ltd. (formed in 2003) and Hong Kong International Leasing Co. (formed in 2007).
Avolon’s owned, managed and committed fleet is now in the order of 400 aircraft, which combined together with HNA Group and Bohai’s other aircraft leasing interests, comprises of a total fleet of more than 500 aircraft – which would now rank it as the world’s fourth largest aircraft leasing business by asset value.
Bohai Leasing's purchase of Avolon is not only the largest aviation deal in China so far, but is also marks the first time a Chinese lessor has succeeded in taking over a Western one. In 2012, an ambitious attempt by a private Chinese consortium to acquire ILFC for $4.8 billion failed to come to fruition. The US-based lessor was later acquired by AerCap in 2014.
Also in the race to purchase Avolon was AVIC Capital Co. Ltd. - the financing arm of Aviation Industry Corporation of China, a Chinese state-owned aerospace and defence company. It had bid, along with and its parent China Investment Corp - the Chinese sovereign wealth fund - for a 51% bid for Avolon but ended talks during 2014, when the parties could not come to an agreement. Avolon then progressed with its IPO at $20 per share in December 2014. Under AVIC Capital Co. is AVIC International Leasing, which leases out primarily Chinese-manufactured aircraft to Chinese carriers. It has also grown a portfolio of around 50 western built aircraft, utilising export credit financing for a lot of the transactions.
Hong Kong has been very open about its intention to become more of a rival to Singapore and Ireland and it has recently introduced withholding tax reductions aimed at establishing the city as an aircraft leasing and financial hub. Designed to make the city more desirable and competitive, tax on Hong Kong-PRC transactions has been reduced from 7% to 5% meaning the Hong Kong based lessors can now offer more attractive rates to PRC airlines.
Cheng Yu-Tung is such a case in point. Hong Kong’s fourth richest man has, via Chow Tai Fook Enterprises Ltd. and NWS Holdings Ltd. invested in start-up Goshawk Aviation, a joint venture formed in late 2013 with Investec Bank. Having secured a $605 million non-recourse secured loan facility in July 2015, the Dublin-based lessor has recently ramped up staff numbers and will be a name to watch in 2016.
Other mainland-based smaller players worth a mention are Bank of Communications Financial Leasing (or BoCom Leasing) – established in 2007 and headquartered in Shanghai. It has established JY Aviation Leasing as its Dublin-based leasing subsidiary. China Aviation Supplies Holding Company (CASGC) was established in October 2002 and is one of six holding companies of the China Civil Aviation Administration. It offers operating lease as part of it wider business. China International Aviation Leasing Services Limited (CALS) is a specialist aircraft leasing company headquartered in Shanghai. Established in 2012, the company provides domestic leasing services.
There are also reports that Rongzhong International Financial Leasing formed an aviation leasing division in March 2015. With it majority shareholding held by Goldbond Group Holdings Ltd., Rongzhong was established in 2008 and based in Wuhan; it was the first wholly foreign owned finance leasing company founded in Hubei Province. Little more is known about any aviation activity it has been involved with.
Another name to watch going forward is the Shanghai-based aviation division of Ping An International Financial Leasing, which was formed in 2012; and is a wholly owned subsidiary of Ping An Insurance Group – the largest non-state company in China. In addition to a sizeable order of COMAC aircraft made in June 2015 this new entrant is due to expand its portfolio with the arrival of reportedly 30 Boeing and Airbus aircraft via sale and lease back transactions. It also established an Irish subsidiary (Ping An Aircraft Leasing Company Ltd.) in September 2015 and is currently building up a Dublin-based team.
Finally, at the time of writing, CIT Group is in the process of selling its aircraft-leasing business, CIT Aerospace, having initially revealed its intention to do so in November 2015. Reports suggest that more than a dozen entities have asked to be considered for bidding, which includes Chinese and Japanese leasing companies, plus some global pension funds and insurers. CIT’s leasing arm owns more than 350 aircraft with asset valued at around $11 billion, although the estimates of the final price for the lessor range between $3 billion and $4 billion. The first round of bids was due in towards the end of June 2016. The outcome of this contest could change the landscape again over the latter part of 2016.
The Ishka View
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