Ishka World Tour: Institutional investor appetite ‘steadies’ for new aviation deals

Investors and fund managers speaking at the Ishka World Tour stated that investor appetite for new aviation debt is “steadying” despite the risks imposed on the sector from the Covid-19 crisis. Several investors argued that aviation retained its “relative value” appeal, offering institutional investors higher returns compared to other sectors.

Infrastructure has proven quite “resilient” in the crisis, stated the fund manager, with pricing remaining relatively tight. In contrast, aviation is gaining “more traction” with European insurance and pensions funds thanks to the promise of higher returns.

One aviation debt fund manager stated that many of the institutional investors exploring deals now have had limited exposure to the sector. Several investors that had previously invested in aviation have been busy managing their existing portfolio, he explained, while there are several groups of new investors which had been  “waiting in the sidelines” and were “underweight” in the sector. These investors are looking at new opportunities and being more “aggressive” in their demands for structures.

One investor stated that unlike other transportation hard asset classes like shipping or rail, aviation still had a “long road to recovery ahead of it”. Some are still waiting to see what that recovery will look like, but one US investor argues that now is the time to invest as returns will be higher while there remains a significant degree of uncertainty in the sector. But he added that investors needed to also price in  “a realistic probability of a default”  because of the challenges facing commercial aviation, especially when so few airlines have a viable business model to tackle the current crisis and are reliant on some form of capital injection.  Ishka reported previously that many investors struggled to find opportunities in the sector in 2018 or 2019 that met their yield requirements because of the abundant liquidity available to airlines and lessors (see Insight: Impatient capital: Frustrated funds search for leased aircraft).

“There are many interesting opportunities right now and the relative value might have actually increased compared to the last two or three peak years – where the industry constantly talked about the bubble and when and if it will burst,” explained Christian Wolff, a director at Helaba. “No one could foresee that it would be Covid but there was certainly a feeling that there was going to be a correction."

 

Public debt opportunities

 

Aviation debt investors were offered varied bond opportunities over the summer, backed by a wider range of collateral. Aviation debt remains in “high demand” in the US capital markets, explained one institutional investor at the Ishka World Tour commenting on airline and lessor bonds. “It’s really just a function of the fact that there are few other places to find yield. So even despite macro volatility in recent weeks we continue to see spreads flat to generally tighten, and credit curves continued to flatten as well.”

US airlines have raised billions since the start of the crisis with a range of secured bonds, some of which have used loyalty programmes as collateral by carriers like United and Delta. United’s loyalty programme was described as an “essential” and “core” part of the airline’s business in a separate panel at the conference which highlighted that the deal was oversubscribed. A few days later United also successfully issued the $3 billion United Airline Series EETC 2020-1 backed by 99 spare engines and 352 aircraft.

Investors at the conference also discussed appetite for unsecured aircraft lessor bonds arguing that possible downgrades from aircraft impairments had been “well priced in.” Investors also noted that the larger leasing platforms remained attractive from a relative risk point of view, as a liquidity event was “less likely” and many lessors had a large unencumbered asset base which acted as a liquidity “cushion”.  

Another panel noted that the public lessors were receiving a much more favourable reception from the debt markets than the equity markets, where the stock prices for the US-listed lessors remained low even assuming heavily-discounted book values. But one panellist stated that many of the large lessors still retained a potential refinancing risk in the next few years as many had chosen to fund “long-dated assets” with unsecured shorter-term debt.

 

Private placement opportunities
 

One of the best recent investment opportunities, explained two investors, has been in the private placement market. Aviation banks have “pulled back,” explained one investor, in terms of the number of new deals, creating a gap in the financing market even for some of the better credits. Many banks appear to be focusing on existing clients, confirmed one debt fund manager.

This has created an opportunity, added the investor, to fund new sale/leasebacks privately. The benefit is that many of the underlying airlines seeking to raise additional liquidity via lessors and asset managers are top-tier credits.

Institutional investors can also offer lessors, and asset-managers, long term financing often with tenors even exceeding those currently found in the bank market where some institutions have been favouring shorter tenors. But one investor admitted that many new deals agreed today are likely to be refinanced early as lessors seek to reduce financing costs. Covid-19 has also changed how banks and investors assess new transactions, explained panellists, as potential investors are placing greater emphasis on the credit quality of the underlying airlines rather than the appeal of the asset.

 

The Ishka View

 

Commercial aviation is still struggling but investors appear to be closer to deploying capital as they search for better risk-adjusted returns. In general, Ishka notes a general growth in appetite among investors for aviation. The recent tighter pricing for many of the senior aircraft ABS notes in the secondary market is a good example of this, and asset managers state that there are more queries from investors about opportunities generally in the sector (see Insight: 'Rising airline debt margins attract hedge fund interest').

Like lessors and banks, there has been a flight to quality from investors, many of whom are increasingly selective on credits when discussing ABS portfolios, but also when examining private placements to fund new SLBs. Ultimately, as another investor pointed out, aircraft asset prices will only recover once there is more financing back available to facilitate trading.  Private placement debt investors are unlikely to fully replace bank capacity in this regard but any additional liquidity is welcome now by existing players.  

Comments:

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