More consolidation in the leasing market

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By TESTCustomwebLP TESTCustomwebLP September 17, 2015 19:29

More consolidation in the leasing market

As reports circulate in the media that a bid has been made by one aircraft lessor to purchase another, it seems further consolidation in this space is coming. Although none of the speculation reported by other media channels can as yet be confirmed by any of the parties concerned, the news has the industry talking. Any sale follows on the heels of Avolon’s stake sale to Bohai Leasing, which has had a substantial effect on the sector. Avolon’s IPO and stake sale has effectively repriced the sector and regenerated interest in the US dollar denominated cashflows of the aircraft leasing business. Avolon with its 1.6x book value sale to Bohai Leasing at $31 a share has increased the value of all aircraft lessors across the globe. As bidders come forward for other companies, it will be interesting to see if Avolon’s deal ramps up their sale price, or if more savvy bidders may keep their pre-Avolon heads on and lock down valuations to enable immediate gains. We will continue to investigate.

Book value and real value of asset portfolios are far removed from each other and now on top of that a trend may be developing where aircraft lessors are being valued at more like 3x real book value. As new generation aircraft come into service, the tailing off of those residual values will widen this gulf further and faster and that means lessors will have to keep ordering new aircraft and keep turning over the portfolio selling off older aircraft as new aircraft are delivered. The continuous carousel of aircraft leasing cannot lose in the long term if well managed. Indeed global events have proved that aircraft leasing can weather massive shocks such as 9/11, SARS, the Global Financial Crisis and $140 a barrel oil prices, and in-fact turn them to their advantage. Aircraft leasing has grown through all of these events, albeit with the assistance of ultra-low interest rates, but most leading lessors have interest rate swaps and other such hedges built-into their portfolio(s) so even a shock rise in interest rates will have little effect on most leading lessors. Yes, the aircraft leasing sector is booming.

Turning away from speculation and possible ramifications from any potential deal(s), we should mention the feedback loop. As new lessors enter the market and expand rapidly, in the process absorbing portfolios from established lessors, it should be asked: Is the feedback loop now being broken? The fact is that the majority of new lessors are appearing where the majority of new airline start-ups are (as you would expect), in China. When a new Chinese lessor purchases a company outright and with its intellectual knowledge, they are in effect maintaining the feedback loop. But new entrants into the aircraft leasing market that do not have the long-standing in-house predictive tools and which have had difficulty building a leading team of aircraft lessor staff that have been through the cycle with aircraft portfolios a few times, have, in effect no feedback loop – no way to take information from the past cycles and apply the same to an existing portfolio in order to forecast a way forward. So should we be worried about the breaks in the feedback loop that are now showing in the market? That is a serious question.

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By TESTCustomwebLP TESTCustomwebLP September 17, 2015 19:29