FULL INTERVIEW: Zephyrus Aviation Capital issues ABS

By victoria@aviationnews-online.com September 28, 2018 00:33

FULL INTERVIEW: Zephyrus Aviation Capital issues ABS

The market has become attuned to new aircraft leasing companies and equity entering the market but rarely do they make a splash as big as Zephyrus Aviation Capital. Like the Greek god of the west wind, the company has stormed onto the market with heavy weight backers and senior management to secure the purchase of a 21-aircraft portfolio – comprised of mostly narrowbodies and a few widebodies bought from a single seller – which it is refinancing into the capital markets with an aviation asset backed securitisation (ABS).

For a run-of-the-mill start-up leasing company, launching a company by issuing an ABS would be an almost impossible feat. However, this company is spearheaded by the old team from CIT Commercial Aerospace. Damon D’Agostino, who was formerly chief commercial officer at CIT Aerospace, is the president and CEO of Zephyrus Aviation Capital; Tony Diaz, formerly the president at CIT Aerospace, is the non-executive chairman, Robert Meade, who was the head of marketing strategy, is the chief commercial officer, with Richard Genge, who provided marketing coverage as well as optionality analysis while at CIT, is now vice president. The weight of experience in the company is more than sufficient to provide comfort to investors of their ability and skill for managing aircraft assets.

Having left CIT Aerospace after a short transitionary period following its sale to Avolon in 2017, D’Agostino took some time to assess the opportunities for his next career move. “I used that time to process where I felt the industry was going and where the smart space to land would be,” he says. “I deduced that the new aircraft space is too crowded and requires a super low cost of capital to be competitive, and at the moment too many deals are being done by new companies seeking to build a book and a brand name. The next step from that is the nearly-new aircraft space but, in my mind, that too seems busy, overbought and highly competitive. So I landed on the older and end of life aircraft sector, which plays to my skills set.”

CIT Aerospace’s portfolio was slightly on the older side since it had been investing in new aircraft since 1998 and commercial aircraft in general since the early 1980s, so the team had a lot of experience in dealing with older aircraft from a large lessor perspective. Although that market sector too is competitive, D’Agostino describes the players there as “rational”.

Unbeknown to D’Agostino, his former CIT colleagues were going through the same mental process of assessing their next steps in the industry, which eventually brought the four people together. These individuals formed a team and also got connected with Seabury Capital, which was also evaluating the mid-to-late life leasing space.

Tony Diaz, who had a 20 year relationship with principals at Virgo Investment Group and had joined the firm as an operating partner in 2017, introduced D’Agostino and team to Virgo, which at the time was looking to expand its aviation investment business that has been active since 2012. That introduction resulted in a formal partnership between this former CIT Aerospace team and Virgo via Zephyrus Aviation Capital.
“Tony played matchmaker,” says D’Agostino, “after he saw the obvious synergies between Virgo and our team. Virgo has made a sizeable capital commitment into Zephyrus that has allowed the team to acquire the initial portfolio but it also gives us the room to grow, while Seabury is a minority equity partner as well. When you look at the strength and experience of the parties, we knew that we could add value to airlines, lessors and other industry constituents and be a force in the market.”

He adds: “For the past year, we have been working on assessing various portfolios and we recently signed purchase agreements for an initial portfolio of 21 airplanes, and built out a fully functioning platform. We have closed on the debt facility for this portfolio, and the equity is backed by funds managed by Virgo.”

Seabury Capital acted as sole advisor to Zephyrus for the initial portfolio acquisition.

Today, the team has a portfolio locked down and is working through the novations and closing of those aircraft acquisitions but the truly unique aspect to this deal is the move to refinance the debt immediately in the capital markets.

“As we started going through the debt process, we realized that the ABS market is very attractive right now so we have opted to issue an ABS right after closing the portfolio acquisition,” confirms D’Agostino. “I won’t lie, it’s a lot at one time. We’re expanding a business, closing on a portfolio of aircraft and working on the ABS all at the same time. Even one of those streams is a full day’s work on its own.”

Deutsche Bank is leading the ABS deal and Zephyrus will remain as the servicer. “Virgo is a long-term equity investor in the portfolio and platform,” he says. “Virgo wants to build its presence and a true platform in this space; it is not just looking to flip the investment through tradeable E notes. On the platform, that’s why they’re putting enough initial equity behind the company that will allow us to grow to 60-75 aircraft over the next 12-18 months.”

Zephyrus is also planning to underlever the ABS, which will retain a sustainable level of equity, and the debt is being issued as a single A tranche only.

Zephyrus Capital Aviation Partners 2018-1 ABS is a single A tranche of loans due 2038 totaling $336.6 million. The loans have been rated A by Standard & Poor’s and A Kroll Bond Rating Agency; and have a loan to value ratio of 74.04%, with a 4.556% coupon, according to S&P and 68.3% LTV as per Kroll’s calculations. The loans amortise on a 10-year straight-line schedule with a 50% cash sweep in years six and seven of the transaction.

On the closing date, the loan proceeds will be used to pay for the purchase price for the aircraft portfolio during the 270-day purchase period, provided that up to 30% of the aircraft (by appraised value) will be permitted to be purchased up to 360 days after the closing date.

The 18 narrowbody aircraft and three widebody aircraft portfolio comprises 10 A320 family (three of which are A319 aircraft), three A330 family, and eight B737-NG planes. The 21 aircraft have a weighted average age of approximately 13.3 years. Currently, all of the aircraft are leased to 19 airlines worldwide with a 2.9-year weighted average remaining lease maturity.

Deutsche Bank is the sole structuring agent and lead arranger. DVB is the liquidity facility provided. Canyon Financial Services is the managing agent. UMB Bank is the facility agent, security trustee and operating bank. As mentioned, Zephyrus will remain as the servicer.

“Deutsche Bank has been in discussions with the team for nearly a year, working on various ideas that would assist Zephyrus in efficiently establishing its platform and financing,” says Michael Halaby, Head of Aviation Debt Origination at Deutsche Bank. “Given the ‘dream team’ of Zephyrus, Seabury and Virgo, Deutsche Bank was keen to work with them in light of their strategy, individual strengths and previous experience.”

“Given the timing of the portfolio sale, our recommendation was to quickly put in place a bridge to ensure the financing was immediately available and then to term out the financing into the ABS markets in which we continue to see strong demand for credits,” Halaby added.

The investor roadshow was a positive endorsement for the company. “The reaction has been really positive,” says D’Agostino. “We always knew we had a great reputation at CIT but by talking to our former airline customers that really shined through. What we did and accomplished at CIT really gave us a lot of credibility and respect. The investor feedback has been very good. If you look at what our track record was over the last decade as an example, we were transitioning on average, 35 used aircraft a year. In some of the peak years, we had 50. We were doing that on top of new airplanes, on top of sale leasebacks, and a lot of different things. We were holding about just under 100% utilization including defaults and restructuring and everything else. When you have that kind of story that you can tell and you’ve got that sort of credibility in the team, it really does make a difference.”

Looking ahead, Zephyrus is already evaluating more portfolio acquisitions but it is not averse to acquiring single aircraft deals through lessors as well as airlines. Despite the competition in this space of the market, unlike some companies, the team have the necessary skill set and true “metal” knowledge and experience to be able to function effectively.

“We’re metal people,” he says. “We were inside a financial organisation at CIT, but we are all aircraft asset people. That really helps when you’re looking at older assets. They’re higher touch and you’ve got to have the expertise.”

The demand for new aircraft is a concern for the team and a reason why it didn’t feel like the right time to re-enter that space but the real problem for manufacturers is supplier issues, according to D’Agostino, which he says will impact production rate increases. The rising cost of fuel, however, is less of a concern.

“The fuel price has risen but when the Neo and the Max programmes were launched, the price was higher still and destined to go higher,” he says. “Today, the price is in the low $70 per barrel, which means that used aircraft, with their lower capital costs are still favorable versus a new aircraft.” He points to the recent decision by American Airlines to defer some new aircraft orders to keep their NG aircraft flying longer.

Interest rates too are a concern for new aircraft purchases. “Rising interest rates make new airplanes much more expensive, which also helps the used airplane market,” he says. “There are many different factors to it rather than just fuel, which I think still paints up a robust picture for mid-to-later-life aircraft. I really like where we are!”

By victoria@aviationnews-online.com September 28, 2018 00:33