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BoC Aviation soars with Asia’s first aircraft ABS

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By Rev Hui
15 Oct 2015

BoC Aviation has notched up a new landmark for Asia by becoming the first issuer from the region to sell an aircraft leasing ABS. Market observers are buoyed by the landmark transaction and hope it will spur similar deals from Asia and particularly China, writes Rev Hui.

Shenton Aircraft Investment I contains a portfolio of 24 commercial aircrafts, most of which are tier one with long expected remaining useful lives. In fact, the weighted average age of the portfolio is just 4.6 years, which according to a Moody’s pre-sale report is considered young.

Nearly 40% of Fitch-rated aircraft ABS transactions have portfolios that are older than five years. This may reflect the fact that the majority of aircraft leasing ABS deals are from the US. But BoC Aviation broke new ground on October 9 by executing the first deal out of Asia.

Asia_securitization_300pxThe lack of precedents in Asia, coupled with the US market’s deep understanding of aircraft leasing ABS and the broader industry itself, meant it was natural for joint bookrunners Bank of China International, Citi and Goldman Sachs to recommend a Reg S/144A trade — a suggestion that the originator took on board.

“The Asian ABS investor base is generally not deep enough to support trades and since this was a first-time trade, it becomes very important for us to be able to rely on another liquidity pool that understands this type of deal,” said a banker close to the transaction.

The deal was split into two portions with BoC Aviation selling $747.44m worth of class A notes and $60.53m class B notes. They are rated A(sf)/A(sf) and BBB(sf)/BBB(sf), respectively.

In terms of pricing, the class A came at a 4.75% coupon and was sold at 99.04 to yield 5%. The 5.75% class B notes were sold at 99.74 to yield 5.875%. The weighted average life of both notes is 5.8 years.

BNP Paribas, Deutsche Bank and Morgan Staley were co-managers.

Heavy bet on transportation

Now that BoC Aviation has brought Asia’s first aircraft leasing ABS, market participants reckon more will follow.

Speaking at the Asifma Structured Finance Conference 2015 on October 15, Andy Lai, head of Asia Pacific securitization at BNP Paribas, said he is betting heavily on the transportation sector to become more active when it comes to structured finance.

Securitization, he said, is a good way for aircraft leasing companies to free up capital in order to fund aircraft purchases, which is a very cash-heavy activity.

One Hong Kong-based head of structured finance also agreed and pointed out that the potential in Asia, in particular China, is huge. That is because Chinese lenders have been expanding their aircraft leasing business exponentially since they received regulatory approval to do so in 2007.

All of the big four Chinese banks have leasing subsidiaries while other big participants in the market include CDB Leasing and China Aircraft Leasing.

“All of them have huge expansion plans and, most importantly, they are also all keen to expand beyond their domestic market,” he said. “Most of the funding will be obtained through bank loans, but I’m sure a part of that will also come into the debt market, be it conventional bonds or ABS.”

BoC Aviation, for example, sealed an $8.8bn deal with Boeing in August 2014 to purchase 82 aircraft, which will be delivered between 2016 and 2021. The company owns 234 aircraft as of September 30, 2015.

Potential risk

While the potential for aircraft leasing ABS is big in Asia, one Hong Kong-based structured finance analyst said it remains to be seen how interested Asian investors would be. It all goes back to the issue of Asia not having a deep enough ABS investor pool and a lack of understanding of the sector.

Unlike conventional ABS, the analyst pointed out that aircraft leasing ABS is even more complicated due to the cyclical nature of the business.

This means periods of economic downturn are typically marked by a reduction in the asset usage, value and lease rates of the aircraft over time, while investors have to also take into account technological risks. These include things like when a particular aircraft model is likely to be replaced or is declining in value.

In addition, while the originators themselves have good credit ratings, the lessees, on the other hand, do not. The analyst said Asia, in particular, is home to many small budget carriers, which tend to be more at risk when there is an economic downturn.

“The budget carriers tend to be the ones to go bust first when times are bad,” he added. “If that happens, there is a high risk of interruptions to the cash flow since it all depends on how fast the leasing company is able to get hold of its planes and find a place to redeploy them.”  

By Rev Hui
15 Oct 2015