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Can Asset Values Defy Gravity?
The questions swirling about the aircraft financial markets focus on ILFC's position and include: (a) is ILFC well insulated from AIG risk (b) how much is ILFC worth and (c) does the lessor fund long or short! Looking at the overall picture the answers are mixed!!
ILFC's 424B filings with the SEC, indicate that the lessor's interest rates on debt increased from 3.85% in January 2008 to 8.4% in August. The company expect to finance purchases of $17.6Bn covering 179 aircraft throught to 2018. Third party valuations for ILFC range from a low of $2Bn to $5Bn and a high of $7Bn to $10Bn based on a portfolio of 974 aircraf.
Asset values:
Following on the heels of the mortgage crisis starting in ’06, the credit crisis in ’07 and the oil price/commodities crisis in ‘08 asset values globally have fallen 40% plus. Can it be possible that aircraft assets are immune from this trend?
Babcock & Brown:
According to WSJ (Tuesday, September 16, 2008, B4) the Babcock & Brown restructuring "is effectively a partial liquidation involving asset sales, staff reductions and a winding back of the firm's businesses, real estate and operating leasing, areas it sees as core competencies". The stock was at the equivalent of $1.30 on the 15th of September, down 94% since the start of the year and 30% since the 13th.
Babcock & Brown has more than 200 aircraft under asset management contracts for investors!
COMMENT:
ILFC in the center of the AIG storm, Babcock& Brown and ALLCO are focused on restructuring, Lehman's has declared Chapter 11, more than 20 airlines have gone out of business suggesting hard times ahead as the summer peak season winds down.
AviationRegister E-Xpert Witness Journal
Lessors
face challenges
as the
credit crunch
bites hard.
Cerberus, the hedge fund owner of auto manufacturer Chrysler and aircraft lessor Aerfi, is to apply for U.S. a government financial invection. Cerberus is to convert to a regulated bank holding company.
Federal Reserve reduced the fed-funds rate on fears of recession rather than focus on low inflation at bay.
Fed-funds rate is projected to fall to 1% by the end of October.
Fed-funds rate, the interest rate banks charge each other overnight, is down from 5.25% to 1% in 12 months.
GE sells $3bn-$6bn 10%-preferred equity to Berkshire Hathaway on investor concerns over GE Capital.
GE to sell a minimum of $12Bn in ordinary stock to investors in addition to Berkshire Hathay,
Berkshire Hathaway to receive $300M in annual dividends on the first $3BN GE traunch.
Berkshire Hathaway has the right to buy $300M in GE common stock at $22.25 for 5 years.
GE Capitals accounts for almost 50% of GE earnings.
GE stock is down 35% in 2008.
GE/Berkshire Hathaway share deal dilutes existing investor holding by 6% .
ALLCo (Australia) and a major aircraft lessor, takes heavy write downs due to its exposure to toxic U.S. real estate securities.
Babcock & Brown is selling non-aviation assets in an effort to support its stock.
CIT undertook a shift in its core business in March 2008, following a major write down and sale of its real estate poirtfolio.
ILFC caught in the middle of the AIG meltdown is now effectively controlled by the U.S. Treasury!
Boeing Capital parent is the subject of a prolonged strike at its Boeing Airplane division.
GE
Looks for
Additional Capital
GE Capital's leverage (ratio of debt to equity) is about 7:1 compared to investment banks such as Goldman Sachs and Morgan Stanley whose liquidity rations are above 20:1. GE Capital borrows an estimated $97 billion short term commercial paper at low short term rates and lends at high interest rates for long terms to a variety of businesses including the aircraft industry. In late September and early October 2008, GE went in search of fresh capital because the credit markets had dried up, the cost of credit-default swaps on GE Capital debt rose sharply and because of GE's heavy reliance on short term borrowings to funds its day to day operations. GE's borrowing costs rose as a result. The cost of commercial paper rocketed almost 100% from a figure close to the 2% Fed-funds rate to almost 4%. The $3 billion to $6 billion purchase of GE preferred shares by Berkshire Hathaway will cost GE 10% p.a. over five years and that cost will eventually have to be passed on to GE customers.
October 25, 2008
GE struggling to banance its financial mix
Trade industry media sources are reporting that GE Capital and by extension GECAS is way over leveraged - when did you ever think you would hear that proposition! As goes GECAS so goes the aircraft trading industry!
The the "amazing" announcement by the Federal Reserve this morning that they are getting calls for financial help from lots of industries and that Treasury is willing to provide aid. It sounds very much like the end of U.S. Reaganomics/ Laissez-faire politicians as we know it including such political ideas as:
1)reduce the growth of government spending - financial markets can't survive without Government aid these days!
reduce the growth of government spending - financial markets can't survive without Government aid these days!2)reduce marginal tax rates on income from labor and capital - nice idea buy the top 2% held on to gains, invested it in exotic
reduce marginal tax rates on income from labor and capital - nice idea buy the top 2% held on to gains, invested it in exotic financial instruments it and didn't trickle down the gains!! 3)reduce government regulation of the economy - Deregulation proved to be one of the biggest errots since the Depression
reduce government regulation of the economy - Deregulation proved to be one of the biggest errots since the Depression4)control the money supply to reduce inflation - 180 degree reversal, Governments are now having to print money to stave off
control the money supply to reduce inflation - 180 degree reversal, Governments are now having to print money to stave off global economic failure - and stave off political failure!5)Laissez-faire politicians and economists advocated minimal state intervention in the economy.
Laissez-faire politicians and economists advocated minimal state intervention in the economy. History is repeating itself when it comes to the failure of Laissez-faire politics. The British Government laissez-faire economic policy between 1815 and 1846 led directly to economic and social dislocation because the then British Government's political doctrine relied on the notion that private initiative and production are best. They introduced laws whereby economic interventionism and taxation by the State beyond what was necessary to maintain property rights, individual liberty, peace and security were kept to a minimum (Where have we heard that lately!!). Today countries such as Argentina, Haiti, Zimbabwe and a host of poor small countries today where people lack nutrition as agricultural production is exported! Economic policy today is being enforced by the IMF and World Bank boased on policies firmly founded in the notion that laissez-faire economic policies be followed or not loans would be forthcoming!!
Could it ratchet up to hit wealthy economies? - Hopefully not but that carries a heavy price that countries such as Brazil, Iceland, Hungary, Russia and the Ukraine are already learning. Starting last September everyone you know started to pay the price? As a guide rule figure your assets today (only two months later!) are worth 20% to 30% less than they were worth in September! Going forward hard assets are unlikely to recover in value for three to ten years, tax bill at local, state and federal levels will balloon and our incomes will shrink in value.
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January 2010
Allco Aviation (Sub. of Allco Finance Group, Australia, in bankruptcy) the aviation assets and business have been taken over by Hong Kong Aviation.
November 2009
ILFC (Owned by AIG) unsecured debt is cut to B1 junk status by Moody's because AIG may cut off funding in 2010. www.twitter.com/avreg
ILFC: Is (was) the premium aircraft lessor with the largest, most balanced portfolio and best management in the industry.
ILFC got a $2B loan from AIG drawn from TARP funds in October to help repay retiring debts.
ILFC is Airbus and Boeing’s biggest customer and a key player in the A320 and B737 leasing market.
AIG has used cash from the $182.3B TARP funds to refinance ILFC, because its usual credit sources were cut off after earlier downgrades.
AIG remains committed to supporting ILFC through Nov. 15, 2010.
ILFC commitment is to the extent that asset sales, securitizations, and trades are not sufficient to meet its liquidity
needs.
Aircastle Limited has placed six new A330-200s (Rolls-Royce Trent 772B) on long-term leases with South African Airways from 2011.
Aircastle now has 11 of the 12 new A330s it ordered committed for lease.
Aircastle has one new A330 aircraft scheduled for delivery in May 2012 and is actively marketing it for lease.
Aircastle is poised to pursue growth opportunities actively in 2010 and beyond by leveraging its conservative capital structure
Aircastle has 128 aircraft in its portfolio on lease to 60 airlines in 34 countries.
CDB Leasing (China) is investing in the commercial aircraft market that Boeing estimates needs 29,000 new aircraft ($3.2T) in the next 20 years.
China is expected to require 3,770 new aircraft ($410B) over the next twenty years, making it the world's second-largest aircraft market after the USA.
CDB Leasing (China) purchased 12 A320s, B737-800s & B777s ($830M) with leases attached for a total of 15 from GECAS.
CDB Leasing signed an MOU with Brazilian aircraft manufacturer Embraer for $2.2B in aircraft financing and leasing over three years.
CDB Leasing and China Construction Bank signed $3.7B in aircraft leasing agreements with Boeing in November to tap into the country's rapidly growing aviation industry
CDB is a subsidiary of China Development Bank and is focused on developing regional aviation in China.
Boeing signed similar deals with Bank of China, the Industrial, and Commercial Bank of China (ICBC), & the Export-Import Bank of China in 2008.
Airbus signed an agreement for cooperation on aircraft financing and leasing with ICBC in June 2009.
GE, engine manufacturer & major aircraft lessor, sees flat profits in 2010 and will focus on investing in core businesses.
Allied Aviation, a major New York-based privately owned aviation fueling company wants to purchase ILFC, the aircraft leasing company owned by AIG with no money down.
Allied Aviation is complaining that it is being passed over in the ILFC sale process, says Allied president Bob Rose.
ILFC price: Allied Aviation is offering $12B in return for government credit support for 3-to-5 years, the time needed to restructure ILFC.
AIG has been unable to sell ILFC because of the lessor’s $30B debt load.
Steven Udvar-Hazy (ILFC founder & CEO) backed by an investor group offered to buy 10% of the aircraft portfolio for $4B.
AIG is reported to be negotiating a sale of all or part of ILFC to Carlyle Group, Terra Firma Capital Partners, and TPG.
Tuesday 8th December 2009
Dubai Debt: Cumulative liabilities are currently rising faster than investments are able to generate returns says Moody’s.
Dubai exposure: Moody has identified $47B+ in liabilities at government-related companies. Represents more than 100% of 2006 GDP.
Dubai leverage raised through state-owned corporations will continue to grow faster than GDP for the next 5 years.
Friday 27th November 2009
Dubai, in default, has total government debt estimated at $80B & about 65% of that is held by local investors.
Airbus, Boeing, GE/Pratt, & Rolls-Royce have commitments from Dubai Aerospace and Emirates Airlines for orders valued in excess of $87B.
Airbus and Boeing production lines for the A320, A350, A380, B737NG, B777, and B747 have slots allocated to Dubai Aerospace and Emirates Airlines.
Dubai decision to restructure Dubai World debt affects aerospace banks: Barclays, HSBC, RSBC, Deutsche Bank and ING Group.
Dubai Aerospace subsidiary DAE Capital has an aircraft portfolio comprising 37 single aisle and wide-body aircraft.
DAE Capital has 24 aircraft delivery commitments of which 15 are being purchased for lease back to existing operators.
DAE Capital has committed to invest $27B that will include 100 A320s and A350 XWBs, 100 B737NGs and wide-bodies for delivery from 2010.
Emirates Group is owned by the Government of Dubai via the Investment Corporation of Dubai.
Emirates Group is headquartered in Dubai and is a public international travel and tourism conglomerate holding company.
Emirates Group has 50 business units and employs about 48,000 people.
Emirates Group owns Emirates Airline, the national airline of Dubai and the largest airline in the Middle East.
Emirates, (Est. ’85 with two leased aircraft) has 137 aircraft, flies to 100 cities, carries 25M passengers, $12B revenues, & $265M profits.
Emirates has invested heavily since 2000 in a state-of-the-art fleet.
Emirates operates four wide-body types: A330, A340, A380, and the B777.
2008(July): Emirates received its first A380-800 and in August 2008, it became the second airline to fly the A380-800.
Emirates has firm orders for 163 aircraft, and options for 70 more, 134 aircraft from Airbus and 39 Boeing aircraft; value $60B.
2000 (April): Emirates was a launch customer for the A380, and ordered five A380-800s and two A380-800Fs.
2001: Announced the largest order in aviation history for 58 Airbus and Boeing aircraft valued at $15B including 15 more A380-800s.
2003: Ordered 21 A380-800s.
2005: Announced the largest-ever order for 42 B777 family of aircraft valued at $9.7B.
2006 (April): Ordered two more A380-800s & cancelled the A380 freighter orders.
2006: Signed a Heads of Agreement for 10 B747-8Fs fitted with GE’s GEnx engines, and valued at $3.3B.
2007: Announced a historic civil aviation aircraft order for 120 A350s, 11 A380s, and 12 B777-300ERs, valued at $34.9B.
2007, Emirates A380-800 order book now stood at 58.
2007 Order: Comprises firm orders for 50 A350-900s and 20 A350-1000s, plus 50 options for the A350-900s, delivered begin in 2014.
2007 Order: Emirates brought its total firm order for the A380s to 58.
2009: With the new order for 12 777-300ERs, valued at $3.2B, Emirates has 48 pending delivery and is set to become the world’s largest B777 operator.
Gulf International Bank (Saudi owned) postponed a bond auction scheduled for next week.
Dubai World is the main investment vehicle owned by the government of Dubai.
Dubai World is unable to redeem $3.5B of Islamic bonds (sukuk) in December and will not be able to pay it until at least May 2010.
Dubai World Islamic bond issue was one of the largest ever issued.
United Arab Emirates government failure to support Dubai undermined the assumption that the
Emirates would stand behind the debt of state owned companies.
Dubai rating: Standard & Poor’s has downgraded Dubai based banks with exposure to state owned companies.
Credit insurance: The cost of insuring Dubai’s debt has increased 400% since the Dubai World default was announced.
Thursday 26th November 2009
Dubai has total debts of $80B of which State-run Dubai World accounts for $59B of those liabilities.
Dubai World and subsidiary property developer Nakheel, Dubai government owned, deferred a $3.5B debt payment due in December 2009.
Dubai World has asked for a deferral of debt payments until May 2010.
Dubai said today that DP World, which is profitable, would not be involved in the restructuring.
Dubai will most likely have to abandon an economic model that focused on heavy property investment and inflows of foreign capital.
Insurance: The cost of insuring Dubai's debt against default is soaring as bond prices tumble.
Bank shares in Europe fell on fears of exposure to Dubai and concerns the holdings would be cut to meet obligations at home.
Dubai ruler Sheikh Mohammed bin Rashid Al Maktoum, has reshuffled the boards of key companies with equity interests in Dubai Aerospace Enterprise.
Dubai Aerospace Enterprise (DAE) is supporting Dubai's goal of becoming a globally renowned aerospace centre and aviation hub.
DAE’s aerospace business is made up of aircraft leasing, maintenance, MRO and aviation IT solutions. It includes DAE Capital.
DAE Capital has an aircraft portfolio comprising 37 single aisle and wide-body aircraft.
DAE Capital has 24 aircraft delivery commitments of which 15 are being purchased for lease back to existing operators.
DAE Capital has committed to invest $27B that will include 100 A320s and A350 XWBs, 100 B737NGs and wide-bodies for delivery from 2010.
DAE’s shareholders include Investment Corporation of Dubai, Dubai International Capital, DIFC Investments LLC, EMAAR, Istithmar World, and Dubai Silicon Oasis Authority (DSOA).
Dubai has changed the board of the Investment Corporation of Dubai, which manages the Sheikh’s wealth and is a DAE shareholder.
The new board of the Investment Corporation of Dubai is considered as more conservative than the deal-doing directors replaced.
Dubai also changed the CEO of the Dubai International Financial Center.
Wednesday 25th November 2009
Dubai World, the Dubai government-owned investment company has asked creditors for a six-month delay on debt repayment.
Dubai government said the request to delay debt repayments also applied to property developer Nakheel, a Dubai World subsidiary.
Debt default: Standard & Poor’s said the Dubai World announcement could be considered as a debt default.
Standard & Poor's is downgrading its ratings on several Dubai government-related financial entities.
Dubai World has total debts of $59B and has appointed Deloitte to help with its financial restructuring.
Dubai is one of the seven self-governing emirate state that make up the United Arab Emirates (UAE).
Dubai is suffering economically since mid-2008 after six years of rapid growth.
Dubai will have to turn to the Abu Dhabi emirate to bail it out.
Dubai Aerospace Enterprise (DAE) was created in 2006 to target the $100B global airport, aircraft leasing and financing segments.
DAE signed letters of intent in November 2007 for aircraft order worth $27B.
DAE Capital: As of April 2009 DAE Capital had a fleet of 36 aircraft leased to airlines around the world.
The government of Dubai, Dubai International Capital, and Dubai Holding’s investment arm, Emaar, backs DAE.
DAE other investors: Property company, Istithmar, investment holding company and Dubai International Financial Centre (DIFC).
DAE equity players: Amlak Finance and the Dubai Airport Free Zone Authority (DAFZA).
BCI Aircraft Leasing SEC civil charges pending as Jason Hyatt pleads guilty to defrauding investors, lying to a bank and tax evasion.
BCI-Hyatt charges: Chicago Tribune reports Jason Hyatt pleaded guilty to criminal charges related to investments that raised money for BCI Aircraft Leasing Co.
Hyatt plea: Tribune says Hyatt pleaded guilty to six of an 11-count indictment on Monday, the day his criminal trial was to start.
Hyatt plea: Hyatt agreed to plead guilty of defrauding investors in Hyatt Johnson Capital LLC.
BCI link: Tribune says the SEC has civil charges pending against BCI Aircraft and owner Brian Hollnagel for allegedly defrauding investors.
BCI link: Tribune reports Hyatt was BCI's director of corporate finance from at least 2001 until 2003, when he left to start his own investment firm.
BCI link: Hyatt arranged for Hyatt Johnson Capital LLC, his investment firm, to act as a feeder fund to BCI Aircraft.
Hyatt Johnson Capital invested more than $20M in companies affiliated with BCI Aircraft.
Hyatt: Prosecutors had alleged that Hyatt used $2M to help launch a Latin-themed restaurant in Chicago called De La Costa.
Hyatt & Bridgeview Bank: Hyatt pleaded guilty to making a false statement to Bridgeview Bank to obtain a loan in connection with the restaurant.
Hyatt Guilty plea: The remaining Hyatt guilty pleas related to income tax charges.
October2009
ILFC: Jean-Paul Gut (Ex Airbus), and possibly John Leahy of Airbus may be acting for Qatari funds in bidding for ILFC.
ILFC is going to pay back $2B in short-term debt as AIG enters talks to sell part of ILFC to founder and shareholder Steven Udvar-Hazy.
CITs Board and bondholders have approved capital restructuring. CIT is a major aircraft lessor.
September 2009
United Airlines (UAL): When United filed for bankruptcy protection in December 2002 with debts totaling $4B it, lessors paid a heavy price.
United Bankruptcy cost: Ch11 reorganization is costing banks & lessors $850M annual based on restructured leases and mortgages on approximately 450 aircraft.
United Bankruptcy cost: Ch11 reorganization is costing bondholders $1.7B in restructured municipal bond obligations.
United Bankruptcy cost: Is costing labor multibillions of dollars in restructured labor and pension agreements.
AerCap Holdings N.V. ("AerCap") (NYSE: AER) and Genesis Lease Limited ("Genesis") (NYSE: GLS) will merge in an all share-for-share transaction.
AerCap is now the leading independent lessor within the global aircraft-leasing sector, with 116 lessees in 50 countries and a $6B lease portfolio.
AerCap and Genesis will trade as AerCap.
AerCap: The transaction has a value of $1.75B based on Genesis' balance sheet. AerCap stock price has a value of $8.81 per Genesis common share.
AerCap now has a fleet of 358 aircraft and 83 engines that are either owned, ordered, under contract, LOI or managed.
AerCap: The average age of its owned aircraft fleet is 6.6 years.
AerCap has also signed a letter of intent to purchase 13 aircraft from GECAS as part of the deal. AerCap has 83 aircraft on order.
AerCap: GECAS will continue to act as servicer for Genesis' portfolio & provide asset management services in the near term.
AerCap: GECAS has agreed with AerCap a means to terminate early the GECAS services at AerCap's option.
AerCap advisors Morgan Stanley and UBS acted as financial advisors and Milbank, Tweed, Hadley & McCloy LLP, NautaDutilh N.V., & Mell o, Jones & Martin as legal advisors to AerCap.
AerCap: Citi acted as financial advisor and Weil, Gotshal & Manges LLP, Conyers Dill & Pearman and Houthoff Buruma N.V. as legal advisors to Genesis.
BOC has 127 aircraft out on lease and 64 new aircraft on order.
CX/BOC deal is the largest sale-and-leaseback arrangement in Cathay's history and is consistent with CXs cash-preservation priority.
CX/BOC sale-and-leaseback covers six B777-300ERs due for delivery between Q4 2009 and Q2 2011
CX arranged an aircraft sale-and-leaseback deal with BOC Aviation (BOC) to increase its liquidity.
CX has no plans to cancel aircraft orders but it is negotiating delivery deferrals.
CX has 39 aircraft due for delivery through 2012. CX has 19 B777-300ERs on order from Boeing.
CX fleet consists of 97 owned and 25-leased aircraft.
CX will sell its 20.7M shares in HAECO, or 12.5% of its holding, for approximately $245M to Swire Pacific.
Cathay Pacific (CX)/HAECO) deal will reduce CXs share in the MRO HAECO to 15% & increase Swire's holding to 46%.
ILFC Chairman Steven Udvar-Hazy may be preparing to leave the company he co-founded and later sold to AIG & start a new leasing venture with Greenbriar Equity Group and Onex Partners.
The Royal Bank of Scotland (RBS) has appointed Goldman Sachs to look at options for the possible sale of RBS Aviation Capital.
RBS Aviation Capital has assets of around $12Bn of which the aviation assets have a book value of $8Bn.
RBS Aviation Capital is one of the top five global aircraft lessors including ILFC (For sale), GECAS, AerCap, and CIT (For sale).
RBS, now government owned, is looking to sell-off assets to pay back the UK government and regain its independent status
Royal Bank of Scotland (RBS) may sell RBS Aviation Capital, Royal bank, Coutts & Co and NatWest.
Dubai Civil Aviation Authority bond, or Dubai Global Sukuk, matures on November 4.
Dubai Civil Aviation Authority: Dubai faces a crucial test of its credit worthiness with the maturity in November of a $1 billion sovereign sukuk, or Islamic bond, issued by DCAA.
August 2009
ILFC:Unable to sell ILFC, owner AIG may break up the company as its CEO bids for a $2Bn package of aircraft from the leasing portfolio.
Unable to sell ILFC, owner AIG may break up the company as its CEO bids for a $2Bn package of aircraft from the leasing portfolio.Cerberus: Parent of major lessor Aercap is to raise new hedge funds as investors withdraw $4.8Bn due to poor performance.
Aerolineas Argentinas: Bondholders with a judgment against the Argentinean government failed to win court approval to gain control of the assets of the state-run airline.
ACG won Ex-Im support for a $900M bond financing for 22 B737NGs. Deliveries are scheduled through 2011.
Ex-Im is providing a new source of liquidity to the aviation capital market in response to the financial crisis that began in 2008.
AC is using an aircraft funding structure that relies on guarantee for bonds issued by U.S. Ex-Im.
Aviation Capital Group (ACG): Operating activity during Q2 involved transactions for 16 aircraft owned by ACG.
