Aviation Capital Group

ACG's CEO Steve Hannahs authored a two page article on Preparing for a Post-Recovery Aviation Industry which appeared in Jetrader magazine's March-April 2010 issue. Click here to download the article.

 

 

 

 

 

 

 

Aviation Capital Group (ACG) plans to come to market with an $850-$900 million capital markets transaction, backed by the Export-Import Bank of the United States (Ex-Im) to help finance the lessor's new Boeing 737 Next Generation aircraft.

In an innovative structure, ACG as the launch lessor, will issue 12-year notes to finance 22 737-700 and -800 aircraft scheduled to be delivered during the next two years.

Once completed, the deal will signal a major turn in the stubborn aviation-finance market, which has been battling dwindling funding sources and rising liquidity costs. Whether this is a one-off transaction or an indicator of more such deals to come remains to be seen.

ACG already has received final Ex-Im Bank approval for 12 Boeing 737-800 aircraft that will be delivered this year and preliminary Ex-Im Bank approval for the remaining 10 737-700 and -800 aircraft next year.

"We think the market is ready for this structure," says ACG CEO Stephen Hannahs, speaking exclusively to CAO. "It will help improve liquidity in the market for aviation and open up a new investor class."

The structure of this note issuance has traditionally not been done for various reasons. "The success of the FDIC [Federal Deposit Insurance Corporation] guaranteed note programme has demonstrated the market's appetite for this type of instrument, " Hannahs says. "Because an Ex-Im Bank-guaranteed note commits the 'full faith and credit' of the U.S. Government, we believe the capital markets will find an Ex-Im Bank-guaranteed note to be very attractive."

The structure contemplated in this instrument has been created with the assistance of the investment banks and Ex-Im.

According to Ex-Im, this financing vehicle could significantly lessen the financing squeeze in aviation, which has resulted in wider spreads in bank transactions.

"Ex-Im Bank believes use of this structure will contribute to maintaining jobs in the U.S. aircraft manufacturing industry by opening up new sources of more competitively priced funding for Ex-Im Bank guaranteed loans," says Ex-Im's transportation division vice president Robert Morin. "We believe use of this structure provides better value to the US taxpayer as it has the potential to maximize the value of the Ex-Im Bank guarantee."

Ex-Im Bank is also working on a similar deal with an airline customer, Emirates Airlines, which is due to be launched at the roughly same time as ACG's financing. The airline's guaranteed bond will finance three Boeing 777-300ERs.

Before the credit crunch, Ex-Im Bank guaranteed financings priced at Libor flat or 5-10 basis points over, but now those same deals close at Libor plus 100 to 130 basis points.

Hannahs is hopeful that in time with an educated market this financing will trade at levels similar to Federal Deposit Insurance Corporation paper, or in the Libor plus 40-75 basis points range.

ACG says it has not decided on the final issuance format, but there may be a benefit in a series of smaller issuances to educate the market. The lessor is hopeful with each successive issuance the spreads will narrow.

"We anticipate going out with a smaller deal, whetting investor appetite to build market acceptance and then return later with a larger offering," says Madhu Vijayaraghavan, SVP finance, ACG.

As in typical export credit structures, 85% of the financing will be supported by Ex-Im Bank, while the remaining 15% equity will be supplied by ACG.

Airbus and Boeing have long been cheerleading for a capital-markets structure, backed by export-credit support, to increase the flow of liquidity in the constrained debt markets.

Last month, Kostya Zolotusky, BCC's managing director of capital-markets development, admitted at an investor's day in London that the manufacturer was working on an Ex-Im Bank-backed capital markets structure that should come to market "within the next six months."

Ex-Im Bank estimates it will provide between $7 billion and $9 billion in guaranteed deals this year, and Zolotusky said, "It would not surprise me if a couple of billion is for these structures."