Aircraft leasing group Avolon has opened a new US$500mn secured loan with a group of international banks to purchase new aircraft.
It’s the company’s first large scale bank loan in a number of years, with the company preferring the capital markets most recently. CFO Andy Cronin tells GTR that lending conditions have improved greatly since mid-2013.
The finance will be used to finance previously underwritten aircraft purchases but also gives the company the flexibility to take advantage of unidentified opportunities. “If Ryanair or Air France comes to us and wants to do a lease, we can get an aircraft quickly into that slot,” Cronin says.
Crédit Agricole and Deutsche Bank acted as joint-lead arrangers, with National Australia Bank and HSBC joining as lenders. It’s the first time the latter two have lent to Avolon. The finance has an eight-year tenor, maturing in December 2022.
Avolon has been a big borrower over the past couple of years. Last year, the company launched its inaugural capital markets facility, worth US$636mn, taking 2013’s total debt accrued to US$1.6bn.
Cronin says that the company has been able to enjoy more favourable lending terms than most airlines, given the stability of the leasing business. “Lessors have a lower cost of capital generally than airlines as business model is more stable,” he says. “Airlines take volatility on consumer demand, lessors are on an eight-year lease term and stable. They enjoy a higher credit profile. There are exceptions. But generally lessors have better credit profile and it allows us to raise capital.”
With the eurozone crisis really taking root around 2011, the bank market suffered. The company did its first ECA-backed transaction in August 2011 and has done one each year since. The lack of liquidity in the bank lending sector saw it look to the bonds market last year but, says Cronin, the market has returned to some level of normality.
“We saw significant change around the mid-2013. A market where there is more liquidity is more conducive to doing a large portfolio financing rather than individual bilateral bank loans. It’s an opportunity to get new lenders in the group. There are a number of lenders who don’t do bilateral lending, but do portfolio lending, particularly when there are other big banks there with them. It can help diversify the lenders,” Cronin says.
Demand has been increasing for lessors’ services in recent years. Air travel volumes have been rising at 1.8 times the level of global GDP growth for two decades, with much of the volume coming in quickly-emerging markets. The global financial crisis didn’t stifle demand for flying, but hit airlines’ ability to purchase new fleets. Furthermore, airlines are sometimes facing 10-year waits for new orders, with many models selling out.
Lessors such as Avolon have capitalised by operating in a number of different channels: they place direct orders with the likes of Boeing and Airbus, they buy and sale aircraft on the secondary market – moving planes from areas in which the demand is falling, to those where they are needed, and also operate on a sale and leaseback model.