Credit managers who embrace aviation investing face an uncertain future
NEW YORK, April 7 (LPC) – In the years following the global financial crisis, private debt managers have added a myriad of strategies to their product line, including niche strategies like aircraft investing, a industry now at the epicenter of the fallout from the coronavirus pandemic.
Attracted by higher returns on investment during years of low interest rates, some of the most prominent private debt managers, including Carlyle Group, KKR and Apollo Global Management, have found their way into the industry.
Aircraft leasing and aircraft asset-backed securities are the primary investment strategies. The first is the way airlines finance their planes, the second a way for credit managers to finance aircraft acquisitions.
Aircraft rental returns may depend on the age and type of aircraft. Younger and smaller planes earn the least at 3 to 5%, and older and bigger planes the most at 10 to 12%, according to a survey by British aviation finance research firm Ishka .
According to a research paper by Guggenheim Partners, airplane ABS have different levels of debt varying depending on risk, and each level can earn more than 2% more than comparable corporate bonds.
Capital came from various places: Carlyle dedicated private funds, while KKR committed capital from its credit and infrastructure funds, in addition to its Business Development Company (BDC), which Apollo also has. made.
The unprecedented health crisis is forcing aviation investors to take up its most important challenge in years. For the week of March 30, departures worldwide and to the United States fell by nearly half and a quarter, respectively, according to flight data tracker OAG. Demand was down around the world every week in February and March.
Fitch Ratings last month attributed a negative outlook to aircraft lessors, who had a stable outlook at the start of the year. Growth in passenger traffic and strong liquidity positions contributed to this change.
“Fitch is concerned about short-term downward pressure on lessors given significantly reduced travel demand, potential airline failures, increased repossessions resulting in impairments and less access. favorable to capital markets, ”said Johann Juan, analyst for the rating company whose coverage includes aircraft leasing, said in an interview.
Industry watchers will closely monitor the quality of the portfolio and the potential for depreciation in aircraft values.
“The growth in aircraft leasing then squeezed rental returns, contributing to an increasingly shrinking margin of safety for the industry,” said David Petu, a second analyst at Fitch who covers aircraft leasing. ‘planes.
Carlyle acquired aircraft lessor Apollo Aviation Group – unrelated to Apollo Global Management – in October 2018. The company, now known as Carlyle Aviation Partners, is raising its fifth private fund, targeting $ 850 million, according to investment documents a Pennsylvania State Pension Fund. He aims for an annual return of 12.6% to 14%.
Carlyle closed several ABS deals in 2019, including a US $ 540 million deal last fall that funded the acquisition of 29 aircraft. So far this year, the company has completed a transaction.
Aviation fund structures are often long term and can likely get through tough times, said an aircraft leasing fund manager. ABS structures “continue to hold up well,” and the industry also has dry powder to deploy once the atmosphere stabilizes, the official said.
SOURCE OF CAPITAL
In addition, KKR announced a US $ 1 billion commitment to Altavair Finance in January 2019, establishing a platform to acquire aircraft served by Altavair, an aircraft lessor.
KKR aimed to be “cautious” about financing, which included bank debt and aircraft ABS, of its Altavair acquisitions, a fund manager familiar with the matter said. This effort put the company in a better position to weather the crisis, he said.
In addition, KKR’s BDC, FS KKR Capital Corp, has a joint venture with DVB Bank which owns 38 planes, according to a fund report. It also refinanced some of its debt with an ABS transaction in February, according to a pre-sale report from S&P Global.
The $ 2 billion stimulus bill passed by Congress last month may have little effect on the aircraft ABS market, despite the fact that it contains billions of US dollars to support the industry air transport, said Patrick Wacker, portfolio manager who invests in aircraft ABS at Insight Investment.
“The majority of these underlying (securing transactions) pools are centered on smaller operators in emerging markets which are very unlikely to be bailed out,” he said.
The largest portfolio positions for Apollo’s BDC, Apollo Investment Corp (AINV), are in aircraft lessor Merx Aviation. AINV’s investment in Merx represents 12% of its portfolio, according to a March 26 letter to its stakeholders. Merx has a “well-diversified, high-quality fleet” that will “enable it to” overcome the challenges of today, “AINV CEO Howard Widra wrote in the letter.
Apollo also bought PK AirFinance, another aviation loan company, from GE Capital in December.
Representatives for Carlyle, KKR and Apollo declined to comment.
The fallout from the coronavirus has plunged aircraft investors into uncharted waters. The pandemic represents the biggest blow to the aviation investment industry, Insight’s Wacker said.
“It’s the biggest shock I’ve seen. It is much more serious than September 11, it is much more serious than the financial crisis, ”he declared.
“The difference here is that the financial crisis has not immobilized entire fleets of planes across countries. I think many of us are wondering, will the United States block all non-essential air travel? That was never a question that was asked in 2008. ”(Reporting by Andrew Hedlund. Editing by Kristen Haunss and Michelle Sierra)