Avolon steers clear of Chinese parent debt
ONE of the world’s leading aircraft-financing firms, Ireland’s Avolon Capital, has insisted it remains unaffected by the growing scrutiny of its parent, HNA Group, a vast global conglomerate with investments in Deutsche Bank and Hilton Worldwide.
In the US Bank of America Merrill Lynch has reportedly suspended its financial dealings with HNA due to anxiety over its gargantuan debt pile and opaque ownership structure.
The news followed a string of reports indicating China’s government is clamping down on some of its biggest global deal-makers amid concerns their long-running debt-fuelled buying binge threatens an economy already plagued by hidden layers of leverage.
Bank of America has opted to temporarily remove itself from transactions with HNA, which is run by billionaire Chen Feng, and there are reports that other US banks have adopted a similar stance. When contacted by the Irish
Independent, Dómhnal Slattery said the scrutiny of HNA did not concern Avolon. It’s a “group issue”, he said, declining to comment further.
A spokesperson for Avolon also declined to comment.
However, sources in New York pointed out the increasing pressure on HNA – which owns Avolon’s immediate parent, Bohai Capital Holding Co Limited, a specialised leasing firm that spans an array of sectors including airlines, infratructure and shipping – may impact the Dublin-based firm’s credit rating.
Avolon, established in 2010 by Mr Slattery, a prominent figure in the industry, was bought by Bohai in 2015 for $2.6bn. Factor in debt and the deal’s value swells to $7.6bn.
Bohai, listed on the Shanghai stock exchange, is in turn majority owned by HNA, a privately-owned organisation that controls a $100bn empire and ranks as the largest shareholder in Deutsche.
While the conglomerate’s ownership structure has long attracted scrutiny, this latest revelation about the reluctance of US banks to engage with HNA, which owes over $100bn in debt, mostly to Chinese statebacked banks, is likely to intensify concerns in credit markets.
A source in New York argued Avolon may be negatively impacted by any fallout as its credit rating is tied partly to the performance of parent, Bohai.
Sources close to Avolon, the world’s third-largest aircraft leasing firm, stress it is finan- cially independent from its parent with separate credit ratings from the three major ratings firms; Fitch, S&P and Moody’s. All ranked Avolon’s debt as non-investment grade.
Factored into those judgements are the debt levels of Bohai, and its heavy reliance on short-term funding.
After Avolon completed its acquisition of CIT’s aviation-leasing arm of CIT Group for close to $10bn in April – a transformative deal that pitched it up against the world’s biggest players – GE Capital Aviation and AerCap – Moody’s highlighted in a note that the deal involved “significant double leverage”.
Avolon funded the deal with $5.5bn in senior bonds, a further $3bn in bonds as well as a $2.4bn cash injection from Bohai.
The capital raising was almost three times over-subscribed, a sign of market support. However Moody’s pointed out that Bohai’s capital injection was also partially financed with borrowed funds, which has initially resulted in significant double leverage.
In the note the credit rating agency said “Bohai relies heavily on short-term funding and is highly leveraged, which we view as a potential risk to Avolon’s credit quality”.