National Post

U.S. ‘primary focus’ of RBC Capital Markets for growth

Tie-up reshapes global air finance industry

- Matthew Monks kevin orland and

Royal Bank of Canada’s capital markets chief says that even after two decades of expansion in the U.S., the country remains its biggest opportunit­y for growth.

RBC Capital Markets sees the potential to boost its market share in the U.S. from its current level of about 2.5 per cent to as much as 4 per cent over time, chief executive and group head Derek Neldner said in an interview. While that won’t happen overnight, “clearly the U.S. is still our primary focus,” he said.

“On one hand we’re advanced because we’ve been at it for 10 to 20 years; on the other, I think there’s still a tremendous opportunit­y for growth,” Neldner said in an interview.

A particular focus for the firm, which already is in the top 10 in the U.S. in terms of wallet share, will be to diversify the U.S. platform by adding more advisory and equity capital markets capacity, said Neldner, who took over as the division’s head in November 2019.

RBC Capital Markets had the strongest performanc­e among Toronto-based Royal Bank’s major divisions in its most recent fiscal year, boosting profit 4.1 per cent to $2.78 billion in the year ended Oct. 31. The gain was driven by a boom in trading as well as increased revenue from corporate and investment banking. The investment banking business alone has generated more than C$1 billion in revenue for four of the past five quarters.

Royal Bank shares are up 24 per cent in the past 12 months, compared with a 33 per cent advance for the S&P/TSX Commercial Banks Index.

Trading and equity capital markets activity will remain elevated but normalize somewhat this year, Neldner said. Mergers and acquisitio­ns work should pick up as companies look to strategica­lly reposition themselves coming out of the coronaviru­s pandemic, he said.

The market for special purpose acquisitio­n companies, or SPACS, also will remain strong, Neldner said. He said RBC Capital Markets is approachin­g the business “selectivel­y” and keeping high standards for the management teams it will engage with, Neldner said.

Last year saw 296 SPACS raise about US$84.7 billion globally, more than five times the dollar volume of a year earlier, according to data compiled by Bloomberg. Already this year, 248 SPACS have raised US$76.8 billion.

RBC Capital Markets is ranked 14th globally in SPACS this year, working on eight deals. That already tops the six deals the firm worked on last year, when it finished 21st in the category.

The firm has advised on transactio­ns including online payments firm Paysafe Group Ltd.’s US$9 billion deal in December to go public by merging with a blankchequ­e firm led by billionair­e Bill Foley.

Most of the SPACS that already have been raised will be able to find an appropriat­e acquisitio­n target since the vehicles have essentiall­y become an extension of the market for later-stage startup financing, said Venkat Badinehal, managing director and head of RBC Capital’s financial institutio­ns group in the U.S.

“As long as the market remains constructi­ve,” Badinehal said, “we think you’ll see a greater amount of the capital that was raised being able to find a constructi­ve target.”

The world’s two largest aircraft leasing companies are combining to create a new financing giant after Ireland’s Aercap finalized a deal worth more than US$30 billion to buy the leasing business of General Electric .

The two companies, which tied the knot on Wednesday after days of speculatio­n surroundin­g a takeover of GE’S leasing arm GECAS, together control more than 2,000 jets, dwarfing rivals.

The tie-up creates easily the largest buyer of jetliners built by planemaker­s Airbus and Boeing and will reshape a global air finance industry that has attracted a flood of capital in recent years as investors look for higher returns.

Shares in both New York-listed companies fell about 6 per cent on Wednesday as Aercap prepared to issue new stock to help finance the transactio­n and GE disappoint­ed expectatio­ns of some investors that it would raise its cash outlook.

The deal comes as the independen­ce of several leasing firms has been brought into question by the coronaviru­s crisis and could trigger further consolidat­ion, analysts say.

It is the latest move by GE chief executive Larry Culp to reduce debt and focus the conglomera­te on its industrial core of power, renewable energy, aviation and health care.

In a phone interview, Culp said the deal would help GE become better capitalize­d in line with peers and “significan­tly” derisk its balance sheet, opening up an array of capital allocation options including higher dividends, share buybacks.

“We’re not declaring victory today, but this is an important step in our transforma­tion,” he told Reuters.

Culp took the reins of the conglomera­te in 2018, months after the 129-yearold company dropped out of Wall Street’s blue-chip index following years of dwindling profits.

Aercap chief executive Aengus Kelly said the Dublin-based company had acquired its rival for an “attractive” discount to its book value in its second defining transactio­n in almost a decade, after purchasing U.s.based ILFC in 2014.

Both deals saw Aercap pounce on solid business rivals whose owners were suffering due to a wider financial crisis. In both cases, the owners took up offers of stakes in the larger Aercap in return for ceding control, betting on an industry recovery.

“This is not about scale or getting bigger for the sake of it,” Kelly told analysts.

The deal to buy GECAS, or GE Capital Aviation Services, includes about US$24 billion in cash and US$1 billion paid in Aercap notes or cash. It includes 111 million new shares, giving GE a stake of 46 per cent in the Aercap-controlled company.

Culp said the stake would be monetized “over time” as the aviation industry recovers.

The deal values GECAS at just over US$31 billion based on closing Aercap share prices on Tuesday.

GE said it planned to reduce debt by about US$30 billion this year using transactio­n proceeds and existing cash, but announced a US$3 billion writedown in connection with the deal.

The deal, which includes the transfer of about 300 helicopter­s, is expected to close in the fourth quarter of 2021.

Citi and Goldman Sachs have provided Aercap with US$24 billion of committed financing for the transactio­n.

Aercap said the deal would raise its debt to 3.0 times equity but this adjusted ratio would return “rapidly” to a targeted level of 2.7.

Analysts have said the scale of the combined entity, controllin­g about three times the number of aircraft as its nearest competitor, Dublin-based Avolon, could force Aercap to offload aircraft to meet anti-trust requiremen­ts.

The new group will have a mainly Airbus fleet but Kelly expressed support for the troubled Boeing 737 MAX, recently restored to service after an almost two-year safety grounding.

“I wouldn’t bet against Boeing,” he said..

Analysts have said the deal would give the combined group greater bargaining power when buying jets.

Boeing declined comment on the merger.

Airbus said it would maintain the good relations it has had with Aercap and GECAS.

 ??  ?? Derek Neldner
Derek Neldner
 ?? LUKE SHARRETT / BLOOMBERG FILES ?? General Electric’s drive to focus on its industrial core, which includes aviation, got a
boost with the news its aircraft leasing unit was being sold to Ireland’s Aercap.
LUKE SHARRETT / BLOOMBERG FILES General Electric’s drive to focus on its industrial core, which includes aviation, got a boost with the news its aircraft leasing unit was being sold to Ireland’s Aercap.

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