Travel boom fuels bond bet tied to airplanes
Market is becoming an important funding source for aircraft-leasing firms
A rush into bonds linked to airplane leases is lifting an already lofty market.
Buyers are on pace this year to snap up a record amount of debt supported by lease payments on aircraft and their engines: As of Nov. 12, $6.3 billion (U.S.) had been issued, close to last year’s record $6.6 billion, Finsight data show.
The market is fast becoming an important funding source for aircraft-leasing firms— which own and manage thousands of planes—complementing more traditional sources of financing such as corporate bonds and bank loans.
The leasing companies pass risk onto traditional investors like big money managers by creating asset-backed bonds, which are issued by vehicles set up expressly to own a particular group of planes, collect lease payments and repay their investors. Coupons range from over 4% for higher-rated bonds to more than 7% for junk-rated debt.
For money managers, the securities provide diversification into an asset class that behaves differently than standard bonds or stocks. In essence, they are betting air travel will continue to boom, propelled partly by a rising Asian middle class that can afford to fly more. The International Air Transport Association expects annual journeys world-wide to double in the 20 years to 2037.
Aircraft lessors buy aircraft, chiefly from Boeing Co. and Airbus SE, and lease them to airlines, typically on contracts of eight to 12 years for new planes, shorter for older ones. They now own or manage more than 9,600 single-aisle and double-aisle planes—nearly $300 billion worth—according to Flight Ascend Consultancy. That is 61% more than a decade ago and almost half of the global fleet of these two types of aircraft.
The decades-old sector was long dominated by a few specialists, but the circle has widened recently. Private-equity firms have been drawn to leasing, as have Chinese outfits that can borrow cheaply.
In some cases, lessors use the bonds to unload older aircraft without giving up their income from managing the fleet. These bonds offer a higher return, since lease payments are larger relative to the value of the airplane, but also greater risk, since analysts say older planes are more prone to losing value in a downturn. Air Lease Corp.’s two asset-backed deals in the past two years—dubbed Thunderbolt—are backed by aircraft with weighted average ages of 8 years and 12.5 years, compared with 3.8 years for the planes Air Lease still owns.
“They are good airplanes,” said Gregory Willis, chief financial officer at Air Lease. “Just because an airplane is 12 years old doesn’t mean it doesn’t have a lot of life left in it.”
Paul Norris, head of structured products at Conning, which manages money for insurers, said his clients like aircraft ABS as an alternative to standard corporate bonds. Deals he has a piece of include the second Thunderbolt. While there are risks, he said, Air Lease’s history, scale and operational expertise made it a good bet. In Hong Kong, now a major hub for aircraft finance, hundreds of financiers and others from the industry recently shuttled between two simultaneous conferences. On the sidelines of one, put on by Airfinance Journal, the subject turned to the flood of money chasing aircraft.
Some industry participants fret that planes could lose value in an aviation downturn, leaving losses for investors who got in at the top if they need to sell aircraft or securities tied to them. Many economists expect the global expansion to slow from next year, and trade tensions loom over an already cooling China, a key driver of passenger growth.
“Eventually we will have a recession and people should start thinking about the possibility,” said Adam Pilarski, senior vice president at consultancy Avitas. Other factors can also dent air-travel demand. It fell after the 9/11 terrorist attacks, for example, leading to losses on early aircraft asset-backed securities, according to S&P Global Ratings. Shares of some traditional aircraft lessors have fallen this year. While the S&P has gained 2%, Air Lease is down 20%, Aircastle Ltd. is 19% lower, and AerCap Holdings NV has fallen 1.9%. Others are faring better, with Hong Kong-listed BOC Aviation Ltd. up 48% and FLY Leasing Ltd.’s American depositary receipts up 0.1%.
“In this cycle the balloon is pretty full,” said Rob Morris, head of Flight Ascend. “It seems like this cycle is coming to an end.”