In October 2022, the aircraft finance world descended on New York for a series of conferences hosted by Airfinance Journal, Ishka, and Airline Economics, respectively, along with meetings of the Aviation Working Group (“AWG”) and the Wings Club Foundation’s 80th Annual Awards Gala. Vinson & Elkins’ aviation finance associate Coral O’Connor looks at some of the key issues discussed at and around the various events.
Industry stakeholders conveyed cautious optimism regarding expected mergers and acquisitions (“M&A”) activity over the next 12 months, while highlighting certain particulars of the anticipated market of which dealmakers should be aware. These particulars primarily focus on the intersection of buyer class, interest rates and asset prices. Given the current cost of financing, strategic investors, rather than financial investors, are expected to dominate the market. With less of a focus on achieving certain return thresholds over a set investment horizon, strategic investors — especially smaller leasing companies — are driven to achieve scale through consolidation. While interest rates will have an impact on any proposed transaction, such a buyer’s confidence in refinancing the transaction will outweigh short/medium term interest rate concerns if the asset price is appropriate.
Interest rates aside, asset prices are expected to be volatile across 2023 and may act as an M&A deterrent for some. Regardless, industry stakeholders agree that several drivers, such as credit exposure from prior consolidations, will create a general need to engage in transactions such as portfolio sales. While the 2023 M&A landscape will not be easy to navigate, industry stakeholders have been able to identify where deals will likely happen and generally agree next year should see steady activity.
In the absence of aviation asset-backed securitization (“ABS”) activity, issuers and investors have expressed renewed interest in private placement deals as other sources of financing become more expensive and more difficult to access. Private placements often offer more flexibility than traditional capital markets offerings and on-balance sheet bank deals, as they can be tailored to specific investor needs. This allows the participants to structure more bespoke deals or finance more challenging portfolios. This tailor-made approach can also lower execution risk because deal timelines are generally shorter, disclosure requirements are less rigorous than in an ABS issuance and the investor pool is smaller and readily identifiable. Though pricing for private placements may not match that of other capital sources, certainty that the deal will close is increasingly valuable to borrowers as rates, and the economy at large, remain volatile. If these market trends continue, expect to hear about more private-side deals in the coming months as the most likely alternative to capital markets ABS issuances.
A hot topic of conversation was how Lessors were progressing with their insurance claims in respect of their aircraft stranded in Russia. While AerCap was the first to file suit against its insurance providers in the English courts in June of this year, others have now followed. Dubai Aerospace Enterprise also filed suit before the English courts at the end of October; whereas, at or around the same time, Carlyle Aviation Partners and Aviator Capital filed suit in the judicial circuit court for Miami-Dade County, and Aircastle filed in New York. Both Avolon and BOC Aviation filed in the Irish High Court at the beginning of November. While the AerCap case now moves into the case management state of proceedings, it will be interesting to see if any nuances to the arguments being advanced are raised in these new proceedings.
As is well documented by now, aircraft finance deal flow needs an increase in lease rate factors to account for the current interest rate environment. While there was some positive anecdotal evidence from the conferences on lease rate factors in the Sale and Leaseback market moving from the low 0.5s of earlier this year to the high 0.6s recently, these increases are not yet meeting the increased debt costs faced by lessors in the current rising interest rate environment.
Several key industry topics were identified by the AWG, primarily issues stemming from the global COVID-19 pandemic and the Russia-Ukraine War. The first focused on lessons learned from COVID-19 in the distressed debt space. Parties should be cautious of assuming in the case of a default or restructuring that everyone will simply come to the table and discuss how to proceed. For example, making sure things are clearly defined in the debt documentation so that in the case of foreclosure, the parties have an understanding of how an auction will be conducted, what “reasonable” means, etc. Rather than assume that different parties with different objectives will be able to come to an agreement in a distressed situation, creditors and debtors should reflect at the front end of a transaction on what each party can or cannot do.
Second was how the Russia-Ukraine War highlighted the fact that the aviation industry’s insurance system is not working at optimal levels, leaving opportunities for insurance companies to claim that this type of peril was not the peril insured against. Parties should rethink their standard insurance clauses and policies in order to make sure such documents work in today’s world. Relatedly, the AWG panel also discussed how parties should consider insurance coverage in case of nuclear detonation, the enforcement of Cape Town Convention rights in countries where Russian-operated aircraft land, and airworthiness rehabilitation of formerly Russian-operated aircraft. The panel also took the opportunity to announce that the AWG Cape Town Convention Compliance Index is now available free of charge for all industry participants.