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Buying and Selling Aircraft Lease and Loan Portfolios

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Buying and Selling Aircraft Lease and Loan Portfolios SPECIAL FEATURE Buying and selling aircraft lease and loan portfolios The recent acquisition by Sumitomo Mitsui of RBS Aviation Capital from Royal Bank of Scotland is a significant transaction for the aviation finance sector as a whole, and not least for the participants, writes James Cameron, in the first of a two-part article ilbank Tweed Hadley & McCloy Capital. In addition, many of the transporta$ and industry understanding to assume what M represented five of the bidders tion asset books owned by banks are so large is an already very e/cient, well$regarded for the acquisition of RBS Aviation that a seller could not easily absorb even business. For the founders of the company Capital, including winner Sumitomo Mitsui a +( per cent write$down, which in many who are still there % including Peter Barrett, Banking Corporation #SMBC). cases would be conservative, notably if a chief executive o/cer, and Catharine Ennis, The transaction may prove to be a fillip for seller’s obligations are government backed general counsel % the transaction represents a the transportation sector generally, including where regulatory issues, such as government further phase in the company’s history. banks looking to dispose of other non$core consent, may be a factor. RBS’s aviation division was founded transportation assets and potential buyers of In the case of RBS Aviation Capital, the around +( years ago, when the bank acquired those assets. motivations were clear. RBS first considered International Aviation Management Group While not particularly complex, the selling the business over three years ago, and #IAMG0, formerly Lombard Aviation Capital. transaction is of unprecedented size and has in doing so has materially reduced exposure The company was rebranded with the been closed in very challenging and uncertain to dollar$denominated transportation assets RBS name in '((1, by which point it times. It would appear likely that, with the at a time of considerable market volatility and had +(* aircraft, and was a dominant success of this transaction, the unsuccessful concern over availability of dollars. presence in the sale/leaseback market bidders and other potential acquirers will SMBC has acquired a strong business that for narrowbody aircraft. continue to look to buy aircraft and aircraft is transformational to its already well$estab$ loan portfolios that are regarded as non$ lished aircraft finance and leasing business. Seller goals core, particularly from state$owned banks. Investment bank Goldman Sachs has There are a number of potentially competing Milbank Tweed Hadley & McCloy is currently succeeded in arranging what is yet another considerations for a seller in deciding what is involved in a variety of these projects. ground$breaking transaction by co$ordinating to be achieved. For example, does the seller There is no better time to consider how what many commentators thought was a want to achieve “true sale”, such that it no transactions of this nature and in various surprisingly large number of serious bidders longer legally or from a tax or accounting per$ derivative forms are closed, as applied to and bringing the deal to a successful close in a spective owns the business or assets? Or, does the RBS deal and also others that are in relatively short timeframe. the seller want to retain the business and the pipeline. RBS Aviation goes to a new home that monetise the assets, for example, through a clearly has the financial resources, expertise receivables sale? A hybrid might be an asset Why buy or sell? sale but with a total return swap of part of Notwithstanding that banks, particularly RBS Aviation Capital is scheduled to receive the debt to the seller with a view to tranching those that are wholly or partially government nine A320-family aircraft in 2012, with another and selling remaining exposure at a later date. eight to be delivered in the first half of 2013. owned, are under pressure from sharehold$ Further, is the seller looking to sell the ers, politicians, the public and regulators to entire business with the “platform” #that is, dispose of what are perceived to be their more the inclusion of sta5 and goodwill0, as in the risky and expensive assets % both in dollar RBS Aviation Capital sale, or just part of the terms and also due to the need to set aside business or assets? We are seeing consistently capital % there have been comparatively few in non$core asset disposals, including the RBS significant non$core disposals closed in the trade, initial requests for proposal #RFPs0 transportation sector since '((*. Why? This issued by sellers that provide a variety of is mainly due to the gap between book value Allen: 1172200 Limited/Patrick Global IHS options % including, for example, share sale, and actual value. asset sale and part$asset sale. This may be Many of the bidders for RBS Aviation because sellers are not confident of achiev$ Capital more commonly play in the distressed ing the sale of all of the business or assets, or quasi$distressed debt markets, and so are and so want to garner expressions of interest less accustomed to paying full value for a for less than the whole business. In reality, strong, well$run business like RBS Aviation those bidders that bid for an entire business jtf.janes.com 2 February 2012 Jane’s Transport Finance | 25 SPECIAL FEATURE or assets are likely to make the future bidding rounds, with bidders for part of a business ‘Execution risk is a significant only being held pending outcome of the consideration, because however main bids. Finally, there may be tension between tempting the highest bid may be, an timing and price. Goldman Sachs and RBS appeared to manage this very well in the aborted transaction, particularly one recent transaction and achieved fairly quickly what most commentators appear to think is of this size, would have far-reaching a strong price. But it can be a tactical call. For example, would RBS have taken less to close consequences’ the deal in '(++? And did the bank risk loss of momentum once year$end had passed? In might buy the company and that their inten$ sale will involve transfer of title and novation the end it was moot, but for future trans$ tions were genuine. Once bids are received, of leasing transactions % which, in the RBS actions the commercial parties may view both initially and in subsequent rounds, a case, totalled more than '(( leases. An asset timing risk di5erently, particularly in such seller will undertake price comparisons. This purchase, therefore, involves each airline volatile markets. may not be a straightforward process because agreeing to sign a novation agreement, along di5erent bidders may have submitted their with diligence and advice on the jurisdiction The RFP bids on di5erent bases. As with timing, a in which each aircraft is located at the time Having determined what it wants % or hopes further consideration will be execution risk. of title transfer to ensure a valid and tax$free % to achieve, a seller issues an RFP against There have been instances on both closed transfer of title. Such issues are minimised signature of a non$disclosure agreement. and aborted portfolio sales in which the and in some cases negated by a share sale. RFPs vary in form from the detailed to the highest bidder presented the greatest execu$ Notwithstanding that a share sale may fairly bland. It is for the bidder to decide how tion risk, for example, the ability to bring appear to be more straightforward, a seller to respond, but clearly the process is designed the purchase price at completion because of may want to protect itself against buyer to encourage buyers to be more aggressive the requirement for external financing or non$performance. and descriptive in their responses in the hope consents under existing facilities. It has been reported that exclusivity was of attracting a seller’s interest. Another issue is structure in the form of not granted to any one bidder in the RBS airline consent and involvement on an asset Aviation Capital transaction, but in most The data site bid compared to a share bid, or the need for portfolio trades #either by shares or asset0 Accompanying the RFP or at the second$ extensive merger filings or consents. Execu$ there comes a point in the transaction when round bid stage, bidders may be permitted tion risk is a significant consideration because it would be. Following such time, a seller is access to an electronic or physical data room however tempting the highest bid may be, an heavily exposed to a number of factors, for or data site containing information about a aborted transaction, particularly one of this example, the state of the financial markets target, its business, assets and underlying size, would have far$reaching consequences but also to a buyer’s acting in good faith, transactions. In the RBS case, it has been not only for the seller % which may need to and may want to impose penalties in the reported that some potential bidders com$ restart the process on a further two to three$ form of pre$determined liquidated damages plained about the lack of company informa$ year sale cycle but also for the sector and if the buyer fails to complete all but a small tion available to them. related financial markets. number of agreed and well$diligenced and The tactical issue for a seller is that it may understood circumstances, such as obtaining not want to disclose sensitive information Buying an aircraft lessor merger consents. to a large number of potential bidders, some The main consideration for a buyer will be In either case, a buyer is likely to want to of which may be regarded less seriously than whether to bid for assets or for an entire restrict a seller’s conduct with respect to the others, and may be bidding to understand company.
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