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The Leasing Market in a Hurricane Eithne Manning, Head of Funding The Leasing Market in a Hurricane Eithne Manning, Head of Funding and Tax SMBC Aviation Capital Important Notice and Disclaimer This presentation has been prepared by SMBC Aviation Capital Limited (the Company and its subsidiaries (the “Group”) and the industry in which the “Company”) solely for information purposes and does not constitute, and Group operates. These statements may be identified by words such as should not be construed as, an offer to sell or issue securities or otherwise “expectation”, “belief”, “estimate”, “plan”, “target”, or “forecast” and similar constitute an invitation or inducement to any person to purchase, expressions or the negative thereof; or by the forward-looking nature of underwrite, subscribe to or otherwise acquire securities in the Company or discussions of strategy, plans or intentions; or by their context. All any member of the Group (as defined below). statements regarding the future are subject to inherent risks and uncertainties and various factors could cause actual future results, This document may not be (in whole or in part) reproduced, distributed, performance or events to differ materially from those described or implied in stored, introduced into a retrieval system of any nature or disclosed in any these statements. Such forward-looking statements are based on numerous way to any other person without the prior written consent of the Company. assumptions regarding the Group’s present and future business strategies and the environment in which the Group will operate in the future. Further, The information contained in this document has not been verified or certain forward-looking statements are based upon assumptions of future reviewed by the Company’s auditors and, as such, is subject to all other events which may not prove to be accurate and neither the Company nor any publicly available information and amendments without notice (such other person accepts any responsibility for the accuracy of the opinions amendments may be material). expressed in this document or the underlying assumptions. The forward- The Company makes no representation or warranty of any sort as to the looking statements in this document speak only as at the date of this accuracy or completeness of the information contained in this document or presentation and the Company assumes no obligation to update or provide in any meeting or presentation which accompanies it or in any other any additional information in relation to such forward-looking statements. document or information made available in connection with this document This document is not intended for distribution to, or use by, any person or and no person shall have any right of action against the Company or any entity in any jurisdiction or country where such distribution or use would be other person in relation to the accuracy or completeness of any such contrary to local law or regulation or which would require any registration or information. licensing within such jurisdiction. This document contains statements that constitute forward-looking statements relating to the business, financial performance and results of the 2 SMBC Aviation Capital: Introduction Top 5 613 $11.1bn LARGEST OWNED,MANAGED SHAREHOLDER LESSOR ANDCOMMITTED SUPPORT AIRCRAFT A-/A- 81% $2.5bn S&P/FITCH NARROWBODY FY2020 SALE AND RATINGS AIRCRAFT LEASEBACKS 3 Agenda Part #1 Part #2 Lessor Perspective Lessors’ Access to Funding • Lessor landscape pre pandemic • Access to funding markets pre pandemic • The impact of the pandemic on lessors • The impact of the pandemic on funding • Lessor response markets • Outlook • Outlook 4 End of Cycle Landscape Recap 5 Increasing Role of Aircraft Lessors Today 43% of global fleet is leased equating to around 11,000 aircraft – market value in excess of $325 billion Global Commercial 25,300 Aircraft Fleet Leased Aircraft 17,600 12,500 8,300 4,500 1,800 11,000 1,030 6,600 43% 35 100 3,000 1970 1980 1990 2000 2010 2020 Source: Ascend 6 Leasing Industry Overview – Main Players Lessor Fleet Ranking Growing Asian Presence: 13 of the top 24 lessors have 35 Asian shareholders – in excess of 3,000 aircraft 30 ) Significant M&A Activity: n 25 b $ ( 12 lessors changed ownership or t e e acquired competitors since global l F 20 d financial crisis e g n a M 15 & d Recent acquisitions by e n Japanese Corporates: w 10 O ACG and Aircastle 5 0 0 2 4 6 8 10 12 Average Age of Portfolio Source: Ascend World Fleet 04 Jan 2021, Management Info. Average age weighted by fleet IMV 7 7 Leasing Industry is Growing but Remains Fragmented – In 2008, top 10 lessors accounted for 70% of total lessor market – Proliferation of new entrants outweighs impact of consolidation – Today, top 10 lessors account for just 50% of total lessor market Declining Share of Top Lessors 2008 2014 2019 Top 20 Lessors Top 10 Lessors #Lessors Source: Ascend 8 Features of Top of the Market Profitability 1 2019 year of record profitability Other Funding Markets Bank lending and ABS wide open for non Investment Grade lessors 6 Influx of Liquidity Capital inflows driving competitive 2 market and yield compression Bond Issuance Bond markets primary source of financing for Investment Grade 5 lessors to fund, record tight levels Direct Orders Direct Order channel exhibiting 3 signs of oversupply, especially for Trading Activity wide body aircraft Robust secondary trading market allowing recycling of capital and 4 portfolio management opportunities 9 Impact of Covid-19 10 Impact of Covid-19 on the Aircraft Leasing Sector Unprecedented Shock Financial Challenges Path to Recovery Industry Outlook Financial Strength Market Opportunities Adjusting to New Reality Lessor Challenges Through Period of Market Dislocation Rental Managing Airline Impact on Deferrals Restructurings Profitability • Extent of rent deferral • Increased number of • Increased asset requests has abated airlines in bankruptcy impairment and credit proceedings losses • Virus resurgence presents new near term risk • Lessors have increased • Wide body and older size and scope of aircraft most impacted restructuring teams • Strong lessor liquidity required to support • Impairment triggered airline requests • Younger narrowbody earlier under IFRS Vs aircraft will be retained US GAAP 12 Effective OEM Duopoly a Key Industry Risk Mitigant — Large jet aircraft market is dominated by Boeing and Airbus — Barriers to entry are very high — OEM has vested interest to avoid oversupply and “white tail” risk — Results in disciplined behaviour with aircraft supply broadly tracking passenger growth Historical Delivery of New Aircraft Vs Global Passenger Traffic 1800 6 1600 Airbus Boeing Other Pax Traffic (RPM) 5 1400 1200 4 t f a M r 1000 P c r R i 3 a n 800 f o i o l l . i o 600 2 r N T 400 1 200 0 0 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 Source: Ascend, Passenger Jet aircraft with 120+ seats 13 Lessors Materially Reduced Near Term CapEx Commitments Restructuring of direct orders and OEM production delays materially reduced near term commitments IG Lessors Capex Reduction SMBC Aviation Capital 22% 53% 48% CAPEX ($Bns) 25.4 3.3 79% 20.2 2.7 11.8 15.7 1.4 0.7 Initial CAPEX Revised Initial CAPEX Revised Initial CAPEX Revised Initial CAPEX Revised (as at 30 Sep) (as at 30 Sep) (as at Sept 30) (as at Sept 30) 2020 2021 2020 2021 Source: Company Financial Reports. Initial Capex based on March 2019 reports. Revised Capex includes actual deliveries up to Sept 30th, 2020 and forecast thereafter • 15bn+ of SLB transactions completed since March 2020 Flight to • Leading airline credits seeking to shore up liquidity Quality • Limited market for tier 2 / tier 3 airlines • Less competing capital driving improved returns and structures Risk Adjusted • Reduction in bank lending, JOLCOs providing opportunities Returns • Divergence in returns/credit quality versus direct order channel Sale and Leaseback Market: Changed Dynamics • Primarily narrowbody aircraft with selective widebody transactions Asset Focus • OEM production delays reducing inventory of new aircraft • Airlines monetising unencumbered, on-balance sheet aircraft • OEM production ramp-up to provide increased SLB inventory Market • c.450 part completed MAX aircraft to deliver in 2021-22, A320NEO Opportunity monthly rate increase in Q4 2021 • Market will open for tier 2 airlines once path to recovery more clear 15 Sale and Leaseback Market Providing Opportunities – Over $200bn of liquid aircraft types due to deliver over the next 3 years – Airlines not funding for cash as they rebuild balance sheets and some funding channels currently closed – Leasing will remain the preferred funding channel until debt markets fully recover Financing requirement by Year and Family ($bn)1 2021-2024 deliveries by region2 Other 80 14% A320 B737 787 A350 70 Asia Pacific 60 33% 50 40 North 30 America 24% 20 10 0 Europe 2021 2022 2023 29% Access to capital will be a significant competitive advantage 1 Cirium Fleets October 2020, SMBC estimates 2 Cirium Fleets October 2020 16 Strong Long Term Fundamentals 17 Long Term Traffic Growth Drivers Remain Intact Propensity to Increased Growing Increase in travel increases Urbanisation ‘Middle Class’ LCC carriers with wealth Age profile and lessors ownership by region1 20 year delivery forecast by region2 Age Leased % Age Leased % Other Europe 16 70% 26% 21% 14 60% 12 50% 10 40% 8 South 30% 6 East Asia 11% 4 20% North America 2 10% 21% 0 0% China S. Europe Asia Middle Africa
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