ISSUE ONE 2016

THE LEADING GLOBAL PUBLICATION FOR OPERATORS OF AND INVESTORS IN AIRCRAFT AND ENGINES

Aviation Law Yearbook

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COVERS.indd 1 11/01/2016 08:50:49 Chinese lessors expand their reach Debra Erni, Partner, Pillsbury Law explores the growing influence of China and Hong Kong in the aircraft leasing market

n the context of commercial compared to the end of 2014, and it is whilst the current number is not entirely aircraft financing, expanding the aviation segment in particular that clear, the major players in the field are foreign investment from Asia has witnessed continuous growth. going from strength to strength with the has seen a rapid emergence In 2007, the PRC permitted state civil aircraft leasing market expected to of new power houses in the banks to have leasing units, resulting in reach $130bn by 2025. At the end of leasingI company space, particularly in all five state banks and one of the major September 2014, China’s civil aviation the People’s Republic of China (PRC). policy banks forming new aircraft lessors industry had nearly 2,200 passenger The PRC’s financial leasing industry in a space of less than 18 months. In planes in service, of which 1,500 planes as a whole has continued to expand in December 2013 the central government were leased (40% via finance leases). the past 18 months with total turnover again stated its desire for PRC lessors to The rapid domestic growth forecast reaching around RMB 3,420bn ($500 become some of the biggest in the world in China is not the sole driver and the million) as of the end of March 2015, by 2030. There were reportedly only 20 rising number and activity of PRC up about RMB 220bn ($340 million) domestic lessors in the PRC in 2013 and lessors follows express government

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“A new start-up an Airbus A320-200 to Himalaya Airlines, adopting a novel structure with Rongzhong International the use of a Chinese special purpose Financial Leasing vehicle (SPV). A now established name in the commenced trading industry, Minsheng Financial Leasing, is looking to move into the Hong in February 2015 and Kong market. The lessor has also been another name to watch active in the US market, signing up to a $300 million financing of eight in 2016 will be the Gulfstream aircraft, using a US Ex-Im Shanghai-based aviation Bank guarantee and a memorandum of understanding with Boeing for 30 division of Ping An 737s, a number which would more than double its current portfolio. In 2014, the International Financial lessor counted full-service carriers, such Leasing, a wholly owned as China Eastern and China Airlines, and low-cost carriers, such as Ryanair and subsidiary of Ping An Norwegian Air, among its customers. Insurance Group – The PRC top ten is completed by CMB Financial Leasing, Bank of the largest non-state Communications Financial Leasing, company in China.” CCB Financial Leasing, ABC Financial Leasing, Changjiang Leasing (its parent company, HNA Capital, also has a share in Hong Kong Aviation Capital) and AVIC Leasing, all of whom have been involved in a range of transactions in the industry. Coupled with this, their the past 18 months, and finally Bohai acquisition of, and investment into, Leasing, one of the main shareholders established foreign leasing companies of Hong Kong Aviation Capital (HKAC) has provided immediate access to and the successful bidder of a 20% stake management experience and a wider in Irish lessor in September 2015. customer base. It is currently the only listed leasing CDB Leasing is arguably the best company in the PRC. known of the PRC lessors, leasing to 43 Reports have also highlighted that a airlines (including all the main airlines new start-up Rongzhong International in the PRC as well as lessees in another Financial Leasing commenced trading 23 countries). The lessor used a Japanese in February 2015 and another name operating lease with call option (Jolco) to watch in 2016 will be the Shanghai- in 2012 to finance aircraft for Japan based aviation division of Ping An Airlines and it has been looking at using International Financial Leasing, a wholly ECA financing from Natixis to expand owned subsidiary of Ping An Insurance its portfolio. Reports throughout 2015 Group – the largest non-state company highlighted that it was also exploring in China. In addition to a sizeable order encouragement to grow and diversify the option of listing on the HKSE. In of COMAC aircraft made in June 2016, internationally. While the historical addition to its three domestic platforms this new entrant is due to expand its trend was always for PRC based leasing in the PRC, it also operates out of Dublin. portfolio in the first part of 2016 with companies to focus on inter-state ICBC Financial Leasing has the the arrival of reportedly 30 Boeing leasing, reflecting previous regulatory largest asset base of the PRC lessors and Airbus aircraft via sale and lease limitations and the availability of the (including ships) and currently owns back transactions. It also established free trade zones (Tianjin, Shanghai, and manages just over 300 aircraft. In an Irish subsidiary in September 2015 Fujian and Guangdong), Chinese lessors March, it signed a purchase order with and is currently building up a Dublin have now become conspicuous in their the Chinese manufacturer COMAC based team aggressive pursuit of assets with leases for 30 ARJ21-700 aircraft (following Despite the fact that most of the attached to foreign airlines as a means an order for four C919s in 2011), and Chinese entities are connected to the state to expand their portfolios and enhance it has also recently completed the first through their parent corporation being a bargaining power and influence in ever cross border lease into Nepal of state owned bank or corporation, they

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GROWTH FRONTIERS MIDDLE EAST & AFRICA 2016

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have resorted to using traditional means it aims to boost its portfolio by about attention through significant expansion for funding their aircraft purchases; as $2bn to $5bn by the end of 2016. It of his holdings within the aircraft leasing mentioned above Minsheng Financial signed a purchase order for 70 A320s business in the past 18 months and a Leasing has used US Ex-Im guarantees in 2014 and in 2015 delivered both number of articles have suggested that for purchase orders having previously Airbus and Boeing aircraft to a range his involvement in the market could spur had a bridge facility with DVB Bank, of airlines including Volaris, SriLankan others into seeking out targets as aviation in August 2015 CMB Financial Leasing and Jetstar. Financing has come through is seen as a more stable and possibly refinanced three aircraft using DVB ECA support and it has PDP financings profitable investment than real estate. Bank and Morgan Stanley debt and (with Natixis) listed on its website. It Cheng Yu-Tung is such a case in point. CDB Leasing is in talks with Natixis also secured $300 million in funding Hong Kong’s fourth richest man has, regarding ECA financing for Airbus and from shareholder Bohai Leasing in via Chow Tai Fook and NWS Holdings Boeing deliveries. July 2015. invested in start-up Goshawk Aviation, The Hong Kong lessor base continues Two new lessors entered the market in a JV formed in late 2013 with Investec to develop with BOC Aviation and China 2015, Hong Kong financial group Bridge Bank. Having secured a $605 million Aircraft Leasing (CALC) very active Partners opened up an aviation division non-recourse secured loan facility in in the market. BOC Aviation owns/ in July and Astro Aircraft Leasing also July 2015 the Dublin based lessor has manages more than 250 aircraft with launched, although neither have any recently ramped up staff numbers and 200 currently on order and it recently deals in the public domain as of yet. will be a name to watch in 2016. Cheung extended its $2bn revolving credit Hong Kong has been very open about Kong, through its Dublin-headquarted facility which matures in 2022 with its intention to become more of a rival Accipiter Holdings, bought 18 planes . It has 60 airlines on to Singapore and Ireland and it has from units of GE Capital Aviation its books. recently introduced withholding tax Services for around $714.8 million in CALC is Hong Kong based and reductions aimed at establishing the 2014 and reportedly struck a deal to Sponsors listed with offices in four PRC cities city as an aircraft leasing and financial buy 60 aircraft from AWAS before being and is marketed as “the largest aircraft hub. Designed to make the city more outbid by Macquarie for the portfolio. operating lessor in China, in terms of desirable and competitive, tax on Hong Cheung Kong also entered into a JV with new aircraft import under lease each Kong-PRC transactions has been MCAP in March 2015 (50% Cheung year”. It completed a $224 million ECA reduced from 7% to 5% meaning the Kong, 10% Li Ka Shing Foundation backed facility in April 2015 that will Hong Kong based lessors can now offer and 40% MCAP), creating Vermillion cover 5 A320s and it has a further 100 more attractive rates to PRC airlines. Aviation. Vermillion purchased 15 A320s on order after signing a new Last and certainly not least, we must vintage aircraft from MCAP in February purchase order with Airbus in Paris make mention of the fairly recent entry 2015 with its Irish entity (Vermillion in 2015. of two very high profile individuals into Aviation Holdings Ireland Limited) and Hong Kong Aviation Capital (HKAC) the aircraft leasing market. Cheung Kong concluded a purchase and leaseback has been very public in its intention to Holdings’ owner, Li Ka-shing, (Asia’s arrangement with Avianca Brasil for expand over the next two years saying richest man) has courted much press new Airbus A320-200 in August 2015.

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