ISSUE TWENTYSIX MAY/JUNE 2015 THE LEADING GLOBAL PUBLICATION FOR OPERATORS OF AND INVESTORS IN AIRCRAFT AND ENGINES UKEF AVIATION FINANCE BOC AVIATION LATAM EETC INVESTING IN LESSORS BLACK SWANS www.aviationnews-online.com Talking Bonds Following on from the article in Issue 25 on corporate bond issuance, Airline Economics speaks to Robert Martin, chief executive of BOC Aviation, about the lessor’s financing strategy. n March 2015, the global aircraft billion Global Medium Term Note to 28% of its total debt portfolio today. leasing company, BOC Aviation, (GMTN) Program. The largest share of its portfolio remains launched its inaugural issuance This is BOC Aviation’s largest bond commercial bank debt, which it has of Rule 144A/Regulation S transaction to date. Over the past three traditionally used for its funding needs, US$750 million five-year fixed years, the company has been steadily with export credit-guaranteed funding Irate senior unsecured notes, which growing the capital markets portion of its comprising around 20% of its total was issued under BOC Aviation’s US$5 overall debt financing portfolio, from 5% portfolio. BOC Aviation’s debt portfolio 32 Airline Economics May/June 2015 www.airlineeconomics.co will continue to change since the lessor “In our industry, you need to make turns, we have those sources of funding has another US$2bn remaining to issue sure that you maintain your access with export credit as a backstop and our under its US$5bn GMTN program. to debt at all points in the cycle,” says parent company Bank of China.” Robert Martin, chief executive of BOC Martin. “The idea is that we have two “We have traditionally maintained a Aviation, stresses that he will ensure the significant sources of debt during the very wide group of commercial banks – company’s sources of debt remain global good times: the bond market and the at one point we had over 50 banks in the and diverse. commercial bank market. So if the cycle commercial debt group – but over time www.airlineeconomics.co Airline Economics Airline Economics May/June 2015 33 BOC AVIATION we realised that by getting a rating we we have seen a pick-up of as much as “We have been a big could extend into new markets,” he adds. 40 basis points per annum by issuing BOC Aviation has been issuing in other currencies and immediately proponent of getting unrated debt in the Singapore market swapping back into US dollars. Provided our industry to be seen since 2000 but in September 2012 it we swap it back immediately, we don’t decided to do so on a rated basis when run any currency risk at all.” to be investment grade it received its inaugural credit ratings of Martin intends to continue to issue A- from Fitch and BBB from S&P. S&P in other currencies that the US dollar wherever we can. raised its long-term corporate credit to tap into those additional pools of And that is definitely rating for BOC Aviation to A- in March capital. “It is a matter of where are the of this year, which has benefitted its cross currency rates versus the US dollar happening. In Asia- pricing power in the global markets as but in theory we certainly will look at Pacific, investors tend well as open up a new pool of investors. issuing in Euros at some point, possibly “We were pleasantly surprised by the the Japanese Yen market – we have even to look at us in the same impact of the S&P rating on pricing,” says looked last year at New Zealand dollars. Martin. “We saw significantly tightening Since we received our A- rating from bucket as financial of the pricing in the previous bond issues S&P as well Fitch, our bonds are in a institutions. We need to and the 144A – the all-in was just over new category of investments.” 3% for five year money at a fixed rate and Martin expects the company’s capital position ourselves as now our 10 year was around 4% all-in, in markets debt share to continue to move investors in aircraft that US dollar terms.” up to around 50% over the next few Under its EMTN programme, years, but since BOC Aviation still has take cashflow risk on which was upsized from US$2bn to its remaining amortising debt in place, airlines...” US$5bn and later converted to a GMTN it will take some time for that to happen. programme in March this year (see box “Incrementally it will look as though Robert Martin, BOC Aviation for full issuance history), BOC Aviation we are raising more debt capital markets has issued just over US$3bn of capital just because we have a proportion of markets debt in several currencies. amortising debt in place,” he says. “We “Traditionally our industry is based are very cautious – as a company we our next capital markets deal, part of it on US dollars but there is an additional always look at our overall debt repayment is driven by looking to our overall debt pool of non-US dollar investors out profile. For a leasing company this is amortisation.” there we have to tap into to,” says the most important part of our overall In terms of the size of future Martin. “Whenever we do a non-US financial planning. When you move issuances, Martin is keen to make sure dollar denominated deal, we swap it from amortising bank debt to more debt the volumes remain substantial – at least back immediately into US dollars. If we capital markets, you need to spread out US$100 million – but states that more watch the cross currency swap market at the debt balloons very carefully. So when than US$1bn at once is unlikely since he the same time as we do the bond issue, we decide which tenor do we want to do is conscious of the balloon risk at the end 34 Airline Economics May/June 2015 www.airlineeconomics.co BOC AVIATION of the deal. “The maximum we would This interest will continue. As the recognition, particularly in Asia Pacific, ever do at once would be $1bn because middle classes start to emerge across Asia which was the reason why it first issued we want to spread out the maturities,” Pacific, one of the things they start to do capital markets debt in the Reg S market he says. is buy insurance. The insurers then have before it went to the 144A market. This Like currencies, different tenors large amount of float they are looking to has proven to be a successful strategy. attract a different pool of investors. “We invest and they know they will be holding When BOC Aviation went to market for plan to issue bonds of anywhere between the funds for a long period of time before its 144A transaction in March of this year, five to 10 years,” says Martin. “Then we they are drawn down, particularly life it started the issue in New York during will be watching the differential rates insurance companies. That means they the Asian morning time on Monday, and and the shape of the yield curve in the are looking for opportunities to invest. before New York had even opened it had five and 10 years, which will tell us which Aircraft lessors particularly are gaining $4.5bn of orders from Asia-Pacific and way to go. On the long end, investors in popularity as investors become more Europe. When the US opened, the total tend to be more insurance companies, aware of the benefits of the industry for book went to $5.5bn within two hours. while the more liquid five-year paper its long-term stable returns. “In the end, we intentionally wanted to tends to attract fund managers, private We are spending a lot of time get to the US investors but Asia knew banks and even corporates.” conducting investor education,” says we were going to the US,” says Martin. With its wide issuance, BOC Aviation Martin. “We are also encouraging other “You get this strange dynamic where has seen first-hand the increased leasing companies in Asia to get credit Asian investors try to get their orders appetite from insurers for longer tenor ratings as well. The more companies that in early, so we tightened the pricing bonds from aircraft lessors. “There do so, the more interest there will be in then and split it 50:50 between US and is definite interest from insurance the sector. We have been a big proponent Asian investors.” companies in the aircraft leasing sector,” of getting our industry to be seen to be He adds: “Our intention with this says Martin. “When we went out with investment grade wherever we can. And first deal was to open up our US book our five-year deal in March 2015, a lot of that is definitely happening. In Asia- as much as possible to US institutional the feedback we got from the insurance Pacific, investors tend to look at us in the investors – the large pension funds, companies is that they would prefer the same bucket as financial institutions. We insurers and asset managers – but we longer tenor if possible – both because it need to position ourselves as investors also needed to keep our Asian investors is matching their liabilities and because in aircraft that take cashflow risk on happy, which is why we have done some they want the overall higher yield.” airlines so that investors understand private placements in Asia as well.” Fuelling this demand is also the that we are no different to a property BOC Aviation intends to raise around liberalisation of what insurance REIT for example.