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Complexity of lessor restructurings

Written by Ciarán Flynn, Goodbody and Samuel Sibony, DC Advisory

13 January 2021

With four out of every 10 leased aircraft still grounded and airline liquidity becoming increasingly tight, it is likely that as time passes more and more aircraft lessors will need to restructure their balance sheets to reflect the dramatically changed conditions. In this article Samuel Sibony of DC Advisory and Ciaran Flynn of Goodbody outline the value that experienced restructuring advisors can bring to the table, on behalf of debtors and/or creditors. In this increasingly complex area, they say, adopting a ‘one size fits all approach’ may not be the best way to achieve a successful outcome.

The aviation sector has been in the front line of the economic battle with Covid-19 and has already paid a heavy toll. From making a profit $26.4 billion in 2019 the world’s commercial airlines slumped to an estimated loss of nearly $120 billion last year. While airlines have been successful in attracting significant government support – over $140 billion globally – a number of casualties have entered bankruptcy processes, including Norwegian, South African, Virgin Australia and Thai Airways. This has had a knock-on impact on the aircraft leasing market. A recent report by Alton Aviation Consultancy estimates that four out of every 10 leased aircraft are currently grounded. Furthermore, about 900 aircraft are leased by airlines with only enough cash to last two months or less and are not government owned. Against this background there is likely to be more financial pain for the airlines and lessors.

Aircraft leasing is a financing spread business: lessors receive a higher lease rate form their airline clients (or top line) than the cost of financing (or cost base). The Covid-19 crisis impacted first and foremost the top line of the business model. The industry witnessed a collapse in the airlines’ ability to pay their leases, leasing rates, demand for naked aircraft and residual aircraft values. At the same time, the lessors’ cost bases remained stable. Interest and maturities on debt need to be paid to creditors while obligations to OEMs remain whole.

'The increase in appetite for aircraft related debt has been the bedrock of the growth in the aircraft leasing market' - Samuel Sibony of DC Advisory and Ciarán Flynn of Goodbody.

According to public sources, a number of global leasing companies are in the process of restructuring their balance sheets. The largest is Nordic Aviation Capital (NAC), the specialist regional aircraft lessor majority owned by EQT, the private equity firm. NAC entered an Irish Scheme of Arrangement in June 2020 with approximately €6 billion of gross debt on balance sheet. Its creditors agreed to suspend interest and amortization payments in exchange for a €60 million equity injection by EQT, an uplift in margin and extra collateral. Smaller lessors like Avation have announced the hiring of restructuring advisors to assist in their dialogue with holders of their outstanding bonds, due to be repaid in 2021.

Lenders to the aviation sector have shown considerable forbearance throughout 2020. However, there is no guarantee that this will continue through 2021. Historically, lessors have been able to tap the broadest range of funding sources: banks, bonds, private placements and securitisations, with ABS issuance hitting close to $9 billion in 2019. The increase in appetite for aircraft related debt has been the bedrock of the growth in the aircraft leasing market. As an illustration, the debt stock of large lessors has increased exponentially over the last 10 years: Aercap from $7 billion to $30 billion and Air Lease $1 billion to $14 billion.

The stressed nature of lessors is typically reflected in the price of the debt trading at a discount to par (100 per cent). The 6.5 per cent May 2021 Avation bonds are currently trading at a price of 70 per cent, a yield of 120 per cent, most likely meaning lenders do not believe they will get a par redemption of their bonds and therefore the final value of the bonds will need to be written down. Similarly, in the case of NAC, there have been transactions in the bank loans at a discount to par. The buyers of this discounted debt are typically new lenders like hedge funds, attracted by the potential high reward of owning this credit.

In stressed or distressed situations, the role of financial advisors is key. Financial advisors are restructuring and process experts, whose role is to defend the interest of their client (debtor or creditor) by maximising their recovery, which also means having all parties agree to a deal that allows the company to survive and grow. Debtor-side financial advisors are paid by the debtor, not the shareholder: their role consists in helping management draft a business plan and structure a new capital structure better suited to the new market paradigm and negotiate with creditors. The creditor financial advisor helps to manage an often disparate creditor group with non-aligned interests, analyses and conducts due diligence on the business plan, provides access in some cases to private information that bondholders cannot and negotiates on their behalf. Financial advisors, working hand in hand with lawyers, are financially incentivised to save a lessor from possible insolvency and allow the company to grow thanks to a correctly sized debt structure.

The NAC scheme of arrangement shows the complexity in today’s restructurings. The complexity lies in its multi-jurisdictional aspect, the complexity of its structure with over 30 SPVs, the multitude of creditors with different securities and interests, including banks, owners of private placements, hedge funds, state-owned banks and private debt funds. On top of this, NAC has over 400 aircrafts on lease to various airlines, some of which are themselves in distress, potential naked aircraft to remarket or sell, and potential new orders with OEMs.

Two specialist institutions, DC Advisory and Goodbody, have joined forced to help debtors and creditors in forthcoming restructurings. DC Advisory is an international investment bank with a European restructuring advisory practice centred in London. The DC Advisory team has worked on the most complex European restructurings of the past decade on behalf of funds, banks and debtors. Goodbody is a Dublin based investment bank, with a particular expertise in debt capital markets, advisory to airline, lessors and aviation regulators. As has become clear in recent restructurings, the level of complexity of lessor restructurings is immense and the “one size fits all approach” may not lead to a successful outcome. We believe our complementary team is uniquely positioned to advise on all aspects of a lessor restructuring.

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