Worldwide: ABS Set To Soar As Financing Option In Asia's Booming Aviation Market

Last Updated: 19 July 2019
Article by Stacey Palker

Most Read Contributor in Netherlands, August 2019

Investors are now turning their interest toward asset-backed securitisation market for aviation finance in Asia.

Asset-backed securitisation (ABS) has for decades been common practice for the aviation industry in Europe and North America. In Asia, the market remains relatively underdeveloped and untapped but it is beginning to gain traction, as noted by a panel of experts in TMF Group's recent webinar titled 'Aircraft lease securitisation,' which was organised in association with Airfinance Journal.

The key trends driving this growth are a widening range of investors, greater scope for ABS in financing a variety of aircraft and equipment, and the rise of tradeable equity in ABS.

Growing investor interest

Interest in ABS in Asia goes back to 2015 when BOC Aviation became the first Asian issuer of an aircraft ABS. It was the regional aviation finance industry's first securitisation deal. A growing number of deals since then has helped spark demand from a wide range of investors, including hedge funds, private equity, asset managers, family offices and sovereign wealth funds.

Crossover investors, such as from the shipping sector, also are eager to take advantage of ABS, drawn to benefits such as reliable supply, lower volatility and consistent growth over the last 40 years, which is expected to continue, according to Weili Chen, Head of Capital Markets Aircraft Financing, Standard Chartered.

"[The aviation leasing sector] has been seeing very steady [growth], roughly two times GDP growth rate, and that is not really expected to deviate that much if you look out over the next 20-30 years," he said. "So, I think there are a lot of very attractive characteristics of this asset class – on top of which this is a very liquid, dollar-based asset."

The increased ease in leasing or trading the underlying collateral has also boosted the popularity of ABS, Chen said, as have efforts by organisations like the Aviation Working Group to make title transfers simpler.

For institutional investors, the long-term stable cash flow associated with an ABS is of particular value, as are the facts that the collateral is liquid and can be moved globally, said Eric Blau, Treasurer, at lessor Aviation Capital Group. Blau pointed out that the ABS market met multiple strategic purposes, including portfolio management.

"A lot of us view ourselves as asset managers as well as aircraft lessors, so in the context of managing a portfolio of aircraft you can use the ABS market to share the risk in your portfolio with a broader investor base while maintaining the same customer relationships," Blau said, adding: "You can use the ABS market to manage concentrations. You can use it to manage exposure to different areas of the world and different aircraft types so that you can continue to grow your own portfolio as well as your managed portfolio for a third party."

ABS trends

Johnny Lau, Chief Consultant at PwC's Aviation Business Services, said recent years had seen numerous enquiries from institutional investors in Japan, China, South Korea and Singapore expressing interest in purchasing aviation debt and equity products without the complication of setting up their own leasing firm or hiring an expert team.

"I'm sure that if we have good plans and also good issuers, then we would be able to find in those countries new sources of investors," he said, noting this was especially true for cash-rich Chinese firms.

"They need to invest somewhere, and they are bound by some very rigid outbound investment rules. And it seems that aircraft is one of the things that they are allowed to invest in, and the government may feel comfortable to approve such kind of investments," he said. "I'm sure that if we can do [a domestic ABS deal] in mainland China, I think that will be a very successful transaction."

Drew Fine, Partner at the New York office of law firm Milbank, said the US aircraft ABS market – which typically saw three or four ABS transactions a year – has been "incredibly robust" in the last couple of years with 2019 on track to continue this trend.

And, he said, the market had changed: most ABS used to consist of very liquid, relatively young Boeing and Airbus aircraft, with the average portfolio being perhaps five years old.

"This has evolved – we have had deals with aircraft engines, freighters, a lot of mid-life aircraft deals, regional aircraft, turboprops, finance leases and even aircraft-secured loans," Fine said. "Basically, as long as we can find a reliable cash flow, then we can put together an ABS."

One growing trend, he said, was of larger leasing firms using ABS to sell the debt and equity side of the portfolio while continuing to service the aircraft and often retain an ownership stake. Yet another area that has evolved – and one that directly involves Asia – is the source of third-party equity, according to Fine. The rise of tradeable equity has allowed shares of ABS equity to be sold in the USD5-10 million range, moving the industry away from its reliance on single, large private equity investors to a diverse pool.

"There have been six of these tradeable equity deals done so far, and many more to come," Fine said.

One region worth noting, he said, was South Korea, which recently saw two ABS deals where equity was obtained from the local market, and was then sold in senior and sub-tranches to groups of 10 to 15 investors.

"I think sooner rather than later we will see a combination of an ABS and a Japanese lease – and that will also be a very popular market," he said.

What ratings agencies look for in an ABS portfolio

Investors should look for the same aspects in an ABS portfolio as rating agencies, according to Drew Fine, Partner at the New York office of law firm Milbank. They are:

  • diversification in terms of lessees, countries and regions
  • no single airline comprising more than 10-15% of a portfolio
  • liquid aircraft types – the most popular models that can be remarketed if necessary - with at least 15 aircraft
  • an experienced servicer
  • aircraft leased into countries with a good history of repossession

Moderator Kevin Butler, Managing Director, TMF Group, UK and Ireland, summarised: "There will clearly continue to be opportunity and growth in the China aircraft leasing market, and ABS is likely to become increasingly important in providing the diversified funding that it needs. What is certain is that China, and the entire Asia-Pacific region, will drive growth in air travel for the next two decades and investors need to find ways in which to secure a place in this stable growth market".

How TMF can help

Securitisation attracts investors who value transparency in relation to agency services, investor reporting, cash management and financial reporting.

With offices in over 80 jurisdictions, TMF Group has served the securitisation market since collateralised loan obligations products were introduced in the 1980s.

We offer the greatest experience, independence and multi-jurisdictional footprint across all major aviation leasing hubs, and can partner with clients on the entire journey from inception to portfolio expansion to eventual securitisation.

Contact us to find out more about the business opportunities this huge market has to offer, and let us help you navigate the challenges and seize the opportunities presented by the region's dynamic, fast-growing aircraft leasing market.

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