London/Dublin, 11th January 2018: According to IBA, the various airline failures and challenges have done little to diminish investor appetite. Indeed, IBA would point to a trend of lessors exploring ostensibly riskier credits as they search for returns in an increasingly competitive market.
The market has witnessed an unprecedented surge in aircraft leasing over the past few years triggered by low interest rates, an above average rise in passenger traffic, low oil pricing, and attractive returns. New arrivals have since entered the space in large numbers, mostly from China, and the demand for deals has reached an all-time high.
With competition for deals fiercer than ever and with investors and lessors hunting further afield for yield, how should lessors best to assess their risk as they enter a new deal? IBA highlights a need for effective mapping and management of risk, and advocates robust intelligence gathering and analysis.
“Lessors need to look beyond the financials whether hunting value in a transaction, analysing the risk in a jurisdiction, or assessing the operating track record of a lessee” says Paul Lyons, Head of Advisory at IBA. “To measure operator risk we have developed an innovative approach that utilises IBA’s expertise and intelligence network alongside desktop and financial analysis and gathers 30+ data points (combining public sources with proprietary data) across five areas of risk: financial performance, fleet profile, operational efficiency, lessor relationships, and regional risk.”
But some deals are still attractive, even if they are risky. According to IBA, if there is a trend here it is that lower reserves are being paid and that less monitoring is being done. It believes that lessors will be caught short as a result. So after intelligence gathering and risk mapping what steps can be taken to mitigate against potential problems?
Firstly, the Lessor’s own, or IBA’s, analysis can be used in negotiations around reserves, lease rates, and security deposits. When the lessee is considered ‘riskier’, IBA might also recommend more frequent inspections, or access to quarterly management accounts.
In addition to the financials, it is advisable to explore the operator’s technical competence especially when red flags are raised. This is especially important when taking on a new lessee or delivering new-gen aircraft.
During a technical due diligence programme, the IBA team will assess the operator’s ability to maintain the aircraft to the standards required of the lease such as: location and condition of records, condition of aircraft and storage facilities, location and condition of spares (engine parts in particular).
Inspections then continue on an annual or semi-annual basis, depending on results.
Actionable intelligence around the value of an asset and the operator’s ability to retain that value, combined with the political and economic direction of key jurisdictions, and both the likelihood and the impact of default are all critical factors. Whether considering the transaction risk, assessing an investment opportunity, setting deposits rentals and reserves, or informing negotiation around second leases – expert analysis can deliver greater transparency around decision-making, resulting in: higher margins, improved contract terms, reduced risk and a more efficient spread of credits.
Paul Lyons concludes: “Lessors and investors are increasingly reliant upon a broad spectrum of solid and reliable market intelligence, data, and possession of the true facts and figures. A whole host of factors can affect confidence, and measuring operator risk with a meaningful IBA Score (IBAS), enables lessors to be better informed around mitigation efforts, and across rentals, reserves and deposits.”