Monday, June 19, 2017

Caisse Enters Aircraft Leasing Business?

On Monday morning, the Caisse de dépôt et placement du Québec (CDPQ) put out a press release, CDPQ & GE Capital Aviation Services to join forces in creating USD 2-billion global aircraft financing platform:
  • CDPQ to provide strategic capital over four years to create an aircraft leasing and financing platform alongside world class operator GECAS
  • Platform will provide GECAS with increased flexibility to support future growth
  • Investment marks new milestone in the strategic relationship between CDPQ and GE
Caisse de dépôt et placement du Québec (CDPQ), a leading institutional asset manager, and GE Capital Aviation Services (GECAS), a world leading aircraft leasing company, announced today that they have signed a commitment letter to create a USD 2-billion global aircraft financing platform. The transaction is subject to conditions including any required regulatory approvals.

This new platform, to be named Einn Volant Aircraft Leasing (EVAL), will be involved in the acquisition of modern fuel efficient aircraft from a diverse set of global airlines and in leasing them back to such airlines under long-term leases. GECAS will source the transactions and, under a sistership condition, will invest in aircraft ownership opportunities alongside the platform to further align its interests with those of EVAL. GECAS will also act as servicer for the platform.

EVAL will provide GECAS with the flexibility to finance future growth and opportunities, while serving as an entry point for CDPQ into the aircraft leasing and financing industry. In addition, it represents a key step in the expansion of the strategic relationship between GE and CDPQ, which has been built over several years.

“This platform will provide financing solutions to airlines to help support the growth of their fleet and answer essential industry needs. The high-quality aircraft will be chosen for their ability to withstand short-term cyclicality in a sector underpinned by strong long-term growth drivers,” said Michael Sabia, President and Chief Executive Officer of CDPQ. “Through this platform, CDPQ’s stable capital and GECAS’ extensive expertise and network will combine to identify the best opportunities globally. Working with world class operators such as GE is a fundamental part of our investment strategy, and this announcement is yet another example of this strategy in action.”

“This new platform will enable continued growth and development of our global customer relationships,” said Alec Burger, President & CEO of GECAS. "We are delighted CDPQ will be our strategic partner in this exciting venture, which is a natural expansion of the relationship between the highly regarded pension fund manager and GE.”

Goldman Sachs & Co. LLC and Bank of America Merrill Lynch advised GECAS on the transaction. Clifford Chance, Milbank, Tweed, Hadley & McCloy, Torys, Walkers and Lavery provided legal advice. E&Y provided tax advice.

ABOUT CAISSE DE DÉPÔT ET PLACEMENT DU QUÉBEC

Caisse de dépôt et placement du Québec (CDPQ) is a long-term institutional investor that manages funds primarily for public and parapublic pension and insurance plans. As at December 31, 2016, it held C$270.7 billion in net assets. As one of Canada's leading institutional fund managers, CDPQ invests globally in major financial markets, private equity, infrastructure and real estate. For more information, visit cdpq.com, follow us on Twitter @LaCDPQ or consult our Facebook or LinkedIn pages.

ABOUT GE CAPITAL AVIATION SERVICES

GE Capital Aviation Services (GECAS) is a world leader in aviation leasing and financing. With 50 years of aviation finance experience, GECAS offers a wide range of aircraft types including narrow-bodies, wide-bodies, regional jets, turboprops, freighters and helicopters, plus multiple financing products and services including operating leases, purchase/leasebacks, secured debt financing, capital markets, engine leasing, airframe parts management and airport/airline consulting. GECAS owns or services a fleet of over 1,950 aircraft (1,660 fixed wing/ 306 rotary wing) in operation or on order, plus provides loans collateralized on an additional ~400 aircraft. GECAS serves 264 customers in over 75 countries from a network of 26 offices. gecas.com

GE (NYSE: GE) is the world’s Digital Industrial Company, transforming industry with software-defined machines and solutions that are connected, responsive and predictive. GE is organized around a global exchange of knowledge, the "GE Store," through which each business shares and accesses the same technology, markets, structure and intellect. Each invention further fuels innovation and application across our industrial sectors. With people, services, technology and scale, GE delivers better outcomes for customers by speaking the language of industry. ge.com
With this deal, the Caisse is entering the aircraft leasing business with a great partner (GECAS) that has extensive experience in this field.

The Caisse isn't the first large Canadian pension to enter aircraft leasing. Ontario Teachers', CPPIB and PSP have all done major deals in this space.

In April, I discussed how CPPIB is preparing for landing and how it and its co-investors, which included Terra Firma, announced the sale of Dublin-based aircraft leasing company AWAS to Dubai Aerospace Enterprise Ltd.

In its press release, CPPIB's  Ryan Selwood,Managing Director, Head of Direct Private Equity, stated the following:
“We are pleased with the outcome of this transaction. We continue to believe that the aircraft leasing industry is a highly attractive market for CPPIB over the long term and look forward to exploring future opportunities to invest in the sector at scale, subject to market conditions.”
In other words, CPPIB still finds the aircraft leasing sector attractive over the long term and its managers are not ruling out reentering the space, but the price was right to sell AWAS to Dubai Aerospace Enterprise, so they jumped on the opportunity.

Now, as far as the Caisse is concerned, I bring to your attention what its CEO Michael Sabia stated in the press release:
“This platform will provide financing solutions to airlines to help support the growth of their fleet and answer essential industry needs. The high-quality aircraft will be chosen for their ability to withstand short-term cyclicality in a sector underpinned by strong long-term growth drivers,” said Michael Sabia, President and Chief Executive Officer of CDPQ. “Through this platform, CDPQ’s stable capital and GECAS’ extensive expertise and network will combine to identify the best opportunities globally. Working with world class operators such as GE is a fundamental part of our investment strategy, and this announcement is yet another example of this strategy in action.”
In other words, Michael acknowledges this is a cyclical business that can get hurt during global economic downturns and explicitly states that "high-quality aircrafts will be chosen to withstand short-term cyclicality."

Again, this is a great platform where the Caisse partnered up with a very experienced operator in the sector, one of the largest in the world.

So what is it about aviation financing that attracts institutional investors? Here I will refer you to an excellent paper EY put out in April, Aviation finance: an interesting prospect for long-term investors.

Below, I provide the Executive Summary:
A sustained low-yield environment and demanding regulatory requirements have placed considerable pressure on insurance companies and pension schemes over the last few years. In response, investors have looked to less liquid, alternative investments that offer a higher risk- adjusted return. Increased investor appetite has led to a reduced yield on more “traditional” loans and a search for more unconventional opportunities. This paper looks at one such opportunity: aviation finance.

There is considerable demand for finance in the aviation space, and institutions such as insurance companies and pension schemes can play an important role in meeting this need. Funding is provided in various forms, from traditional shares and loans to aviation specialist products such as enhanced equipment trust certificates.

The characteristics and investor rewards vary widely across different products. We believe that some of these characteristics may appeal to institutional investors — in particular, the opportunity to access investment grade debt collateralized on a long-lasting asset. However, there are also a number of operational and analytical challenges that can either be performed in-house or outsourced to external parties. These include the need for sector-specific expertise, the complexity around asset valuations under various regulatory regimes, and also the potential requirement for system developments.

This paper begins by exploring the aviation finance landscape, including why there is a demand for finance, who has met this demand historically and what forms financing can take. The paper continues to consider the investment opportunity from the point of view of an institutional investor and asks: why would an insurer or pension scheme want to invest in aviation finance, and what are the challenges of doing so?
Again, take the time to carefully read the entire paper here, it is excellent. If you are wondering why the Caisse partnered up with GECAS, the paper states one of the operational challenges:
"Aviation debt is a niche asset that requires extensive market knowledge to access markets and assess contractual features and collateral offerings."
So the Caisse will partner up with GECAS for operational reasons, finance its operations and enjoy a cut of the revenues, long-term revenues that match the Caisse's long-dated liabilities.

Below, a short clip citing the top 5 facts of GE Capital Aviation Services (2015). And an older clip (2014) when GE Capital Aviation Services (GECAS), the commercial aircraft leasing and financing arm of GE, signed a contract with Myanma Airways, the flag carrier of Myanmar (Burma), to lease 10 new Boeing narrow bodies.

Also, back in April 2015,  The Street reports GE sold most of GE Capital. Most of GE Capital Real Estate was sold to funds managed by Blackstone (BX), and Wells Fargo (WFC) bought a portion of the performing loans at closing. GE kept parts of its financing business related to its industrial operations, like GE Capital Aviation Services, Energy Financial Services and Healthcare Equipment Finance.

And lastly, a nice clip from KPMG Ireland which discusses why they are global leaders in aviation finance. And Aircraft Leasing is one of the least known, but one of Ireland's greatest global success stories in the financial services world. Find out more about this exciting industry and the new MSc in Aviation Finance at UCD Smurfit School.





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