ORIX Aviation steps up for Avolon
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September/October 2018
YOUR ESSENTIAL INTELLIGENCE RESOURCE FOR AVIATION FINANCE
ORIX Aviation
steps up
for Avolon
The senior management
explain the thinking
behind the deal
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NMCA
I P IRTEEVRI EOWN C O| M P ECTAI LT S
I OCNH A I R|M A N CI INTVTA
E SKTEI G
OAT
V EIRO N | | I NRTURTEHP IKDE' S P LIANNTN
L LY EERD
V I IEPW
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Cover story
ORIX Aviation
steps up for Avolon
The Dublin-based lessor’s move to take a 30% stake in Avolon,
a company with a fleet three times its size, surprised many in
the leasing industry. Jack Dutton speaks to the lessors’ senior
management about the deal.
J apanese-owned lessor ORIX
Aviation’s move to buy a 30% stake
in Avolon for $2.2 billion is the latest
been strong trading partners for the
past three or four years with 45 aircraft
valued at $3 billion being traded
in a series of divestments made by the between both companies,” says Meyler,
Irish lessor’s once acquisitive parent, in an interview with Airfinance Journal.
HNA Group. He adds: “In knowing the Avolon
The Chinese conglomerate has business well from our close working
shed nearly $17 billion in assets since relationship, we knew there was
2017 after a multi-year asset binge. limited overlap in our business models
The whole process began with a which made it a fit.”
conversation between Avolon’s chief Rumours first emerged at Airfinance
executive officer, Domhnal Slattery, Journal’s Hong Kong event last
and James Meyler, chief executive November that parts or the entire
officer of ORIX Aviation Hong Kong, Avolon portfolio could be sold to a
in January in an informal setting about rival lessor, with AerCap and CDB
the aspirations for their businesses. Aviation being touted as possible
“ORIX Aviation and Avolon have suitors.
22 Airfinance Journal September/October 2018
Cover story
The rumour mill started again this year He adds: “The great opportunity for
with various media reports indicating that Avolon is to have ORIX further turbocharge
HNA had contacted parties “in the last the level of activity in Japan so it becomes
couple of months” about buying a slice of the premier distributor of aircraft in the
the lessor. Hong Kong-based CK Holdings Japanese investor market, which over
and NWS were rumoured as potential many cycles and decades has proven to
buyers. be a very resilient market. It’s perhaps the
However, Slattery was quick to deepest single market in the world for
deny these rumours on the day of the acquiring aircraft, be it corporate entities or
announcement, saying there was never any be it high net-worth individuals.”
formal sales process in place. He insisted
that sales talks only ever occurred with Complementary or competitive?
ORIX, which will finance the acquisition out The main benefit for Avolon in having ORIX
of cash from the ORIX Group. The deal is as a minority shareholder is the latter’s
expected to close in November. investment-grade status.
“ORIX fitted the profile of the investor
Deal challenges that would effectively remove any structural
“I think valuation is important,” says Slattery. impediments to our roadmap to investment
“This transaction has been valued at a grade,” says Slattery. “And we believe this
slight premium to our book value, but it’s transaction will achieve that and you’ll see
had a very significant premium on Bohai’s that any structural impediment of Avolon
price to book.” Bohai Capital is Avolon’s getting to investment grade has effectively
direct parent. been removed as a consequence of this
According to Avolon, the HNA-owned transaction.”
lessor has an enterprise value of $23.7 The deal is the largest-ever single
billion based on its 31 March status. dollar ticket for a minority investment in
He adds: “Bohai’s stock price has had its an aircraft leasing company. Slattery says
challenges after the last number of weeks he was “convinced” that only a lessor with
after it effectively started trading again. ORIX’s scale, balance sheet, liquidity and
Bohai’s price is trading at a deep discount commitment to the leasing sector would be
to book, so this is a really smart transaction able to write a ticket of that size.
from the Bohai investor’s perspective.” Shareholders of Bohai Capital still need
Although some market participants were to approve the deal, which includes a
surprised that ORIX ended up investing governance framework with significant
in Avolon, the lessor has been in the ORIX becoming a 30% protections for the minority shareholder.
space for 28 years and its parent, ORIX However, ORIX does not have a right
Corporation, has been consistently lending shareholder in Avolon to purchase a larger stake of Avolon at a
and investing in airlines and aviation since predetermined price.
1978. ORIX Corporation has also invested
should be and will be “You should think about this split at
in airports and worked with companies seen in the Japanese 70 to 30% being a long-term stable split
such as Vinci Airports, which operates 36 of the ownership of the business,” says
airports globally. market as a very strong Slattery. “I think it’s fair to say, and I think
Unlike Avolon, ORIX Aviation has a
long-term shareholding structure, being
endorsement of the this will be brought out in the rating agency
releases when they come out over the
the industry’s longest single shareholder- Avolon business model next few hours, that ORIX has got a series
owned leasing business. ORIX Aviation of minority shareholder protections that
combines larger aviation investments with and franchise. have got them very comfortable with their
asset management, which attracts both minority position.”
domestic Japanese and international James Meyler, chief executive officer, ORIX Slattery says that those minority
investors, as well as traditional aircraft Aviation Hong Kong shareholder protections have also assisted
acquisition and leasing. In the financial year the agencies in becoming comfortable with
ending 31 March 2018, the lessor executed decoupling Avolon’s credit rating from its
$4.2 billion in transactions and has closed parent’s rating. He says the deal will take
more than $30 billion in deals over the past endorsement of the Avolon business model away the structural impediments of Avolon
15 years. and franchise,” he says. getting to investment grade.
Meyler says that the main challenges Although Avolon already has several “For the foreseeable future, 70 to 30% is
ORIX experienced when negotiating Japanese banks as part of its lending what you’ll be looking at,” he adds.
the deal was defining the “insulation syndicate, Slattery also believes that Although both lessors have traded
framework” structure for Avolon as a fully the ORIX stake is likely to improve the many aircraft in the past, David Power,
funded and capitalised entity, independent Japanese market’s perception of the HNA- chief executive officer of ORIX Aviation,
of its troubled parent HNA Group. owned lessor, on both the bond investor insists that the businesses are more
side or on the debt side. complementary than competitive.
Japanese endorsement “ORIX is probably the most active “When we looked at the opportunity,
Meyler believes the deal will increase distributor/syndicator in the Japanese we could see that our businesses are very
Avolon’s foothold in the Japanese market. investor market and has been for a very complementary and the areas of overlap
“ORIX becoming a 30% shareholder long time,” says Slattery. “So, whether that’s are minimal. That was very positive for
in Avolon should be and will be seen in the single investor, Jol [Japanese operating each of the parties; it also helps given
the Japanese market as a very strong lease], ORIX are right up there.” the strength of ORIX Corporation and the
www.airfinancejournal.com 23
Cover story
investment-grade aspirations of Avolon.” Avolon from HNA and gives ORIX Aviation
Power says the deal will create “a win- has a powerful position at the board table
win situation”, although both businesses with two board seats,” he adds.
will continue to be run separately.
As a 30% shareholder in Avolon, ORIX Putting dollars to work
will benefit from the Chinese-owned For Avolon, the deal “accelerates its
lessor’s cash flows and profits. Meyler, who roadmap” towards becoming an investment
is also deputy chief executive officer and grade-rated lessor. As one of the largest
chief commercial officer of ORIX Aviation buyers of aircraft in the world, becoming
Group, says his company will also benefit investment grade will allow the lessor to
from the returns made from Avolon’s buy aircraft at lower prices and access
orderbook, but it will not be taking any of cheaper debt, accelerating its growth. It
the orders itself. also presents a significant deleveraging
Meyler says: “We’re buying into the opportunity for its parent Bohai Leasing.
business plan that Avolon has set out and Slattery does not expect HNA Group
we want Avolon to keep growing, increase to extract any further capital from Avolon.
in value and reach investment grade. That’s “Just normal on-the-run dividend flow
very much our target for the investment. over years,” he adds, “so I think we’re
ORIX Aviation will continue to grow by its in a different phase of the company’s
business plan.” development now that ORIX has come to
However, there will be areas of the table.”
synergy. “We imagine in future there will For ORIX, which is primarily focused on
be opportunities for us to cooperate on mid-life aircraft and asset management
various types of transactions, especially in rather than new aircraft acquisitions from
the Japanese market where ORIX is one of the original equipment manufacturers, it
the key players,” says Meyler. provides an opportunity for it to put its
He adds that these transactions are likely dollars to work.
to be aircraft trades. “It’s an inflation hedge – inflation is
ORIX has moved from owning and now back on the radar and so if you want
managing 100 aircraft eight years ago to to put a significant amount of dollars to
230 aircraft today. The lessor plans to work – and I think $2.2 billion in anybody’s
grow to more than 300 aircraft in the next Inflation is now back terminology is a big number – Avolon
three years. Avolon, on the other hand, allowed them to put it to work in scale,”
eventually looks to become the world’s on the radar and so if you says Slattery.
largest aircraft lessor. Its owned, managed ORIX has been through many industry
and committed fleet was 890 aircraft at
want to put a significant cycles and events, including 9/11 and the
30 June, making it the third largest behind amount of dollars to work financial crisis of 2008. Meyler says the
GECAS and AerCap. lessor has had a strong past couple of
– and I think $2.2 billion years.
HNA’s motivations “We’ve added almost 100 aircraft over
Slattery insists that the deal was
in anybody’s terminology the last couple of years to our owned
commercially rather than politically is a big number – Avolon and managed portfolio,” he adds. “We’re
motivated. He says conversations were now at just under 230 aircraft owned
held purely between HNA Group, Bohai, allowed them to put it to and managed, worth $10 billion. Our
ORIX and Avolon, and they had nothing to
do with China looking to sell off parts of the
work in scale. business model is quite unique but also
it’s complementary to the likes of Avolon
HNA portfolio to reduce its debt burden. Domhnal Slattery, chief executive officer, where it has the orderbook.
He indicated in an investor call in August Avolon “ORIX Aviation has bought into other
that HNA had no interest in selling a investments in the past – airlines and
controlling interest in Avolon. airports; we’re an investor in aviation.
On completion of the transaction, the continue as a valued partner.” We see this as a very good investment
revised Avolon board will comprise two The fact that ORIX acquired a minority and return on our equity as expected.
ORIX directors, three Bohai directors, with stake rather than a majority stake in Avolon Even if the business is completely run
Slattery as executive director and one raised some eyebrows in the market, independently to our business plan, we
independent director. because it still allows Bohai and HNA to expect the return on investment to be good
“Having dealt with the HNA and Bohai have majority control over the business. and that’s accretive to our own business
group in this process, it is fair to say that However, Meyler seems comfortable with because we’ll have 30% of their business.”
they are a well-run and professional this. Although Slattery says that the
organisation working diligently to “HNA and Bohai bring real value to stakeholder structure of Avolon will not
restructure their business model in line with the table in terms of the ORIX Group’s change in the short term, Power has
their circumstances. This deal is assisting position with the manufacturers and their not ruled out increasing ORIX’s stake in
that process,” says Meyler. knowledge and experience in the airline Avolon sometime in the future. Asked
“People need to remember that Avolon and airport sectors,” says Meyler. whether ORIX would consider eventually
is fully funded from an equity perspective “ORIX Aviation has certain minority doing so, Power says: “We are committed
and is very much a standalone global shareholder protections that, in essence, to this space and if the right opportunity
entity. As such, Avolon is a real success give us rights over key business decisions. comes along to increase our investment
story for HNA and fits its core aviation Both ORIX Aviation and the rating agencies in this space, we will certainly plan to take
industry business focus. We expect them to comfortable that this transaction decouples advantage of that opportunity.”
24 Airfinance Journal September/October 2018
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