Aviation update - NAC’s ‘last chance’ July extension amid lessor M&A wave, continued airline tumble

Laura Thompson

6 May 2021•9 min read

The aircraft leasing sector is deep in an M&A wave as lessors and airlines alike continue their cruise into restructuring. Lessor consolidation has long been awaited by this fragmented and competitive sector and the pandemic appears to have finally pushed some bruised businesses into merging, with those in the industry expecting more to come.

At the same time, lessors including regional player Nordic Aviation Capital (NAC) are seeking further support from lenders after more than a year of depressed air travel. Airlines continue to topple too, with the largest of late being Mexico’s Interjet, meaning less homes for lessor aircraft. Typifying this is the Irish High Court’s recent decision to allow Norwegian Air Shuttle to reject 425 lease contracts with 68 counterparties.

Meanwhile, banks are getting increasingly repossession-happy as lessors struggle to make due on their secured loans. “Most of our business used to be getting the aircraft from airlines for lessors,” said one repossession source. “Now it’s the banks trying to get the aircraft from the lessors. Those conversations have really kicked off in the last couple of months.”

NAC’s ‘last chance’

NAC has won forbearance from lenders through July to give it time to reach a deal with lenders, sources close to the matter say. NAC would not have been able to start paying interest payment in May, when the original deferral ended, and is now working to secure a deal with its lenders beyond just deferrals.

“They’re aware this is a last chance for them before something more like Chapter 11,” said one restructuring source. “The problem is that there are so many parties involved, their interests are very different. The advisors themselves are overwhelmed – it’s a real lengthy process, going on a silo-by-silo basis for some 17 or 20 silos. Everyone is pushing hard for a deal.”

The world’s largest regional aircraft lessor and fifth largest lessor reached agreement with lenders last June to pause interest, amortisation and maturity payments on $6bn of debt across 89 financing arrangements for six, nine and twelve months respectively. Lenders agreed to the plan in exchange for a €60 million equity injection by NAC sponsor EQT, plus a 0.25% margin uplift and securing collateral on NAC’s remaining unencumbered fleet. The agreement was implemented by an Irish Scheme of arrangement which was sanctioned on 11 September.

This latest extension came after two major shareholders, EQT VI and GIC, decided not to invest further in the business. NAC also appointed independent directors and a restructuring committee. Founder and chairman Martin Moller, through family office Axiom Group, could invest further in NAC in the event of a restructuring, though one buyside source says there is little capital available from Axiom. Another counters that NAC is not in need of major capital input as its costs are by and large just financing costs at the moment.

Low visibility

Sources close to the matter express their frustration with an information gap as they struggle to understand the cash flows of the company. “People are challenging some of the assumptions made by the company,” said a second restructuring source. “Lenders want cash flows on a plane-by-plane basis, but there are huge differences in how different people value all the different cash flows associated.”

Aircraft values and lease rates are tightly guarded secrets in the leasing industry, made muddy here by issues including impairments, time on the ground and power-by-the-hour agreements. Maintenance reserves – a fading feature of leasing agreements to high quality lessees – are a particular point of contention, sources say. The often-cosy relationships between lessors and aircraft appraisers (who frequently double as sponsor-driven publications and event businesses) across the industry is also on some lenders’ minds.

“The appraised values you can get are just wildly different with wildly different assumptions on recovery and residual values,” complained one buysider. “Not to mention the quality of the lessee.” NAC itself uses IBA throughout its scheme of arrangement, a firm one lessor describes as “friendly”.

NAC has a particularly high exposure to one of regional aviation’s most distressed assets - the De Havilland Canada Dash 8 Q400, whose largest operator, UK regional carrier Flybe, folded in February 2020. Regional leasing sources put the CMV of a 2011 vintage Dash 8 turboprop at $7m, while the more popular Embraer E190 of equal age stands healthier at $9m. Monthly lease rates on Dash 8s continue their descent, sources say, now cruising low at some $60,000 – nearly a half price discount from pre-pandemic. E190s, meanwhile, should fetch around $90,000 per month. Another popular regional jet, the ATR 72, is currently valued at around $8m at 10 years, lessors says, or $70,000 per month.

New business has also lagged. Since the beginning of the year, NAC’s only deliveries have been to LAM Mozambique – a distressed airline – and an ongoing series of deliveries to US start-up Breeze Airways, which won its AOC from downed lessee Compass Airways last year. One restructuring source highlights that this has become somewhat typical of the market, estimating that some 25 start-up airlines are rushing in to secure cut-throat deals with tottering lessors. (Tempering this, other start-ups, including New Zealand’s Pasifika Air and Canadian Treq, shelved their debuts in recent months.)

Lenders also dispute some of the market forecasts put out by NAC and its advisors, which predicts a post-Covid recovery as late as 2026.

Silo slices

“Most people are holding the debt,” said one buysider source. Some “slices” of the RCF and PPNs from the NAC 29 silo are trading, buysiders say. Around $50m on NAC 29 traded at 80 at the end of April, a second buysider said, and the RCF traded at 67 in April, down from low 70s trades in December 2020.

NAC stuck with existing advisors for this further forbearance, other advisors grumble. Moelis and Weil are advising one group of secured lenders, while Lazard and Milbank advise a second. Perella and Linklaters advise on the RCF and Houlihan and Akin Gump are advising the private placement holders.

NAC declined to comment.

Terror in the regions

Distress remains keenest in the regional sector. The highest-profile case, that of regional lessor Nordic Aviation Capital (NAC) saw another recent twist as the lessor won a forbearance extension from June to July. Another regional lessor, AeroCentury, filed for Chapter 11 in Delaware courts on 30th March, while a third, Canadian Chorus Aviation Capital, announced it had amended terms on at least CAD$256.8m of debt in its FY2020 results. Elsewhere, Avation could be looking to rejig its fleet make-up away from regional jets and towards narrowbodies.

It is unlikely NAC would be able to follow its peers in finding a buyer. It is already the largest regional lessor in the market and two of the general lessors that are largest than it just announced their own merger (AerCap and GECAS). Of the other two (Avolon and BBAM), neither have a strong focus on regional jets, and Avolon itself is rumoured to be up for sale – which Avolon denies. The release of the Airbus A220 aircraft as a hybrid regional-narrowbody aircraft also caught the imagination of non-regional lessors, lessening their desire for jets.

Of the world’s 30 largest lessors, only three are dedicated regional lessors, of which NAC is the largest. Another, Chorus Aviation , was forced to amend at least CAD$256.8m of debt in its FY2020 results to cope with the pandemic. Unlike NAC, Chorus funds itself through a small number of facilities with relationship banks, a source close to the company said, meaning it was able to negotiate amendments with relative ease. The other, the UK’s Falko, is potentially swept up by AeroCentury's Chapter 11 as it services Drake Asset Management’s fleet. Drake Asset Management is AeroCentury’s sole secured lender.

AeroCentury had already required forbearance from its sole secured lender, Drake Asset Management, prior to the pandemic. Drake has entered into a stalking horse agreement to acquire the aircraft collateral, however only at “higher and better bids”, the company wrote. The lessor has moved move away from Saab 340 and Fokker 50 aircraft, niche and sunsetting platforms, now offering operators a fleet of Embraer ERJ-145/175 (E-Jets), and Bombardier CRJ-700/900/1000 (CRJs) regional jets and Dash 8 turboprops.

The long-awaited consolidation

NAC remains the darling of distressed debt investors’ thoughts. The blockbuster news in the leasing space more broadly, however, was the marriage of its two giants: AerCap and GECAS. The world’s largest lessor, public Irish platform AerCap, snapped up GE’s aircraft leasing business in a $30bn deal that a fourth leasing source described GECAS’s as “Covid pricing”. Rumours of a GECAS sale have persisted for years with long-time aviation investor Apollo reportedly interested in a $40bn valuation.

GECAS was not alone in settling down. Fly Leasing, a public narrowbody-focused aircraft lessor based in Ireland, announced it would be bought by Carlyle Group at an EV of $2.36bn. Carlyle itself lists 246 aircraft owned, under management or committed to purchase totalling $6.1bn. The purchase is expected to close in Q3.

Fly had been on restructuring and distressed debt watchlists. The lessor booked $115m of impairments on nine aircraft with a weighted average age of 13.1 years in FY 2020, blaming early lease termination and part-out. The two aircraft returned early were A330-300s – largest, expensive aircraft that have been tailspinning in operators and values in recent years.

Elsewhere this month, SVPGlobal and EnTrust Global agreed to acquire DVB Bank’s Aviation Investment and Asset Management Business this month. MUFG Bank called off its own acquisition of DVB’s aircraft leasing and management arms in November last year after it failed to win approval from relevant authorities. EnTrust was looking to set up an aircraft leasing fund as far back as 2019.

This long-awaited rush of M&A is not, then, purely coming on the back of discount Covid pricing. Two of leasing platforms that recently found a new home were either in sales processes before the pandemic (DVB Bank) or long rumoured to be looking for a suitor (GECAS). Still, aircraft leasing sources expect more M&A to come along from mid-sized players. “There’s lots of smallish platforms in Ireland that will be looking at the big boys consolidating and wanting to get in on that,” one lessor mused.

There are certainly many interested buyers. Pimco/DAW and fellow lessor Castlelake were the other final round bidders for Fly Leasing, according to trade press Air Finance Journal, citing people familiar. The aircraft lessor also received bids from KKR, Macquarie Aviation and Merx/Apollo Aviation, the report said.

New aircraft leasing funds are also taking off after an understandably quiet 2020. Ares Management launched Vmo Aircraft Leasing with an initial $500 million of committed equity in January. In Spain, Dunas Aviation Fund was finally launched last quarter after two years of deliberation. Oaktree Capital and Azorra Aviation put a collective $350m into expanding the latter's aircraft leasing business in March, while PE firm Vanterra Capital anchored Flight Lease Fund, a US fund focused on mid to end-of-life aircraft.

However, aircraft leasing sources point out that a large proportion of the world’s biggest lessors are Chinese or Chinese-owned. “Those won’t be getting involved in this wave of M&A,” said a fourth lessor.

Both Goshawk Aviation and Avolon have publicly denied rumours they are hunting for suitors, though distressed debt and restructuring advisors remain interested in the former.

Behind every failing lessor is a failing airline

Every airline is a restructuring risk in a pandemic, lessors admit. Strong state support has been the dividing line throughout Covid-19, though many of those suffering hardest began their troubles long before lockdowns. The following table provides a short update on some airlines investors and advisors could be keeping an eye on.