FT : Telecom Italia looks to put troubled past behind it with break-up

Telecom Italia looks to put troubled past behind it with break-up
One-time monopoly seeks sounder footing after years of upheavals and decline

As an emblem of Italian business, Telecom Italia has had a long and lamentable record of upheavals, debt-laden struggles and political intrigues.

Now its future is once again up in the air, with the new management plotting a break-up of the group as international private equity firms circle around its assets.

The stakes are not small. An offer proposed by US fund KKR last November valued the company at €33bn, including net debt. Still not officially rejected, a takeover at that valuation would be among the biggest private equity buyouts in European history. It is highly unlikely to happen.

Pietro Labriola, the sixth chief executive at Telecom Italia in under a decade, has drawn up a plan to spin off the group’s Italian fixed network. The existing company would house all the remaining assets including its mobile operations and its Brazilian business. It is not dissimilar to KKR’s plan.

If either break-up plan goes ahead, it would be a denouement to what has come to feel like an unsustainable situation.

The company’s stricken share price — down some 60 per cent over the past five years — fell to an all-time low of €0.30 this month. That came after the group reported a record net loss of €8.7bn for 2021, leading to further downgrades of its already beaten-up credit rating. Vivendi, now Telecom Italia’s largest shareholder, wrote down the value of its 24 per cent stake by €728mn this month.

How it got to this point has been a sorry tale for a country that still sees it as a strategic asset. When Telecom Italia listed in 1997, it was dubbed the “mother of all privatisations” that took place in Italy during the 1990s, when the finance ministry’s top bureaucrat was Mario Draghi, the current prime minister.

What has dragged down this potentially very profitable business is a streak of strategic errors, partly driven by politics and some greedy shareholders, that have left it with too much debt. In 1999, as a newly privatised company, its net debt was €8.1bn. The figure currently sits at €22bn.

In 1999, after Rome blocked the company’s merger with Deutsche Telekom, it was acquired for €50bn in a debt-financed hostile takeover by a group of investors, led by the chief of Olivetti, dubbed “courageous captains” by Massimo D’Alema, former prime minister. That takeover was seen at the time as a genuine milestone for Italy and Europe that could redraw the map of cosy Italian capitalism.

However, after the group sold Telecom Italia two years later at a substantial profit, the company ended up with a debt burden on its balance sheet from which it never really recovered. At the pace of its current deterioration, the group risks needing a capital injection.

The obvious route now is to reorganise the business through a carve-out of its assets — an approach envisaged by Labriola and KKR — which would allow it to reduce its debt. The Labriola plan would involve a more extensive split-up. The KKR option lacks detail but it is disliked in some quarters of Italian politics where the company continues to be perceived as a national public asset.

Separating the primary network from the other services would also allow discussions over the single broadband network project to move forward. The project is a priority for Italian politicians.

The plan would also allow a merger between Telecom’s so-called “last mile” broadband network, FiberCop, of which KKR acquired a 37.5 per cent stake in 2020, with smaller and less profitable rival OpenFiber in which state investor CDP now holds a 60 per cent stake.

That all leaves KKR ‘s buyout option in doubt. On paper, discussions are ongoing, but insiders say they have come to a halt as the private equity group wants to run due diligence before putting forward a binding offer. They add that Telecom Italia is refusing that because if KKR were to ultimately walk away, or lower its offer, it would have negative repercussions on the share price.

Telecom Italia is a still prized asset. It is not for nothing that it is drawing interest from funds and private equity firms alike. This week the group also confirmed that it had received an offer from private equity firm CVC for a minority stake in the network services company that would be created following the break-up plan.

However, the group’s businesses need to be put on a sounder footing, not just for its shareholders but for Italy, which — more than two decades after its first takeover — is still waiting for its capitalism map to be redrawn.

FT : Breitling chief’s grounded approach speeds watchmaker’s growth

Breitling chief’s grounded approach speeds watchmaker’s growth
Georges Kern has broadened the brand’s appeal by steering it away from the masculine aviator image

It is five years since Georges Kern blindsided the Richemont Group by announcing he was off to head up Breitling, the independent Swiss watch company.

The former IWC Schaffhausen chief executive was a Richemont veteran of 17 years and, less than a year before his shock departure, had been promoted to the Richemont board and appointed the group’s head of specialist watchmaking.

The divorce may have been unexpected, but the marriage of Kern and Breitling so far has proved harmonious. According to a report by Morgan Stanley last month, Breitling’s annual revenues surged to an estimated SFr680mn ($730mn) in 2021 — an increase of 55 per cent over the past two years.

The report’s authors also calculated that Breitling’s volumes had increased from 140,000 watches a year to 190,000 over the same period and that its market share had increased by 0.4 per cent.

The same report showed that Breitling appears to have outperformed many of its competitors under Kern’s leadership. Morgan Stanley’s data placed Breitling 11th among Swiss watch brands, up two places from 2019 and above rivals such as Tudor, which is owned by Rolex, and LVMH-owned Hublot.

“Breitling is substantially above the industry’s average sales growth and even more so bottom line,” says Oliver Müller, founder of Swiss watch industry advisers LuxeConsult and one of the authors of the Morgan Stanley report.

Kern’s appointment at Breitling followed the news in 2017 that London-based private equity group CVC Capital Partners had taken an 80 per cent stake in the company, in a deal worth €840mn. Kern, who has a 5 per cent stake in the business, was seen as having the right combination of Swiss watch industry experience and the sort of maverick tendencies that would shake up a brand in need of fresh thinking.

As Richemont founder and controlling shareholder Johann Rupert said at the time, Kern had “been offered an interesting opportunity to become an entrepreneur”.

Sweeping changes followed. Out went the salacious pin-up girls and the high carbon-emitting Breitling Jet Team, and in came a raft of new brand ambassadors, led by Hollywood A-listers Brad Pitt and Charlize Theron, organised in “Breitling squads”; plus an easy-going, loft-style boutique concept; sustainability messaging around recycled straps and packaging; and a range of new watches, many of them aimed at women — a new take for the brand.

Kern is known for his intensity but, sitting in his office, wearing an open-necked shirt and a sweater, he cuts a relaxed figure. He is still ready to take a thinly veiled swipe at his former employer, though. “I truly believe that we wouldn’t have been as successful in a group,” he says. “We’ve been radical. And we’ve been totally free. They [CVC] let us work — we are the specialists, the professionals.”

He might have a point. While Breitling accelerates, revenues at Richemont watch brands IWC, Jaeger-LeCoultre and Panerai have yet to return to their pre-pandemic levels, according to the Morgan Stanley report. Kern will not confirm Breitling’s figures but says the Morgan Stanley numbers are “most probably true” — adding that, because it has no group costs, the company is very lean and has been able to be “hugely profitable”.

He continues: “People said we would crash this company. Watches are very emotional. When you change so much, you have to gain more than you lose. Of course, we lost customers. You need to score more goals than you concede — and we scored many more.

“We gained huge market share during Covid, which shows our values worked. I’m convinced that, without these changes, the company would be bankrupt today.”

Seasoned industry observers say Breitling has been the making of Kern. Kristian Haagen, an author and creative director of social media agency DailyWatch, met Kern in the mid-2000s, not long after he became chief executive of IWC. “He appeared to me to be quite arrogant, honestly,” says Haagen of their first encounter.

“For years, it was almost impossible to get an interview with him. But he did something good by moving out of a group. It released him. He’s very savvy and he’s doing something that no group would.”

Kern says he wants Breitling to be “the leader of neo-luxury”, a concept based on being “not exclusive, but inclusive; casual; and sustainable”. The company now has 160 boutiques around the world, with plans for 40 more this year. These offer facilities such as pool tables, bars and trendy furnishings, designed to reduce the sense of intimidation some new customers might have at the door of a luxury store.

Changes to Breitling’s image have been accompanied by a collection overhaul. The company was once famous for its pilot’s watches, but Kern has introduced what he calls an “air, land and sea” approach. He describes most of his lines as being “retro style”. Some are reinventions of mid-century products, such as the Premier and Top Time lines, while he has also reworked the popular Chronomat line, originally from 1984. This year’s big launch, announced in Zurich earlier this week, is a revamp of the Navitimer, a distinctive line of pilot’s watches created in 1952.


The latest Navitimer B01 Chronograph 46 models
Kern has also targeted female consumers with smaller, sometimes pastel-shaded designs, and says the company now sells 12 per cent of its watches to women — up from almost zero five years ago. He says he is aiming to grow this to 30 per cent within three years.

During the pandemic, he proved himself one of the more active watch industry bosses, launching a series of webcasts called Breitling Summits. These had high production values and cast Kern as the star, hosting interviews with Theron and introducing the new recycled packaging concept alongside the Swiss explorer and clean technology pioneer Bertrand Piccard.

Kern has since claimed these webcasts attracted “millions” of viewers, justifying his decision to take Breitling out of the annual trade show cycle. Unlike Rolex or Tag Heuer, Breitling is not at Watches and Wonders in Geneva this week.

Breitling’s growth has attracted further investment. In 2018, CVC bought the remaining 20 per cent from former owner Théodore Schneider, and, in October last year, the independent investment firm Partners Group took a 25 per cent stake. No financial details were disclosed at the time, but it was reported that the deal gave Breitling a valuation of $3.3bn.

“Partners Group are no mugs,” says Jon Cox, an analyst at Kepler Cheuvreux. “Kern gets what younger watch buyers in that price point are interested in — style, style, style. And the nod to environmentalism also goes down well.”

Kern may have invested heavily in boutiques, but he continues to develop Breitling’s third-party retailer network, as well. Brian Duffy, chief executive of Watches of Switzerland Group, which operates 10 Breitling boutiques in the UK and US, says Kern’s repositioning of the brand has been good for his business. “Group sales of Breitling watches are up 212 per cent over the past five years,” he notes.

“Georges has great vision and huge energy,” adds Duffy. “And he’s much more comfortable using his skills in a brand situation than he is managing a portfolio — he’s less a corporate guy and more a make-it-happen guy.”

As if to make the point, Kern posted a video last month on LinkedIn from an antiwar march where he was demonstrating against Russia’s invasion of Ukraine.

Asked about his plans and whether CVC intends to sell the business, Kern is non-committal. “I don’t know whether there will be an IPO,” he says.

But analysts expect one. “I would not rule out an IPO at some point in the future,” says Cox, “although [for investors] only having one brand may be more of risk than being part of a larger portfolio, in terms of investment profile.”

Kern expects his business to continue growing. “Luxury will become more and more popular and there will be hundreds of millions of people able to buy luxury,” he says. But not everyone will profit, he adds.

“Because of globalisation, people are all buying the same things. There will be six or seven [watch] brands making 80 per cent of the turnover.”

Looking back on his move in 2017, Kern says he has only one regret. “I should have done it earlier,” he says. And his ambitions are undiminished. “When you do stuff, you want to have fun, intellectual satisfaction — and you want to win,” he says.

>>> Europe : Brokers Upgrades & Downgrades - 31st of March 2022 V2(+)

>>> Up
* Freenet Raised to Neutral at Exane; PT 24 euros
* Glencore Raised to Buy at SBG Securities; PT 510 pence (+)
* Halma Raised to Hold at HSBC; PT 2,365 pence
* Howden Joinery Raised to Outperform at Davy (+)
* Kapsch TrafficCom Raised to Buy at Erste Group; PT 22 euros
* M&G Raised to Add at AlphaValue/Baader
* Pearson Raised to Equal-Weight at Barclays; PT 725 pence
* Sabadell Raised to Buy at Deutsche Bank; PT 95 euro cents
* Sancus Lending Group Ltd Raised to Buy at Liberum (+)
* Seplat Energy Raised to Buy at Meristem Securities
* Stillfront Raised to Buy at HSBC; PT 53 kronor
* Telefonica Deutschland Raised to Neutral at Exane; PT 2.40 euros
* Telia Raised to Neutral at Exane; PT 35 kronor
* Wacker Chemie Raised to Outperform at Oddo BHF; PT 190 euros (+)

>>> Down
* BASF Cut to Neutral at Oddo BHF; PT 68 euros (+)
* BBVA Cut to Hold at Deutsche Bank; PT 6 euros
* Cancom Cut to Sell at DZ Bank; PT 50 euros (+)
* Citi Says European Stocks’ Discount to U.S. Is Now Too Great (+)
* DFS Furniture Cut to Hold at Numis; PT 225 pence
* Fuchs Petrolub Cut to Neutral at Oddo BHF (+)
* HAL Cut to Neutral at Oddo BHF; PT 151 euros (+)
* KPN Cut to Neutral at Exane; PT 3.20 euros
* Telenor Cut to Underperform at Exane; PT 114 kroner
* Vodafone Cut to Underperform at Exane; PT 110 pence

>>> Initiation
* Alstria Office Reinstated Hold at HSBC; PT 14.60 euros
* Amplifon Rated New Neutral at JPMorgan; PT 34 euros
* BBVA Reinstated Neutral at Goldman; PT 7.30 euros
* Capgemini Rated New Outperform at Credit Suisse (+)
* Computacenter Rated New Outperform at Credit Suisse (+)
* Deutsche Bank Reinstated Buy at Goldman; PT 18.70 euros
* DIM FP Rated New Equal-Weight at Morgan Stanley; PT 445 euros
* Santander Reinstated Buy at Goldman; PT 5 euros
* SwedenCare Rated New Buy at SEB Equities; PT 136 kronor
* UBS Group Reinstated Buy at Goldman; PT 27.90 Swiss francs

>>> Call
* Admiral Upgraded at Peel Hunt With Valuation Now ‘More Sensible’
* Citi Opens Positive Catalyst Watch on Pernod Ricard Ahead of 3Q (+)
* Deutsche Bank’s Stock a Buy for Goldman’s New Banking Analyst (+)
* LVMH Offers Scale, Diversification Amid Volatility, Cowen Says (+)
* S4 May Remain Under Pressure With New Result Date Undecided: MS (+)
* Sinch Cut at Handelsbanken on Anticipation of Weak First Quarter
* Var Energi New Buy at Jefferies on Organic Production Outlook

>>> Stoxx 600 Pre-Market Indications

  • EasyJet (EJT1 TH) +3.4%
  • Ryanair (RY4C TH) +2.4%
  • Stellantis (8TI TH) +1.1%
  • Commerzbank (CBK TH) +1%
    • Commerzbank Reinstated Neutral at Goldman; PT 9.70 euros
  • Rational (RAA TH) +0.9%
  • Raiffeisen (RAW TH) +0.8%
  • Deutsche Bank (DBK TH) +0.8%
    • Deutsche Bank Reinstated Buy at Goldman; PT 18.70 euros
  • Carl Zeiss Meditec (AFX TH) +0.8%
  • Sartorius (SRT3 TH) +0.7%
    • Sartorius, Sartorius Stedim Exposed to Growth Trends, MS Says
  • TotalEnergies (TOTB TH) -1.2%
  • Erste (EBO TH) -1.2%
  • Shell (R6C0 TH) -1.5%
    • Watch Europe Oil Stocks as Crude Slumps Over U.S. Reserves Plan
  • BP (BPE5 TH) -1.6%
  • Eni (ENI TH) -1.8%
  • Equinor (DNQ TH) -1.9%
  • CD Projekt (7CD TH) -2.7%
    • CD Projekt Cut to Reduce at HSBC; PT 120 zloty

>>> TradeGate Pre-Market Indications

DAX:
  • Deutsche Bank (DBK TH) +1%
    • Deutsche Bank Reinstated Buy at Goldman; PT 18.70 euros
MDAX:
  • Commerzbank (CBK TH) +1.3%
    • Commerzbank Reinstated Neutral at Goldman; PT 9.70 euros
  • ProSieben (PSM TH) +1.3%
  • Carl Zeiss Meditec (AFX TH) +1%
  • Varta (VAR1 TH) -2.8%
    • Varta Sees 2022 Revenue EU950M to EU1B, Est. EU999.3M
SDAX:
  • BayWa (BYW6 TH) +1.6%
  • SMA Solar (S92 TH) +1.4%
    • SMA Solar Sees 1Q Ebitda EU12M to EU16M
  • Bilfinger (GBF TH) +1.2%
  • Deutz (DEZ TH) +1.2%

>>> What to look at today - 31st of March 2022

U.S. futures rose and oil dropped sharply on signs that the Biden administration is considering a massive release of crude from U.S. reserves to combat inflation. A slide in Chinese technology stocks weighed on Asia.   Shares weakened in China and Hong Kong following data showing contraction in Chinese manufacturing, while Japan’s equities steadied, with the yen pulling back after two days of gains. European futures climbed. Earlier, the S&P 500 closed lower for the first time in five days and the Nasdaq 100 dropped as talks between Russia and Ukraine stalled.  Reports that Washington is preparing a plan to release roughly a million barrels of oil a day helped reverse a rebound in crude. The news comes ahead of an OPEC+ supply meeting later Thursday, where the cartel is expected to stick with its strategy of a modest output boost in May. Chinese stocks are under pressure as output data reflect the damage of renewed lockdowns in technology and factory hubs. Further denting sentiment, the Securities and Exchange Commission’s chief tamped down speculation that a deal is brewing to keep about 200 Chinese stocks from losing their listings. Meanwhile, China’s central bank vowed to boost confidence and provide more effective support to the economy.  Treasuries added to gains across the curve, while a portion of the curve has pulled out of a brief inversion that raised concerns about an impending recession. The dollar mostly held a retreat.  US After Hours Quiet after hours session; PATH -18.4%, EXFY -16.4%, MASI -9.9% fall on earnings/guidance

Nikkei -0.65% Hang Seng -1.14% CSI -0.68% Shanghai -0.40% Shenzen -0.83%

Eur$ 1.1166 CNH 6.3588 CNY 6.3486 JPY 121.86 GBP 1.3131 CHF 0.9241 RUB 83.1248 TRY 14.6585 WTI$ 102.32 -5.10% Golds 1,923.39 -0.48% BTC 47,000 -0.45% ETH 3,395 -0.57%

S&P +0.14% Nasdaq +0.42% EuroStoxx +0.26% FTSE +0.07% Dax +0.51% SMI +0.27%

Macro :
- *CHINA MARCH MANUFACTURING PMI AT 49.5; EST. 49.8
- Banks Brace for Earnings Hit as IPO Market Stalls: ECM Watch
- BofA Strategist Sees Potential for Asset Managers to Chase Rally
- Kremlin Says Putin, Draghi Discussed Ruble Payments for Gas
- SEC Chief Casts Doubt on Imminent Deal to Avoid China Delistings

Keep an eye on :
- ABBN SW : ABB Starts New $3 Billion Share Buyback After Divestment
- ADE NO : Adevinta to Sell 76.2% Stake in InfoJobs Brazil to Redarbor
- AIR FP : China Southern to Take Delivery of 39 Boeing Max Jets This Year
- NBA GY : Europe’s Top Copper Smelter Plans to Stop Buying From Russia
- BMW GY : BMW, Mercedes, Volkswagen Seek BEV, Software Recognition in 2022
- BP/ LN : BP Said to Approach State-Owned Majors on Russia Assets (1)
- IAG LN : British Airways Says Technical Issue at Heathrow Resolved
- CWC GY : Cewe Stiftung Sees 2022 Ebit EU65M to EU80M
- CSGN SW ; Credit Suisse Investors Seek Special Audit of Greensill Debacle
- EMMN SW : Emmi Elects Ricarda Demarmels as CEO From Jan. 1, 2023
- ERG IM : ERG’s Garrone Family May Consider Sale of Minority Stake: MF
- GSK LN : FDA Approves ViiV’s Triumeq PD for Children With HIV
- HMB SS : H&M 1Q Net Income Misses Estimates
- HAL NA : HAL FY Net Income EU4.27B
- INPST NA : InPost FY Sales 4.60B Zloty Vs. 2.53B Zloty Y/y
- INTER NA : CSC’s offer period for Intertrust Shares Ends June 10
- LHA GY : Italy Wants Privatization Deal for ITA Airways by Mid-June: Rtrs
- MC FP : LVMH Says Hard to Predict Impact of Ukraine War on Economy
- BNB BB : National Bank of Belgium Raises Dividend to EU138.04/Share
- NRS NO : Norway Royal Salmon Offering Prices at NOK202/Share
- OCI NA : Fertilizer Firm OCI Seeks to Buy NortH2’s Future Green Hydrogen
- ORA FP : Orange Board Proposes Aschenbroich as Non-Exec Chairman
- SAN FP : Sanofi Pipeline Improving, Still Needs Dupixent's Magic for Now
- SFOR LN : Sir Martin Sorrell’s S4 Capital sinks 35 per cent following PwC audit delay
- SPM IM : Italy Is Said to Approve $691 Million Loan Guarantee for Saipem
- SAN SM : Santander Holdings USA Boosts Minimum Wage to $20
- SRT GY : Sartorius, Sartorius Stedim Exposed to Growth Trends, MS Says
- S92 GY : SMA Solar Sees 1Q Ebitda EU12M to EU16M
- ULVR LN : Unilever Recalls Discontinued Antiperspirant on Elevated Benzene
- UN01 GY : Uniper Gets One-Year KfW Loan Extension as Prices Climb on War
- VNA GY : Vonovia Plays Down Possible Bid for Adler as KPMG Report Looms
- VOW GY : VW Is Said to Pick Banks for IPO of $100 Billion Porsche Unit
- VOW GY : Volkswagen curtails production in China because of parts shortages.

>>> Europe : Brokers Upgrades & Downgrades - 31st of March 2022

>>> Up
* Freenet Raised to Neutral at Exane; PT 24 euros
* Halma Raised to Hold at HSBC; PT 2,365 pence
* Kapsch TrafficCom Raised to Buy at Erste Group; PT 22 euros
* M&G Raised to Add at AlphaValue/Baader
* Pearson Raised to Equal-Weight at Barclays; PT 725 pence
* Sabadell Raised to Buy at Deutsche Bank; PT 95 euro cents
* Seplat Energy Raised to Buy at Meristem Securities
* Stillfront Raised to Buy at HSBC; PT 53 kronor
* Telefonica Deutschland Raised to Neutral at Exane; PT 2.40 euros
* Telia Raised to Neutral at Exane; PT 35 kronor

>>> Down
* BBVA Cut to Hold at Deutsche Bank; PT 6 euros
* DFS Furniture Cut to Hold at Numis; PT 225 pence
* KPN Cut to Neutral at Exane; PT 3.20 euros
* Telenor Cut to Underperform at Exane; PT 114 kroner
* Vodafone Cut to Underperform at Exane; PT 110 pence

>>> Initiation
* Alstria Office Reinstated Hold at HSBC; PT 14.60 euros
* Amplifon Rated New Neutral at JPMorgan; PT 34 euros
* BBVA Reinstated Neutral at Goldman; PT 7.30 euros
* Deutsche Bank Reinstated Buy at Goldman; PT 18.70 euros
* DIM FP Rated New Equal-Weight at Morgan Stanley; PT 445 euros
* Santander Reinstated Buy at Goldman; PT 5 euros
* SwedenCare Rated New Buy at SEB Equities; PT 136 kronor
* UBS Group Reinstated Buy at Goldman; PT 27.90 Swiss francs

>>> Call
* Admiral Upgraded at Peel Hunt With Valuation Now ‘More Sensible’
* Sinch Cut at Handelsbanken on Anticipation of Weak First Quarter
* Var Energi New Buy at Jefferies on Organic Production Outlook

>>> US After Hours Summary: Quiet after hours session; PATH -18.4%, EXFY -16.4%,

After Hours Summary: Quiet after hours session; PATH -18.4%, EXFY -16.4%, MASI -9.9% fall on earnings/guidance

After Hours Gainers:

Companies trading higher in after hours in reaction to earnings/guidance: FLEX +2.9%, BRZE +1%

Companies trading higher in after hours in reaction to news: PRG +8.2% (to move to S&P Small Cap 600 from S&P MidCap 400), CORT +3.2% (presents results from Phase 2 study of relacorilant plus nab-paclitaxel), HII +2.2% (REMUS 300 selected as US Navy's next generation small UUV program of record), DDOG +0.9% (partners with MSFT for the Azure Cloud Adoption Framework), ARTE +0.6% (to combine with game-tech operator Novibet), MARA +0.3% (names new CFO), GBCI +0.1% (increases dividend), GVA +0.1% (awarded a $20 mln road improvement project)

After Hours Losers:

Companies trading lower in after hours in reaction to earnings/guidance: PATH -18.4%, EXFY -16.4%, MASI -9.9%, PHR -4.4%

Companies trading lower in after hours in reaction to news: MDV -9.2% (files for $200 mln mixed securities shelf offering), FRGI -7.3% (to be removed from S&P SmallCap 600)

WSJ : AerCap Submits $3.5 Billion in Insurance Claims Over Trapped Russia Jets

AerCap Submits $3.5 Billion in Insurance Claims Over Trapped Russia Jets
Aircraft leasing industry may seek estimated $10 billion in payouts over planes still being flown ‘illegally’ after sanctions

AerCap Holdings NV said it had filed $3.5 billion in insurance claims over more than 100 jetliners the company had rented to Russian airlines and that are now stuck in the country following the imposition of Western sanctions.

The world’s largest aircraft-leasing company by value said it had rented 135 aircraft to Russian carriers, and has so far been able to recover 22 of them. European and U.S. sanctions required lessors to cancel contracts, and banned Western companies from providing maintenance and spare parts for those planes left behind.

The aviation industry has been rattled by the effects of Russia’s invasion of Ukraine, which has forced airlines to suspend and reroute flights. More than 400 rented Western jets remain in Russia, triggering what industry experts said was likely to be a yearslong battle between aircraft owners and insurers over an estimated $10 billion in claims.

Some lessors have said some Russian airlines are being pushed by the country’s government to continue flying aircraft. The Russian government earlier this month passed a law allowing airlines to re-register planes there, contravening international aviation agreements. Lessors said this was tantamount to seizure of their assets, triggering insurance claims from them for the aircraft.

AerCap Chief Executive Gus Kelly said Wednesday on an investor call that the Dublin-headquartered company had filed insurance claims on its planes in Russia, which represented about 5% of its portfolio of around 1,750 aircraft.

The company estimated its current Russia exposure is around $2.5 billion and said it could take unspecified charges against lost planes as early as the current quarter, ahead of any potential insurance payouts.

AerCap’s U.S.-listed shares closed 8.4% lower Wednesday, having in recent weeks recovered around half of their 30% drop since the Russian invasion last month.

AerCap is the world’s largest aircraft lessor following its $31 billion takeover of the jet-leasing business of General Electric Co. last year. GE retains a 45% stake in AerCap.

AerCap said it continued to try to repossess its planes in Russia but isn’t sure if it can, or what condition they will be in with sanctions blocking spare parts and maintenance support.

“Many of these aircraft are now being flown illegally by our former airline customers,” said Mr. Kelly.

Leasing companies and insurers said they are discussing potential payouts on the fleet, many of which are still being flown by carriers such as Aeroflot Russian Airlines PJSC. Mr. Kelly said he expected insurers to contest the claims.

Insurers active in the aviation market, such as U.K.-based Beazley PLC, declined to comment.

Other aircraft-leasing companies have said they face huge legal and logistical challenges in recovering planes. European Union sanctions required them to cancel existing leases with Russian carriers by March 28.

AerCap’s Mr. Kelly said he didn’t expect what he called a “black swan” event in Russia to impact leasing planes to other countries.

The Covid-19 pandemic drove huge losses among airlines and pushed more to rent rather than buy planes. Steven Udvar-Házy, executive chairman of Air Lease Corp., another big lessor with exposure to Russia, said at an investor event earlier this month he expects a record 60% of aircraft deliveries this year to be to leasing companies.

AerCap has more than 400 jets on order, and Mr. Kelly said airline preferences for renting, along with problems at Airbus SE and Boeing Co. in delivering new jets, have given AerCap leverage with customers, particularly with signs of airline demand returning in hard-hit regions such as Southeast Asia.

“Where we have the supply hiccups, it’s not always a bad thing for us,” he said.