Long-term bet on airlines drives investors to aircraft leasing bonds
Lessors raise $14.9bn in January thanks to confidence in robustness of niche in travel market
A string of successful bond deals for aircraft leasing companies reflects a view among investors that this niche of the travel industry is a safer way to bet on a recovery in the sector.
In total, seven leasing companies, which own planes they lease to airlines, have raised a combined $14.9bn in January, according to data from Dealogic, with several receiving cut-price borrowing costs.
Investors said the deals nonetheless offered attractive returns in a corner of the airline industry more protected against further fallout from the spread of coronavirus.
“Out of the whole travel sector they are probably one of the better positioned,” said Monica Erickson, head of the investment-grade corporate team at DoubleLine Capital. “It’ll be a while before anything normalises but the types of planes they have will remain out there. The terms they have with the airlines . . . they can withstand the expected downturn.”
Last week, Aircastle raised a $750m seven-year bond with an additional yield, or spread above US Treasuries, of 2.3 per cent, down from an early indication of 2.6 per cent when the deal was first marketed to investors, according to people familiar with the transaction. Air Lease also raised $750m, this time for three years at a spread of 0.72 per cent.
Earlier this month, AerCap raised $1bn. The five-year deal priced with a spread of 1.55 per cent, down from initially being marketed at around 1.8 per cent.
Most lessors typically enjoy long lease times, which enables them to straddle difficult patches for the airline industry. Their main risks stem from airlines failing to pay rents, or even going bankrupt. But since airlines have secured capital to help survive the shock of the pandemic, that in turn has bolstered the position of the lessors.
The returns on offer to investors from the lessors’ bonds are historically low, but they are still attractive compared to comparable bonds in the market. Most lessors sit at the bottom end of the investment-grade rating spectrum, clinging to the sought-after status while some airlines’ unsecured bond ratings have tumbled into ‘junk’. The average investment-grade rated corporate bond with a maturity of five to seven years currently carries a spread of just 0.77 per cent.
Lessors’ borrowing costs have fallen significantly. Air Lease’s previous debt issue in November was a 10-year bond with a coupon of 3.13 per cent. As exuberance over the rollout of coronavirus vaccines has intensified, the yield on the bond has fallen to 2.75 per cent.
“We have had a lot of capital raises and we are only three weeks in to the year,” said Helane Becker, an analyst at Cowen Securities. “As more vaccine gets into people’s arms I think people will be more willing to travel.”
In a further sign of encouragement for the industry, investment firm Castlelake last week sold the first securitised bond backed by a bundle of aircraft leases since the pandemic took hold last year.
Evan Carruthers, co-founder for Castlelake, said the $595m deal had a number of changes from pre-pandemic bonds, such as ensuring funds were diverted to the highest rated slices of debt in the event that leases go unpaid.
“I think it’s a sign of repair,” he said. “It’s about addressing concerns over what happens if this pandemic lasts another 12 to 18 months and there are collection issues. How do you guarantee the deal still performs? I think there is an elevated awareness of risk in aircraft leasing.”