Financing Rotary Assets

May 17, 2016

Arabian Aerospace

By Michael Savva

May 2016

 When two of the helicopter industry’s most notable individuals got together to discuss financing, the conversation was always likely to be lively and wide-ranging. Michael Savva, who chaired the ‘financing rotary assets’ panel session at the Corporate Jet & Helicopter Investor Dubai event, gave this report for Arabian Aerospace magazine.

 Clark McGinn, senior vice president at Waypoint Leasing and Jaspal Jandu, chief financial officer at Lease Corporation International (LCI), are two of the biggest  names in the helicopter industry.

 They were brought together at the Corporate Jet & Helicopter Investor Dubai event –the latest in a number of Corporate Jet Investor conference programmes following the success in London, Asia and Miami.

 For the first time, investors, financiers, operators, lawyers and other industry stakeholders gathered in the UAE to discuss the pertinent issues in the rotorcraft and business jet world.

 Inevitably, the implications of the low oil price was a theme explored in great detail, though discussion ranged from asset-specific topics, such as financing rotary assets, helicopter values and the importance of maintenance, to industry-wide issues including the lifting of sanctions against Iran.

 For the ‘financing rotary assets’ session, attracting McGinn and Jandu to the panel was something of a coup. Waypoint and LCI are regarded as two of the “big four” helicopter operating lessors, along with Milestone Aviation Group and Lobo Leasing.

 The panel discussion was fairly wide-ranging, taking in the state of the market, looking to focus on the rotary sector and its regional variations and then looking at different sources of finance, before analysing the medium and long-term prospects.

 McGinn and Jandu stressed that “the sky isn’t falling” on the rotary market. While the low oil price has caused some pressure points in certain parts of the market (notably oil and gas), the wider market was considered relatively buoyant.

 A poll of the delegates showed that 36% viewed the current state of the market as positive/extremely positive, 27% as neutral and 37% as negative/extremely negative.

 This view, in general, is supported by market outlooks. Honeywell, in its most recent Turbine-Powered Civil Helicopter Purchase Outlook for 2016 noted that, while the outlook for short-term new purchases remains cautious at best (forecasting between 4,300 and 4,800 new deliveries from 2016 through to 2020–around 400 lower than its 2015 five-year forecast), clearly there will still be a demand for financing for  those assets that are delivered.

 Lockheed Martin has also recently suggested that, while it expects oil and gas sales to drop, it anticipates that this will be offset by good prospects in sales for search and rescue (SAR) and border patrol aircraft.

 However, helicopter leasing and finance is not just about oil and gas. All of the “big four” lessors have targeted other sectors, including SAR and emergency medical services (EMS).

 LCI recently ordered 12 new helicopters for EMS and offshore wind (as well as oil and gas), demonstrating a focus on growing its exposure in some of the more buoyant sectors.

 This trend is also evident from developments in the Middle East. Wallan Aviation recently purchased a Bell 419 and ordered two Bell 505s for use in traffic control, border protection, training and VIP transport services.

 In addition, Falcon Aviation Group’s fleet of AW189s, Airbus EC130s and Bell 412s, is intended to service private helicopter charters, as well as the oil and gas sector, and Abu Dhabi Aviation’s fleet of AW139s and Bell 412s likewise services ad hoc charters (including VIP) and medevac/SAR operations in addition to oil and gas.

 Regionally, while prospects in the Gulf of Mexico, for example, seem to be reliant on fleet renewal plans coming back online in a couple of years, the Asia Pacific region was noted as being one of strong possibilities, particularly in oil and gas (given China’s lack of onshore reserves and the consequential demand to service production and exploration rigs in the South China and East China Seas).

 Waypoint, for one, saw this as more of a long-term play, with the first stage in the process being the need to establish relationships in the short term.

 In the Middle East, both lessor panellists suggested that they were interested in the regional market but have yet to do any deals with local operators. Waypoint was due  to open a new office in South Africa in the second quarter of 2016, which will service  both the African and Middle Eastern markets.

 The trend towards investors financing lessors, rather than operators, seemed likely to  continue, according to the panellists. As well as giving investors additional credits to  rely on and diversifying risk across a number of asset classes and underlying  operators, it was felt that such a financing strategy could benefit operators themselves, whose ability to take aircraft from lessors to respond to near-term opportunities gave them additional fleet-planning flexibility.

 Capital markets financing is a relatively new phenomenon in the helicopter market (notwithstanding Waypoint’s US $200 million private placement in September 2015 and Milestone’s US $187 million EXIM-backed bond issuance in 2013).

While still in its infancy in this market, the panel considered this as a developing structure, which gave lessors the benefits of diversified capital access, longer-term financing and reduced cost of capital, all of which could be passed on to the  operator. It was noted, however, that greater investor understanding of the structure of the sector as a whole, rotary assets themselves, and (for example) their value retention capability, would be beneficial. 

Islamic finance was also discussed as an alternative. LCI utilised murabaha financing as part of its first secured helicopter pre-delivery payments (PDP) finance structure but Waypoint, while having viewed the LCI transaction with great interest, has yet to take the plunge.

While, in the short-term, there is an evident downturn in the need for helicopters in the oil and gas industry, the long- term view remains bullish; manufacturers continue to develop new programmes– Finnmeccanica’s AW169 and AW189, as well as Airbus’ H160 medium and X6 heavy, being examples–and those that have been in the industry long enough have seen the rise after the fall time and time again.

Both lessor panellists remained optimistic about the market in the medium-to-long-term. As well as acknowledging that it would be a mistake to view the whole oil and gas sector as one market (since different pressures affect production and exploration aspects), they recognized that the helicopter market is cyclical and they have seen nothing that makes them deviate from their strategic viewpoint.