At an investor analyst day in April, Bristow Group disclosed that it had 15 bids to lease helicopters for the take over of the UK’s Search and Rescue (SAR) operations. The contract is worth over $3 billion and includes assets totaling about $600 million. Bristow announced that it had signed a letter of intent with Milestone Aviation Group to be the primary lessor and the company is in discussions with additional lessors.
While helicopter leasing is not a new phenomenon, the last two years have seen a number of dedicated asset managers emerge. Milestone was the first to announce its helicopter leasing platform in 2010, shortly followed by LCI Aviation, which is already an established fixed-wing lessor; Waypoint, which secured a $375 million equity check last month; and, Lobo Leasing, which is keeping its strategy and the identity of its investors closely guarded.
“This is a space that was highly underdeveloped,” says Bill Wolf, president and CEO, Lobo Leasing. “The attraction of capital to the helicopter leasing space in such a short period of time is amazing.”
That is not to say that operating leasing is new to this asset class. In the 1980s Richard Santulli, founder of NetJets, bought helicopters to lease to operators. By 1986 he had built a fleet of 192 helicopters. As he moved into the fractional ownership market he sold off the helicopters to fund his new ventures, selling 190 of 192 helicopters at a price higher than the original purchased price. It is no surprise that Santulli has returned to the helicopter leasing market with his latest venture Milestone Aviation Group.
“It’s a nice return in a low risk business,” says William Kelly, CEO, Milestone. “Working helicopters have a very robust model and have not seen the same kind of volatility as has been seen with fixed-wing aircraft in recent years.”
Milestone prides itself on being the first truly global helicopter lessor, with contracts in North America, South America, South East Asia and Continental Europe. While Milestone has been in the market for over two years, LCI Aviation has been looking at entering the market since 2009, launching its platform with a $400 million order with AugutaWestland in 2012. “We’ve been looking at this space for four to five years,” says Crispin Maunder, executive chairman, LCI Aviation. “Helicopters are a much smaller segment of the aviation industry. Until recently, all leasing was being done between the operators to each other.”
This distinction between operating leases offered by banks and those offered by lessors is important and key to the new arrival of several aircraft lessors to the market.
Typically banks have only focused on local markets, taking residual value risk on when it comes to a local company’s assets.
“The customer base sees the value of non-bank operating lessors – that’s our growth opportunity,” says Ed Washecka, CEO, Waypoint Leasing. The company secured $375 million in April from three private equity funds, including George Soros’s and Michael Dell’s investment funds. Cartesian Capital, the third investor, specializes in emerging markets and will extend its expertise to the Waypoint management team as the company works with international clients.
Like Milestone and Waypoint, LCI will be targeting an international client list. The company already has experience with commercial aircraft. “We see both helicopters and fixed-wing aircraft in our portfolio mix – in many ways they are complementary and have different market cycles,” says Maunder. “However, helicopters are without doubt a far more complex class of lease product and call for a lessor to have an expert and experienced team.”
About 65% of the civilian helicopter fleet works offshore. The extreme conditions in which these assets are deployed means that these helicopters require a tremendous amount of maintenance and parts replacement. However, the constant regeneration of these assets gives them a longer life than is seen in the fixed-wing market. “You have a thirty-to-forty year asset that’s pretty resilient when markets crash,” says Clark McGinn, managing director, CHC Leasing. “If you’re leasing to one of the major operators you have a highest and best use asset with a long life. That’s a great value proposition and investment.”
This is definitely the case for utilitarian helicopters. While corporate jet values dropped as much as 50% after the financial crisis according to some estimates, medium-to-heavy helicopters saw at most a 10% drop in values. And, even then, values rebounded within 12 months. This is in large part due to the fact that they serve businesses like oil and gas, search and rescue and emergency medical services that are not sensitive to consumer demand.
Milestone and LCI have already signed several deals. Milestone has over 90 helicopters already on lease to about 20 customers in jurisdictions all around the world and LCI has placed all of its 2013 deliveries and is working on 2014 orders. Both companies have placed orders for helicopters in the hundreds of millions of dollars. Waypoint, which has also signed one lease as of last month, also placed a direct order with manufacturer AugustaWestland in March. Lobo Leasing, which was originally backed by Perella Weinberg Partners, has not placed any aircraft orders and it has not announced who are their shareholders.
In addition to those lessors who have placed director orders with manufacturers, all four lessors will provide sale/leasebacks on secondary equipment, offering refinancing opportunities to operators.
Flexibility and demand
Investors are bullish about the underlying fundamentals of the industry, particularly in the oil and gas industry. They are encouraged by the trend towards deeper water drilling, which will continue to necessitate helicopter transport and result in sustained returns. And, there will be a large replacement requirement according to Kelly, who notes that 35% of the civilian helicopter fleet is over 20 years old.
In addition to attractive opportunities in the market in the long-term, the post-financial crisis climate has created a demanded for alternate sources of funding after many aggressive players scaled back lending in 2009. This new wave of lessors has come at a time when alternative sources of capital are in demand and where some operators would rather retain cash.
As a result of the economic downturn, loan-to-values have fallen, meaning that the equity check for an acquisition is much higher and rates are higher too. But leasing has other notable benefits aside from having to invest in the equity of the asset.
“Some operators would rather have more balance sheet flexibility,” says Washecka. “Or they’d rather do operating leases that match the contracts that they are getting with their end users.”
CHC Helicopters has used structured financing to lease aircraft since the early 2000s to fund its aircraft fleet. In fact, McGinn says the majority of the portfolio is leased. He acknowledges that there has been nothing like the aircraft lessors in the commercial aviation space until now. And just like CHC uses export credit, bank commercial equipment financiers and insurance companies to fund aircraft acquisitions, the company is also speaking to operating lessors. “This is just another iteration of a theme of diversification we’ve seen over the last decade,” says McGinn.
On the other hand, Bristow Group, who could not comment for this article due to a blackout period, said in an analyst meeting in April that the majority of the helicopters in its UK SAR deal would be leased. Including the UK SAR deal, the company would like to grow the total number of leased aircraft fleet from 15% to 30%. In the meeting Bristow executives said that leasing helped achieve a “very competitively low cost of capital from the lessors”. While the company is building its leasing profile, it still operates an ownership business model and will continue to maintain its own helicopters.
But it is not just the large companies that will benefit. “We thought we could enter the market and really help some small to medium sized companies to establish their fleets, as well as offer competitive solutions to bigger players,” says Kelly. Milestone has recently leased aircraft to international customers in India, Indonesia and Mexico as well as to large helicopter operators such as Bristow and CHC.
Operating leasing provides an opportunity for smaller operators, which might not have upfront capital to invest in the equity of the asset, do not have access to cheap debt to make a deal viable, or do not have the technical and asset management capabilities.
“To the extent that we (and operators) can educate the market on the benefits of leasing it will bring the cost of capital down for the whole industry, which would result in lower costs,” says Washecka.
Stable returns and low risk
One of the reasons this sector has attracted capital is because of the stable residual values. Most other hard assets depreciate in real economic terms. That degradation does not happen with helicopters, however, because of maintenance and replacement. Hence, why Santulli was able to sell so many helicopters at higher prices than for that which he purchased them.
“The residuals are certainly much higher than commercial aircraft,” says McGinn. “Helicopters are a utility workhorse, so they look like a sound investment to investors.”
The base case is that the assets will retain their value, but in the best case they will appreciate in real terms. “That’s the bet everyone is making, and it has been proven over time,” says Wolf. “What’s new to the equation is that lots of new capital is available.”
At the moment, aircraft lessors are confident that there is a demand for their services and that placing orders will not negatively impact the market by creating too much supply. “Even with a modest uptick in production that Sikorsky and Eurocopter have announced, we still have a shortage of heavy helicopters in particular,” says McGinn. “It’s all about a rational balance and I don’t see any irrationality in the market at this point.”
The helicopter lessors are only in the assent of their first cycle, so predicting the outcome of a platform sale is difficult. What an exit might look like or what kinds of returns to expect are anyone’s guess. “It is still too early to reliably gauge expected returns,” says Maunder. “But, we’re not in it to make a loss.”
Given Santulli’s 99% rate of success in making money on his helicopter investments, one can predict that the four companies above are making a good bet.
But, the utilitarian helicopter market is still small in comparison to the commercial fixed-wing in terms of number and value of aircraft delivered (about $85 million) in 2012. According to the General Aviation Manufacturers Association, some $3.36 billion of helicopters were delivered in 2012. While a lot of this value came from the 214 twin turbine helicopters that were delivered it also includes 328 piston helicopters and 502 single turbine aircraft.
These four lessors will target twin turbine helicopters as their core market. This does raise the question of whether the market is oversaturated at with four leasing platforms for a small market.
Investors agree that there might be capacity for one or two additional helicopter lessors. There are rumors of another company (not named in this article) speaking to private equity companies about raising capital to enter this market.
“We’ve always had a lot of competition in this industry,” says Kelly. “People see there are opportunities there, and success breeds competition.”
Based on the 15 bids that Bristow received for the UK SAR deal, there appears to be a lot of interest and opportunity. Lessors should expect fierce competition over the next few years, which will benefit operators.