ISTAT ASIA Singapore was held on October 11-13, 2022
Lessors see challenges in secondary market as recession looms
By Naomi Neoh, Air Transport Reporter Asia for Cirium Dashboard
Speaking on a panel at ISTAT Asia in Singapore on 14 October, Deucalion Aviation’s head of Asia, Lewis Sutherland sees headwinds in the secondary market relating to debt and interest rates.
“Most of our business comes from mid-life stage [aircraft], and even these leases in the six, eight and 10 years old [category] are still written in a very benign interest rate environment. So, whilst we have the ability to purchase them in the prevailing market rates, it’s not really a buyer’s market if the sellers are not really able to sell at a significant loss,” he says.
For sellers, there is liquidity in debt markets especially from the Asian banks. For Asian airlines, liquidity remains available, but it becomes now very expensive.
Lewis Sutherland
He does, however, note some opportunities in the sale or refinancing of aircraft in the prevailing market.
ST Engineering executive vice-president and head of aviation asset management Yip Hin Meng states: “Trying to find the right asset at the right price is not an easy task in today’s interest rate environment. Leases that are traded on the secondary market have been placed years ago in a very different interest rate environment.”
Genesis head of commercial Pat Madigan echoes some of the sentiments but has had “a little bit more success recently in acquiring aircraft”, more through bilateral trades.
Our focus now is on the five to 10-year-old assets, and we’ve worked on a few deals for [Airbus] A321s. I think there are little pockets but for the large part it’s getting harder to do.
Pat Madigan
“We see tremendous value in some of the mid- to end of life, 10 to 12-year-plus aircraft that are available on the market on short leases or AOG [aircraft on ground] [although those] are harder to acquire right now as the lenders are not trying to sell,” he says.
Madigan says the lessor has been “very focused” on narrowbodies across the lifecycle from brand-new to end of life.
SKY Leasing chief commercial officer John Duffy thinks it is a buyer’s market for those with captive debt.
You put a warehouse in place, and in time you might get a bank to raise long-term floating money at cheap rates. It’s a seller’s market if you’ve got the right kit and bought it at the right price.
John Duffy
“The search for value is probably not in brand-new sale-and-leasebacks. In some of the RFPs we’ve seen, there’s a lag between interest rates rising, it’s 5% in the last four years or whatever, and a much more tepid rise in lease rate factors. It’s nowhere near keeping up,” Duffy adds.
The current recession headwinds, unlike the Covid-19 pandemic, could spell difficulty for smaller lessors with significant refinancing due.
I feel like Covid was an airline crisis, and the recession has the potential to be a lessor crisis because of the war on refinancing and potentially the outcome of that is going to be big enough.
Lewis Sutherland
He foresees “there are going to be non-investment grade, smaller lessors with very significant refinancing” and that “existing lenders [can] refinance those deals, but the equity is seriously at risk”.
“I think certainly the start of next year we’re going to start to see some of these guys that had larger warehouses rolling over, where the capital markets remain close, and that refinancing is due, creating some opportunity,” Sutherland adds.
Duffy recalls the schadenfreude at the beginning of the pandemic: “At the start of Covid, we looked at some lessors and said they weren’t going to make it. We’ll wait for them to fall over and then we’ll buy these planes off them. None of that happened, almost no one went bust.”
Further Reading:
ISTAT Asia Key Takeaways: Lessor chiefs wary of potential for further consolidation
ISTAT Asia Key Takeaways: APAC airlines eye used aircraft to meet short-term demand
This article was originally published in Cirium Dashboard. Get the view from the top with Cirium Dashboard, to understand key drivers affecting the commercial air transport industry and proactively address changes in the market.
