By Ben Dummett and Julie Steinberg
LONDON -- The coronavirus pandemic has upended the airline
industry, halting travel and grounding planes. Now, the sector's
pain is spreading to a little-known corner of the market where
investors have enjoyed heady returns for years.
So-called specialty aircraft-leasing funds have generated income
for investors hungry for yield. These funds buy jets from the likes
of Boeing Co. and Airbus SE and lease them to global air carriers
such as Thai Airways International PCL and Emirates Airline.
In recent weeks, many of those investors have fled or incurred
big paper losses as some London Stock Exchange-listed funds
suspended dividend payments and held discussions with lenders to
renegotiate payment schedules.
Two of the five LSE-listed aircraft funds have suspended
dividend payments and share prices are down between 42% and 74%
since mid-February.
Until the coronavirus outbreak, as well as some other secondary
market concerns over the resale value of certain jets, the funds
had a "solid investment case," said Markuz Jaffe, a Cantor
Fitzgerald LP analyst. Now, lenders to the airlines may have to
bail out the business model in the near term, "causing the market
to rerate the funds."
The LSE-listed funds have a collective market valuation of about
GBP500 million ($616 million), about half their size from the end
of last year. Comparable asset-backed securities that use aircraft
as collateral, a more common leasing investment structure, are
privately held, which makes it difficult to measure their financial
health. The publicly traded aircraft funds are a good proxy that
offer more disclosure on performance than privately held funds
because they are listed.
Such funds use a combination of debt and money raised from
institutional and individual investors to help finance aircraft
purchases. The planes are then leased out to airline operators,
typically for 10 years or more.
The lease payments generate an income stream for fund investors
and cover debt-financing costs. At the end of the leasing period,
aircraft are sold, the fund is disbanded and sales proceeds are
distributed to investors.
The funds generated dividend yields between 8-9% at their outset
and have fallen to around 7% in recent years due to share prices
rising, though they are still outstripping returns of risky
high-yield bonds. That has attracted a string of big-name asset
managers including Fidelity International, Standard Life Aberdeen
PLC and Invesco Ltd.
Investors presumed the dividends were relatively safe payouts
because carriers leasing the planes were, in many cases, backed by
national governments. The coronavirus outbreak is challenging such
assumptions as a sharp drop-off in travel forces airlines to lean
on their lessors as one way to conserve cash in a scramble to
survive.
Dublin-based Avolon Holdings Ltd., one of the world's largest
plane lessors, last week said 80% of its customers are seeking
payment relief.
One of the LSE-listed funds, DP Aircraft I Ltd., leases two
Boeing 787-8 planes to Norwegian Air Shuttle ASA and another two of
the same jet types to Thai Airways. Since going public in 2013, the
fund had never missed or reduced a dividend payment, according to
its filings. It generated an average annual dividend yield of
between 7% and 10% over the last five years.
That streak ended last week when DP suspended its dividend
payout indefinitely, following the Norwegian group's failure to
make its required lease payments on two jets after grounding much
of its fleet. The move triggered a one-day 20% selloff in the
stock, which had already been under heavy pressure since Feb. 25 as
the virus spread.
The dividend suspension is meant to preserve the company's
"long-term financial stability," DP said in a statement. The
company is seeking common ground with Norwegian Air over lease
payments and German lender Norddeutsche Landesbank Girozentrale
over the debt used to help buy the two aircraft.
"We are confident we will find a solution," said Christian
Mailly, managing director of DS Aviation GmbH & Co., the fund's
manager.
Global airlines, either through trade groups such as Airlines
for America in the U.S. or individual airlines such as Germany's
Deutsche Lufthansa AG and Emirates in the Middle East, are seeking
government support to manage through the crisis. That prospect
could play a key role in ensuring the survival of aircraft funds
and lessors more generally.
That is a bet Ian Rees, deputy head of multiasset funds at
London-based Premier Miton, is making. His group, with around
GBP11.5 billion in assets under management, owns shares in funds
that haven't suspended dividends and he has no plans to sell the
stocks.
The funds lease planes to Emirates, which is government-backed
and has a strong balance sheet, Mr. Rees said, giving him comfort
that it will find ways to persevere through the downturn.
Amedeo Air Four Plus Ltd., another aircraft fund, acknowledged
the role of national governments this week, noting "informal
expressions of support" from the Thai and Dubai governments to back
their airlines. That didn't prevent Amedeo, which leases 12 jets to
Emirates and Thai Airways, from suspending its dividend, as the
talks continue.
Representatives for Amedeo, Norweigian and Emirates couldn't be
reached for comment. A spokesperson for Thai Airways said airlines
globally are suffering heavily.
Write to Ben Dummett at ben.dummett@wsj.com and Julie Steinberg
at julie.steinberg@wsj.com
(END) Dow Jones Newswires
April 08, 2020 07:59 ET (11:59 GMT)
Copyright (c) 2020 Dow Jones & Company, Inc.
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