the state of the global helicopter finance market€¦ · the state of the global helicopter...

Strictly Confidential and Proprietary Information

THE STATE OF THE GLOBAL

HELICOPTER FINANCE MARKET

11 FEBRUARY 2013

JOHN SHELDON LEASE CORPORATION INTERNATIONAL

p1 Strictly Confidential and Proprietary Information

BASIS OF HELICOPTER FINANCE

DIFFERENCE BETWEEN CORPORATE AND WORK HORSE HELICOPTERS AND BETWEEN THE TYPES OF FINANCING REQUIRED

FINANCING OF CORPORATE HELICOPTERS FOCUSSED MORE ON THE CUSTOMER, LESS ON THE ASSET. PERHAPS MORE AN AREA OF GENERAL BANKING, LESS INDUSTRY RELATED

WORK HORSE HELICOPTERS FORM MOST OF DEMAND FOR HELICOPTER INDUSTRY BASED FINANCE

TWO THIRDS OF WORK HORSE HELICOPTERS USED IN OFFSHORE OIL AND GAS - 7% IN DEEPWATER ( + 11%PA)

MOST OF THE REST FOR GOVERNMENTS – SAR, POLICE, AMBULANCE ETC

PREDOMINANCE OF OUTSOURCING BY O&G COS & GOVTS FROM THE EARLY 1990’S

REPLACEMENT OF SUPPLY VESSELS WITH HELICOPTERS FROM 1980 – WITH RISE IN PAY AND QUALITY OF O&G RIG WORKERS

HENCE HUGE GROWTH IN SIZE OF OPERATORS SINCE 1980 – ESPECIALLY FROM 2000 - AND IN AREAS BEYOND IMMEDIATE OFFSHORE GULF OF MEXICO

OFFSHORE O&G PRODUCTION GROWS AT ABOUT 2%PA BUT OFFSHORE HELI-MILES FLOWN AT TWICE THIS RATE

SAR, POLICE, AMBULANCE, ETC AT SIMILAR RATES GIVEN SWITCH OF MILITARY TO CIVILIAN HELICOPTERS


Market Overview - World Energy Supply 1971-2030

Key Takeaway – Approximately 30% of O&G comes from offshore sources mostly requiring helicopter transport

Oil&Gas≈60%


Global Oil Demand & Supply

Key Takeaway – Continuously high oil demand increases the need for further exploration and production offshore to follow


HISTORY OF HELICOPTER FINANCE

1980-1995 PREDOMINANTLY BALANCE SHEET FINANCING - NORMAL BANK LINES AND BONDS ISSUED AGAINST GENERAL SECURITY – MODEST AMOUNT OF LEASING – MOSTLY TAX BASED LEASING SUCH AS US TAX BASED LEVERAGE LEASES

1995-2007 VERY LITTLE TAX ADVANTAGED LEASING AS GOVTS GOT WISE TO UNNECESSARY TAXPAYER UNDERWRITING – ALSO NOT MUCH GENERAL BANK BASED BALANCE SHEET LENDING – A GREAT DEAL OF ASSET BASED FINANCING AND CAPITAL MARKET BOND FINANCING IN THE BOOM YEARS – BOND MARKETS MAINLY IN NORTH AMERICA – ASSET BASED LENDING MAINLY IN EUROPE (UK, SCANDANAVIA, FRANCE, GERMANY, HOLLAND) AND AUSTRALIA

2007 – 2011 COMPARATIVELY LITTLE ASSET BASED OR COMMERCIAL BANK LENDING – A GREAT DEAL OF ECA BASED FINANCING

2011-13 THE ARRIVAL OF THE WORK HORSE HELICOPTER OPERATING LESSORS BIG TIME!


IS THERE ENOUGH CASH TO FINANCE GROWTH?

HOW MUCH IS NEEDED? TOTAL VALUE OF CIVIL MARKET WORK HORSE HELICOPTERS IN THE WORLD COULD BE ABOUT $10BILLION IN O&G AND $5BILLION IN OTHER – ANYONE WITH AN ACCURATE FIGURE PLEASE CORRECT ME!

VERY HARD TO GET A GRIP ON NUMBERS BUT IN THE WORK HORSE HELICOPTER AREA MAYBE $15BILLION IN THE NEXT 5 YEARS AND DOUBLE THAT OVER THE NEXT 10.

ECA’S MUST HAVE FUNDED ABOUT $2BILLION IN LAST 5 YEARS – COULD PRESUMABLY DO SAME AGAIN OR MORE IN NEXT 4 – THOUGH MORE EXPENSIVELY. NEW ECA’S, SUCH AS AFRO EXIM, ENTERING THE FIELD.

OPERATING LESSORS WILL FUND MAYBE $3BILLION OVER THE NEXT 5 YEARS – THE 2 NEWCOMERS PLUS GE AND OTHERS – BEAR IN MIND THAT OPERATING LESSORS ARE PARTLY FUNDED BY THE SAME BANKS THAT WOULD OTHERWISE LEND DIRECTLY.

BOND MARKETS AND PRIVATE EQUITY MAY PROVE TO BE QUITE IMPORTANT – ENTHUSIASM IN THE US IS PARTICULARLY STRONG AT THE MOMENT - MAYBE ATTRIBUTE $3BILLION OVER 5 YEARS TO THEM?

OPERATOR GEARING IS ABOUT 5:1 SO WE’D EXPECT $3BILLION IN NEW EQUITY FOR THEM

THAT LEAVES A MERE $4BILLION OF DIRECT FINANCE FROM THE BANKS (BUT MORE BECAUSE BANKS WILL ALSO BE FINANCING UNDER ECA GUARANTEES AND THROUGH OPERATING LESSORS)

ALL VERY SMALL BEER COMPARED WITH FIXED WING FINANCING – ISSUE NOT QUANTUM BUT QUALITY


Fleet Distribution by Age

Source: Ascend


0

200

400

600

800

1,000

1,200

1,400

1,600

1,800

2,000

0 2 4 6 8 10 12 14 16 18 20 22 24 26 28 30 32 34 36 38 40 42 44 46 48 50 52 54 56 58 60

Economic Useful Life of Helicopters

Fleet Size

0

200

400

600

800

1,000

1,200

1,400

1,600

1,800

2,000

0 2 4 6 8 10 12 14 16 18 20 22 24 26 28 30 32 34 36 38 40 42 44 46 48 50 52 54 56 58 60

Economic Useful Life of Commercial Jets

Fleet Size

Economic Lives

LCI Core Investment Period – 14 Years

Aircraft can be operated in two phases

Phase 1: Passenger Service (0-15 Years)

Phase 2: Freight conversion (15-30 Years)

Economic life driven by basic airframe

structure/systems, evolving technology

Freight conversion requires significant

investment

LCI Investment Period can be extended to 25y

Helicopters can be operated in three phases

Phase 1: Off-shore (0-25y of Age)

Phase 2: EMS/SAR (25-45y of Age)

Phase 3: Utility/Military (45-60y of Age)

Essentially a collection of upgradable spare

parts with no structural life restriction

Key features supporting helicopters longer economic life

– Unpressurised hull – no ultimate fatigue life

– Continuous replacement of components

– Ease of upgrade of most major systems

– Good secondary and tertiary market – generally primary operators retain for long initial terms (compared to airlines)

– Can migrate to variety of secondary or tertiary roles SAR, EMS, military and VIP

Source: Ascend


THREATS TO HELICOPTER FINANCE

WORK HORSE HELICOPTER HISTORICAL VALUES – 1960’S MANUFACTURES STILL FLYING – VALUES MORE THAN COST – VERY LITTLE DEPRECIATION – NO PRESSURISATION – ETERNAL RENEWAL – MRO IS KEY – STRENGTH OF END USERS KEY TO GOOD MRO – END USER MARKET IMMUNE TO DOWNTURNS – UNDERLYING FINANCE AT 6 TO 8%PA

WHAT COULD CHANGE THE ABOVE?

TECHNOLOGICAL OBSOLESENCE - HELIPLANES OF VARIOUS TYPES?

END-USER FADS FOR NEW AIRCRAFT?

END-USER SQUEEZE ON OPERATOR PROFITS?

REPEAT OF 1980’S OPERATING LESSOR SURPLUS = OVERSUPPLY = WHITE TAILS?

FRACKING, THORIUM AND OTHER DISPLACEMENTS OF OFFSHORE O&G?

POLITICAL INSTABILITY AND WAR?

UNRESOLVED TECHNICAL PROBLEMS SUCH AS EC225 GROUNDING?

BASEL III?

IAS/FASB EXPOSURE DRAFT ON LEASE ACCOUNTING?


NEW SOURCES OF FINANCE

ALL SOURCES AREA & CUSTOMER FOCUSSED AT PRESENT

ODD MIXTURE OF PREFERENCES AMONGST THE WORLD’S LENDERS FOR ASSET RISK ON THE ONE HAND OR CREDIT RISK ON THE OTHER – TO BE EXPLOITED!

NEW OPERATING LESSORS ARE OBVIOUS SOURCE

BOND/CAPITAL MARKETS/PRIVATE EQUITY FOR BIG EXISTING OPERATORS AND OPERATING LESSORS

PLACE FOR STRUCTURED FINANCINGS?

LOTS OF INTEREST IN TOKYO, BEIJING, MIDDLE EAST AND CANADA – ALL NEW SOURCES – INTEREST NOT YET CONVERTED TO ACTION THOUGH

GREATER EXPECTATION THAT EXISTING SOURCES IN THE US, EUROPE AND AUSTRALIA WILL CEASE HOLDING STILL AND START GROWING VOLUMES AGAIN + SOME INTERESTING NEW PLAYERS IN THESE AREAS


BANK DEBT VS LEASING VS EXPORT CREDIT

FALSE DICHOTOMY! THEY OFTEN GO TOGETHER – GUESS THAT NEARLY HALF OF HELICOPTER FINANCING IN LAST 4 YEARS INVOLVED ALL 3 AT ONCE.

EXPORT CREDIT: SHOULD BE SEEN AS LAST RESORT – BUT IN 2 WAYS: EITHER BECAUSE THE CREDIT RISK TAKERS ARE SHORT OF DOLLARS OR BECAUSE THOSE LONG OF DOLLARS ARE NOT KEEN ON CREDIT RISK!

BANK DEBT: WHERE OPERATORS WANT OWNERSHIP AND HAVE THE BALANCE SHEET TO TAKE IT.

LEASING: WHERE OPERATORS WANT TO MATCH FINANCING AND THE TERM OF THEIR OWN CONTRACTS AND/OR WANT TO REDUCE BALANCE SHEET USE BY TRANSFERRING RISK (BUT PERHAPS NOT REWARDS!)


SUMMARY NOT EASY BUT NOT IMPOSSIBLE

TOOK 5 YEARS TO CONVINCE BANKS BACK INTO THE MARKET AFTER THE 1973-1978 AND 1989-1995 AIRCRAFT FINANCING RECESSIONS – MAYBE WE’RE AT THE 1978 & 1995 POINT NOW?

THE 2 NEW OPERATING LESSORS HAVE ENTERED THE MARKET AT AN EARLIER POINT IN THE CYCLE THAN DID GPA AND ILFC IN THE EARLY 1980’S AND THIS MAY HELP – IN ANY CASE THE WORK HORSE HELICOPTER INDUSTRY HAS BEEN FAR LESS CYCLICAL THAN THE COMMERCIAL JET TRANSPORT INDUSTRY.

ONE REASON FOR OPTIMISM IS THE INEVITABILITY OF ECONOMIC CYCLES AND THIS APPLIES PARTICULARLY TO THE CORPORATE AND GENERAL HELICOPTER MARKET

HOWEVER THE BEST REASON FOR OPTIMISM IS THE RAPIDLY INCREASING RECOGNITION IN THE FINANCIAL WORLD THAT THE WORK HORSE HELICOPTER HAS BEEN BETTER THAN ALMOST ALL OTHER ASSETS IN HOLDING VALUE AND THAT THERE ARE SOME GOOD REASONS TO EXPECT THIS TO CONTINUE.

MANY WELL KNOW BANKS DITCHED THEIR FIXED WING PORTFOLIOS DURING THE FINANCIAL CRISIS. VERY FEW DITCHED THEIR WORK HORSE HELICOPTER PORTFOLIOS. MANY ARE NOW WRITING NEW DEALS THOUGH CAUTIOUSLY.

PERHAPS 2013 WILL SURPRISE ON THE UPSIDE.


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Lease Corporation International

Dublin | London | New York | Singapore

www.lciaviation.com

Lease Corporation International: 41 Forbes Quay, Sir John Rogerson’s Quay, Dublin 2, Ireland

(T: +353 1 6728 708) Email: [email protected]


Notes on slides – details in actual speech not necessarily evident from headlines in slides

Slide p1 Basis of Helicopter Finance

1. Half to two thirds of all helicopters are built for military registers and thus outside the scope of commercial finance.

2. On shore O & G relatively static in terms of output and demand so, whereas 40 year growth rate averages 2%pa, all the growth is in offshore – perhaps growing at 4%pa.

3. Government – SAR, Police, Medivac, Fire Fighting, Commercial Troop Transport,etc growing at less than 2%pa, but use of commercial work horse helicopters in this area growing at twice this rate because governments are increasingly outsourcing these activities away from the military – UK SAR being a prime example going from all military 8 years ago to all commercial by 2017.

Slide p5 Is there enough cash to finance growth?

Prediction in the speech was that the $15billion needed to finance work horse helicopters in the next 5 years would be “all the 3’s”:

$3bn new equity for operators, £3bn from export credit agencies, $3bn from operating lessors, $3bn from private finance & £3bn from bank lending.

Slide p8 Threats to Helicopter Financing

1. Tilt rotors and EC X types (rotors and propeller combis) have no work horse application – mainly military apps. = no threat.

2. EC 225 grounding has caused two of the largest O & G cos to drop “all new” requirement – why use a $25m heli on work that a just as safe 15 year old $7m heli can do – looks as if common sense is replacing the “all new” fad of recent times (which might have been a threat to value retention).

3. Silver lining to negotiating strength of end users: all of them are keen to maintain as many good operators as possible so that they will allow operators to make profits (if only modest) – comfort for financiers though perhaps not so much for investors.

4. Oversupply: operating lessors unlikely to double up supplies of aircraft for contracts – all participants very aware of scale and pace of growth – far easier to predict than the volatile air pax market.

5. Fracking, Thorium: some impact but unlikely to drive O & G price below long term 2010 real price average of $35 below which could cause cuts in production and exploration. 80% of work is in production which is even more stable than exploration. (Thorium is a form of clean nuclear energy – no waste, no meltdown – being developed by Chinese and Japanese – expected within next decade – but will be as expensive as oil.)

6. Political instability and war: as this affects mainly on shore production any disruption is likely to drive offshore production and heli use up.

7. EC 225 grounding is obviously worrying until solved.


Detail continued from last slide

-- Threats?

8. Basel III: More capital against Risk Weighted Assets but heli assets yield comparatively low RWA. (For 50 largest world banks, RWA is 10x capital and one third of Total Assets – actual numbers roughly $1trn Capital: $10trn RWA: $30trn TA.) RWA = Probability of Default (PD) x Loss – Given Default (LGD).

LGD is Financing less worst case sale value of asset. PD relatively high of for operators – all of which sub investment grade – but LGD is very low since level of financing is rarely above soft asset value.

Liquidity ratio drives banks to seek relationship lending: 75% of non-relationship origin short tem deposits assumed to go in a crisis, but only 25% of good relationship origin short term deposits. So heli financiers will want overall banking of operators.

9. IFRS 17 Leasing: As rating agencies, brokers, banks, credit agencies & operators themselves already balance sheet the NPV of operating lease commitments, the accounting standard making this treatment obligatory is merely a catch up and thus a damp squib and no threat.

NB: Oil price was last $13 in 2002 – barely caused a ripple in the rate of offshore O & G supply and demand!

Slide p9: New Sources of Finance

All sources term focussed as well as area and relationship focussed. Hard to get beyond 5 year term. May favour operating lessors who look mainly for 5 year finance.

Importance of marrying together credit and asset risk banks when arranging heli finance.

In next 5 years, private capital will probably play an increasing role in provision of equity, junior, mezzanine and senior lending – disintermediated finance looking for real rates of return. Lots of interest in helicopters as good asset security. Private wealth banks have senior loan funds to which banks can syndicate.

Rates? Equity 20%pa +, junior around 16%pa, mezzanine around 9%pa (up to 16%pa if most of yield is in potential back end capital gain), wealth funds looking for 5%pa for senior loans (say 1% base + 4%).

Question: Why do O & G companies not fly their own helicopters? Lack of economies of scale, problems getting alternative lift when aircraft grounded, may not want whole use of helicopters (operators can use same heli for more than one end user), a lot of admin for a service that is 1% of their costs.

the state of the global helicopter finance market€¦ · the state of the global helicopter...

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