Orix Aviation’s move to buy a 30% stake in Avolon for $2.2 billion is the latest in a series of divestments made by the Irish lessor’s acquisitive parent, HNA Group.
The Chinese conglomerate has shed nearly $17 billion in assets since 2017 after a multi-year asset binge.
Rumours first emerged at Airfinance Journal’s Hong Kong event in November 2017 that parts or all of of the Avolon portfolio could be sold to a rival lessor, with Aercap and CDB Aviation being touted as possible suitors.
The rumour mill started again this year with various media reports indicating that HNA had contacted parties “in the last couple of months” about buying a slice in the lessor. CK Holdings and NWS were cited as potential buyers.
However, Avolon’s chief executive officer Domhnal Slattery is quick to dispel these rumours in an interview with Airfinance Journal, saying there was never any formal sales process in place. Sales talks only ever occurred with Orix, he insists.
The whole process began with a conversation between Slattery and a senior Orix Aviation member in January in an informal setting about the aspirations for their businesses.
Seven months later, Orix agreed to pay $2.2 billion for a 30% stake in fellow Avolon.
“I think valuation is important,” says Slattery. “This transaction has been valued at a slight premium to our book value, but it's had a very significant premium on Bohai's price to book.”
According to Avolon, the HNA-owned lessor has an enterprise value of $23.7 billion based on its 31 March status.
He adds: “Bohai's stock price has had its challenges after the last number of weeks after it effectively started trading again. Bohai's price is trading at a deep discount to book so this is a really smart transaction from the Bohai investor's perspective.”
What’s in it for Avolon?
The main benefit for Avolon in having Orix as a minority shareholder is its investment grade status. Avolon also looks to benefit from Orix’s experience and relationships, while the latter will benefit from Avolon’s cashflows and profits.
Slattery says: “Orix fitted the profile of the investor that would effectively remove any structural impediments to our roadmap to investment grade. And we believe this transaction will achieve that and we think when the ratings agencies start to come out in the next few hours with their press releases, you'll see that any structural impediment of Avolon getting to investment grade has effectively been removed as a consequence of this transaction.”
The deal is the largest single dollar ticket for a minority investment ever in an aircraft leasing company, he says. He says he was "convinced" that only a lessor with Orix's scale, balance sheet, liquidity and commitment to the leasing sector would be able to write a ticket of that size.
Since the purchaser is owned by Japanese corporation Orix, another benefit of the deal may be a greater market share for Avolon in Japan.
“Orix is probably most active distributor/syndicator in the Japanese investor market and has been for a very long time,” says Slattery. “So whether that's the single investor, JOL, Orix are right up there in terms of its metric.”
“The great opportunity for Avolon is to have Orix further turbocharge the level of activity in Japan so it becomes the premier distributor of aircraft in the Japanese investor market, which over many cycles and many decades has proven to be a very resilient market and perhaps the deepest single market in the world for acquiring aircraft be it corporate entities or be it high net worth individuals.”
What’s in it for Orix?
Shareholders of Avolon's direct parent, Bohai Capital, still need to approve the deal, which includes a governance framework with significant protections for the minority shareholder.
However, Orix does not have a right to purchase a larger stake of Avolon at a predetermined price.
“You should think about this split at 70-30% being a long-term stable split of the ownership of the business,” says Slattery. “I think it's fair to say and I think this will be brought out in the rating agency releases when they come out over the next few hours, is that Orix has got a series of minority shareholder protections that have got them very comfortable with their minority position.”
Slattery says that those minority shareholder protections have also assisted the agencies in becoming comfortable with decoupling Avolon's credit rating from its parent's rating. He says that the deal will take away the structural impediments of Avolon getting to investment grade.
“For the foreseeable future, 70-30% is what you'll be looking at,” he adds.
David Power, chief executive officer of Orix Aviation, adds: “When we looked at the opportunity, we could see that our businesses are very complementary and the areas of overlap are minimal. That was very positive for each of the parties, it also helps given the strength of ORIX Corporation the investment grade aspirations of Avolon.”
Power says that the deal looks to create “a win-win situation”, although both businesses will continue to run separately.
As a 30% shareholder in Avolon, Orix will benefit from cash flows and profits made by the Chinese owned lessor. James Meyler, deputy CEO and chief commercial officer of Orix, says that his company will also benefit from the returns made from Avolon's orderbook, but it will not taking any of the orders itself.
Meyler says: “We're buying into their business plan that Avolon has set out and we want Avolon to keep growing, increase in value and reach investment grade, that's very much our target for the investment. Orix Aviation will continue to grow by its business plan.”
However, there will be areas of synergy. The two lessors are active trading partners – Orix has acquired 45 aircraft from Avolon in the last three years alone.
“We imagine into the future there will be opportunities for us to co-operate on various types of transactions, especially in the Japanese market where Orixis one of the key players.”
Meyler says that these transactions are likely to be trading ones.
Orix has moved from owning and managing 100 aircraft aircraft eight years ago to 230 aircraft today. Orix plans to grow to over 300 aircraft in the next three years.
Slattery insists that the deal was commercially and not politically motivated. He says that conversations were held purely between HNA Group, Bohai, Orix and Avolon, and they had nothing to do with China looking to sell off parts of the HNA portfolio to reduce its debt burden.
He indicated in an investor call earlier in August that HNA had no interest in selling a controlling interest in Avolon.
On completion of the transaction, the revised Avolon board will be comprised of two Orix directors, three Bohai directors, with Slattery as executive director and one independent director.
Slattery adds: “Orix is an investment-grade global financial institution. It's good for our sector that entities of this scale are prepared to write checks of this size. I think it supports the investment cases for all stakeholders in the industry – this is a good place to put capital to work. That's not just a self-serving comment for Avolon; I think it's good for the industry.”