AER - AerCap Holdings

[petec]

Diluted eps up 27% in 1q20. I was honestly expecting them to book an impairment loss. Shows how much I know.

[chesko182]

This probably helps:

 

"The average age of our owned fleet as of March 31, 2020 was 6.2 years (2.5 years for new technology aircraft, 11.5 years for current technology aircraft) and the average remaining contracted lease term was 7.5 years."

 

Most carriers are planning to retire their older fleets (20 years or so) in order to reduce capacity.

 

Press release: https://d1io3yog0oux5.cloudfront.net/_3fcd3cb7275da6539d73dba6105b238a/aercap/db/488/4057/file/Q1+2020+AerCap+Holdings+N.V.+Earnings+Presentation+FINAL.pdf

Presentation: https://d1io3yog0oux5.cloudfront.net/_3fcd3cb7275da6539d73dba6105b238a/aercap/db/488/4057/file/Q1+2020+AerCap+Holdings+N.V.+Earnings+Presentation+FINAL.pdf

 

will be an interesting call that's for sure

 

[mjs111]

Diluted eps up 27% in 1q20. I was honestly expecting them to book an impairment loss. Shows how much I know.

 

Deferred leases aren't booked as losses. They're booked as revenue and then added to accounts receivable (which is basically what the banks are doing for the deferrals they're doing as well: it's not a bad loan if the lender and debtor both agree to the deferral).  Even if they get a lot of deferrals, they won't immediately be booked as losses.

 

 

Mike

 

[Gamecock-YT]

I’d be interested to see what they have to say about Norwegian. In their last 10-K, they were identified as a top 5 customer. Now AerCap is going to end up being an equity holder after the existing shareholders were essential wiped out.

[mjs111]

They talked about Norwegian a bit on the call (42 minutes in).  The equity stake they're looking at in the airline is not something AerCap would regularly consider and they consider it "highly unusual." In Norwegian's case Aengus Kelly said it was a high growth airline that was doing well until COVID-19 hit and so were willing to take an equity stake, especially since the Norwegian government was willing to come in to support the airline.

 

Mike

[Edward]

Norwegian air bondholder presentation:

https://www.norwegian.com/globalassets/documents/other/norwegian-air-shuttle-asa_presentation-to-bondholders_27-april-2020.pdf

 

In short, they exchanged a year of lease income for shares. It's something like 10% haircut on the lease liability overall assuming the shares are eventually worth half of current level when sold.

[bizaro86]

Interesting how much this is up recently. I would have thought the LATAM bankruptcy was bad news, but the market seems to have shrugged it off. They're one of the biggest customers and the planes are all wide bodies. Granted they're new technology, so they wont be getting scrapped, but if LATAM stops paying on them, which seems very likely, I doubt they get a new lease any time soon.

[Edward]

Interesting how much this is up recently. I would have thought the LATAM bankruptcy was bad news, but the market seems to have shrugged it off. They're one of the biggest customers and the planes are all wide bodies. Granted they're new technology, so they wont be getting scrapped, but if LATAM stops paying on them, which seems very likely, I doubt they get a new lease any time soon.

LATAM is a fairly profitable airline in normal times. It has plenty of debt and not too much aircraft leases, about 1/3 of the fleet. It is always easier to modify debt rather than leases. So I think Aercap will be just fine in this case - they don't have a financial incentive to shrink the airline significantly, so they just declared bankruptcy as an opportunity to reduce debt, mostly unsecured. It also gives them leverage to negotiate with US banks, hence why they filed in the US.

 

Now that the debt is technically defaulted on the books of Wells Fargo and the like, they can negotiate haircuts. Once they finished torturing the banks and the bondholders, they might get to fleet reductions. Maybe. Probably not so much.

[bizaro86]

Interesting how much this is up recently. I would have thought the LATAM bankruptcy was bad news, but the market seems to have shrugged it off. They're one of the biggest customers and the planes are all wide bodies. Granted they're new technology, so they wont be getting scrapped, but if LATAM stops paying on them, which seems very likely, I doubt they get a new lease any time soon.

LATAM is a fairly profitable airline in normal times. It has plenty of debt and not too much aircraft leases, about 1/3 of the fleet. It is always easier to modify debt rather than leases. So I think Aercap will be just fine in this case - they don't have a financial incentive to shrink the airline significantly, so they just declared bankruptcy as an opportunity to reduce debt, mostly unsecured. It also gives them leverage to negotiate with US banks, hence why they filed in the US.

 

Now that the debt is technically defaulted on the books of Wells Fargo and the like, they can negotiate haircuts. Once they finished torturing the banks and the bondholders, they might get to fleet reductions. Maybe. Probably not so much.

 

Depends whether you include finance leases or not for the 1/3. I could see some of those being underwater as well.

 

LATAM was shedding planes prior to the downturn (they sent some to Delta) so I doubt they feel they're under-fleeted. They have also already said they are giving back 19 leased planes immediately. https://www.flightglobal.com/airlines/latam-immediately-cutting-19-leased-aircraft-from-fleet/138551.article

 

I can't imagine why they wouldn't use this as an opportunity to push for concessions. If the lessors wont move, they can have the plane back. Seems pretty likely they'd be able to get similar pricing or better when they need planes again because at least for awhile they'll be a glut, especially on wide bodies.

[Edward]

Depends whether you include finance leases or not for the 1/3. I could see some of those being underwater as well.

Finance leases are non recourse but operating leases are.

 

In practice it means that they can give back the aircraft to some secured debt(bag) holders and finance leasing providers and suffer no negative outcome other than loss of the aircraft, which they might be able to buy back for less later. You can also cram down haircuts on unsecured bondholders without big issues.

 

The problem with touching operating leases is that you might lose twice -both losing the aircraft (no big deal) and remaining on the hook for the lease payments (big deal). It means that unless you are knee deep in operating leasing obligations like Norwegian, there is no incentive to touch the leased aircraft but to let the leases expire and not renew.

[bizaro86]

Depends whether you include finance leases or not for the 1/3. I could see some of those being underwater as well.

Finance leases are non recourse but operating leases are.

 

In practice it means that they can give back the aircraft to some secured debt(bag) holders and finance leasing providers and suffer no negative outcome other than loss of the aircraft, which they might be able to buy back for less later. You can also cram down haircuts on unsecured bondholders without big issues.

 

The problem with touching operating leases is that you might lose twice -both losing the aircraft (no big deal) and remaining on the hook for the lease payments (big deal). It means that unless you are knee deep in operating leasing obligations like Norwegian, there is no incentive to touch the leased aircraft but to let the leases expire and not renew.

 

That's true outside of chp 11, but inside chp 11 an operating lease is a contract that can be rejected. The lessor gets their plane back, and maybe a unsecured claim for some loss of value, but that's it. If LATAM rejects an AER lease during chapter 11 they will give back the plane and stop paying immediately. Maybe AER gets a bit of equity on the backend if they're lucky. LATAM will have tons of choices for adding planes when they emerge, so I doubt they're that concerned about losing lift. It puts them in a very strong position to reject leases - they know there is tons of supply (both from the manufacturers and other airlines) so they can reject more than they otherwise would to get lower pricing.

[Edward]

That's true outside of chp 11, but inside chp 11 an operating lease is a contract that can be rejected. The lessor gets their plane back, and maybe a unsecured claim for some loss of value, but that's it.

The unsecured claim would be for the remaining value of the lease contract, not a loss of value claim. It's problematic if the aim is to reduce unsecured debt.

 

It is more effective to reject a finance lease that is close to aircraft fair value or is underwater, then there is no residual liability. Seems much better to me.

[bizaro86]

That's true outside of chp 11, but inside chp 11 an operating lease is a contract that can be rejected. The lessor gets their plane back, and maybe a unsecured claim for some loss of value, but that's it.

The unsecured claim would be for the remaining value of the lease contract, not a loss of value claim. It's problematic if the aim is to reduce unsecured debt.

 

It is more effective to reject a finance lease that is close to aircraft fair value or is underwater, then there is no residual liability. Seems much better to me.

 

Sorry, by "loss of value" I meant they would have a claim for the PV of the remaining lease payments less the PV of whatever a new lease is worth. It is unlikely that a court would approve a claim for all the remaining lease payments, IMO.

 

Also, an airline would reduce unsecured debt in bankruptcy by not paying it back in full. That's literally the point of bankruptcy - so the outcome of a rejected lease is that AER gets the plane back, and an unsecured claim in the bankruptcy to cover their losses from the lease rejection. It is unlikely the unsecured claim would get paid back all or even partly in cash - if an airline could pay its unsecured creditors in cash they wouldn't declare bankruptcy. Instead, they would likely get a huge haircut on the value of the claim, and likely only get equity in the post-reorg equity.

 

I'm still long here, but I'm getting concerned that news that I perceive as fairly bad doesn't seem to be affecting the market in any way.

[Borgesian]

That's true outside of chp 11, but inside chp 11 an operating lease is a contract that can be rejected. The lessor gets their plane back, and maybe a unsecured claim for some loss of value, but that's it.

The unsecured claim would be for the remaining value of the lease contract, not a loss of value claim. It's problematic if the aim is to reduce unsecured debt.

 

It is more effective to reject a finance lease that is close to aircraft fair value or is underwater, then there is no residual liability. Seems much better to me.

 

Sorry, by "loss of value" I meant they would have a claim for the PV of the remaining lease payments less the PV of whatever a new lease is worth. It is unlikely that a court would approve a claim for all the remaining lease payments, IMO.

 

Also, an airline would reduce unsecured debt in bankruptcy by not paying it back in full. That's literally the point of bankruptcy - so the outcome of a rejected lease is that AER gets the plane back, and an unsecured claim in the bankruptcy to cover their losses from the lease rejection. It is unlikely the unsecured claim would get paid back all or even partly in cash - if an airline could pay its unsecured creditors in cash they wouldn't declare bankruptcy. Instead, they would likely get a huge haircut on the value of the claim, and likely only get equity in the post-reorg equity.

 

I'm still long here, but I'm getting concerned that news that I perceive as fairly bad doesn't seem to be affecting the market in any way.

 

I think the market may have been pricing in a far worse scenario with liquidity drying up within the year.

[Peregrine]

Aercap just issued $1.25 billion of five-year fixed unsecured bonds at 6.5% - a bit surprising given that their 2025 bonds were trading at +800 bps spreads just weeks ago. Looks like the demand was quite strong and this was the first major issuance of unsecured bonds for lessors since the pandemic began. May well see funding spreads tighten further as air travel slowly returns to normal.

[mjs111]

I found this site to be useful explaining some of the details specific to aircraft lease financials. For example, I was a little unclear how the maintenance reserve accrual worked but after reading the paper on it, it's pretty clear:

 

http://www.aircraftmonitor.com/publications.html

 

 

Mike

 

 

[manuelbean]

Aercap just issued $1.25 billion of five-year fixed unsecured bonds at 6.5% - a bit surprising given that their 2025 bonds were trading at +800 bps spreads just weeks ago. Looks like the demand was quite strong and this was the first major issuance of unsecured bonds for lessors since the pandemic began. May well see funding spreads tighten further as air travel slowly returns to normal.

 

This is good, right?

[Peregrine]

Aercap just issued $1.25 billion of five-year fixed unsecured bonds at 6.5% - a bit surprising given that their 2025 bonds were trading at +800 bps spreads just weeks ago. Looks like the demand was quite strong and this was the first major issuance of unsecured bonds for lessors since the pandemic began. May well see funding spreads tighten further as air travel slowly returns to normal.

 

This is good, right?

 

Yes - quite good. That the unsecured bond markets remain open gives them a lot of flexibility so that they don't have to tap into their encumbered assets - which would be viewed negatively by ratings agencies. However, spreads have come in even tighter in the days following the offering and are likely to compress further so I do wonder why they went with the offering so soon before seeing things settle down even more but I guess management wanted to be conservative and proactive.

[EricSchleien]

Aercap just issued $1.25 billion of five-year fixed unsecured bonds at 6.5% - a bit surprising given that their 2025 bonds were trading at +800 bps spreads just weeks ago. Looks like the demand was quite strong and this was the first major issuance of unsecured bonds for lessors since the pandemic began. May well see funding spreads tighten further as air travel slowly returns to normal.

 

This is good, right?

 

Absolutely

[manuelbean]

More good news, right? https://www.aercap.com/media/news/aercap-holdings-nv-announces-pricing-of-125-billion-aggregate-principal-amount-of-senior-notes/

[valueinvestor]

Looks like stimulus in action. However, yes it's positive in most scenarios.

[Peregrine]

More good news, right? https://www.aercap.com/media/news/aercap-holdings-nv-announces-pricing-of-125-billion-aggregate-principal-amount-of-senior-notes/

 

They have a few notes that are coming due this year and next so they're refinancing with these new issuances. And despite the equivalent of the apocalypse happening to their airline customers, they're actually lowering their cost of funds with these refinances.

[valueinvestor]

Markets didn't think so - down ~5%.

[manuelbean]

More good news, right? https://www.aercap.com/media/news/aercap-holdings-nv-announces-pricing-of-125-billion-aggregate-principal-amount-of-senior-notes/

 

They have a few notes that are coming due this year and next so they're refinancing with these new issuances. And despite the equivalent of the apocalypse happening to their airline customers, they're actually lowering their cost of funds with these refinances.

 

Thank you for the explanation. Where can I find the interest rate of the bonds they're refinancing? Do they break down all the different issuances and their maturities on the Annual Report?

[Peregrine]

Here's their next three senior unsecured notes maturing this year and the next:

 

4.625%, 10/30/20, $1 bn

8.25%, 12/15/20, $1 bn

4.625%, 4/15/21, $500 mm

 

So their last two issuances of $2.5 billion carries an avg. rate of 5.5% is replacing the above $2.5 bn with avg. rate of 6.08%.