AER - AerCap Holdings

[Tompety03]

I found this commentary on aircraft leasing from Guggenheim CIO.

 

https://www.guggenheiminvestments.com/perspectives/global-cio-outlook/the-great-leverage-unwind

 

(1) This is a very negative outlook on air travel demand and I believe Guggenheim was previously in the leasing business (exited in 2016).  A question for those more familiar with the industry/Aercap - the securitization value is not 100% correlated to AerCap book value, correct? If there is a lease default and the contract is not continued, the securitization would take a complete loss whereas Aercap can still go lease the plane to another entity, correct?  Would appreciate any feedback on that.

 

(2) What does everyone think about the next 12 months for air travel demand? The China data shows a quick rebound once the virus was contained and I think you could assume the same for U.S. and Europe if they are able to contain the virus (those 3 markets cover vast majority of Aercap).  So maybe they get back to 80%-90% within 6-12 months for domestic travel, but international travel would lag (which I believe represent 25% of the market) if countries restrict access. I was also thinking about how the airlines could get people more comfortable with traveling - if in 6 months they have cheap 10 min COVID testing, could that be a requirement to boarding a plane?

 

(3) The U.S. airlines stocks have been crushed, but are still trading at market caps that indicate a strong probability of survival (Delta as $18bn market cap or down ~50%).  If that is how the market is pricing the airlines, shouldn't Aercap be priced much closer to book value? Said another way, if the airlines are able to get through this down period, then Aercap should be able to and if you assume there is no long-term impact to air traffic, then Aercap should be valued close to book.  Or is that overly simplistic?

 

Any thoughts are welcome. I  have a small position in the stock and was considering buying some more, but am being cautious as this is an different situation for air travel that other crisis.

 

Chris 

 

 

"Aircraft securitizations, which are secured by airplane leases from airlines, are in trouble. Airlines are going to face the reality that they either default on their lease payments or ask for forbearance as air travel grinds to a halt. Lessors are already getting a lot of requests for forbearance, but as business conditions continue to deteriorate some carriers will file for bankruptcy or liquidation and have to sell aircraft. Today, the price for a used commercial aircraft is close to zero. That is lower than the price at which airplanes were selling post-9/11. The 9/11 event was mostly a U.S. event and foreign carriers were not dramatically affected. This is the first time that we have a global incident where carriers all over the world are basically shutting down their air travel at a level even lower than the great recession of 2008–2009.

 

Interestingly, aircraft securitizations have not moved into the realm of pricing that would be appropriate. Investors are offering securitizations at 85 or 90 cents on the dollar, when many securitizations reasonably should be worth 50 or 65 cents on the dollar, or maybe lower."

[aglittell]

"Today, the price for a used commercial aircraft is close to zero. That is lower than the price at which airplanes were selling post-9/11."

 

Does anyone have any data that supports this? I find it hard to believe that commercial aircraft are worth zero. I read the rest of the Guggenheim note referenced above; it seemed lot of blanket observations w/ little supporting data.

 

[bizaro86]

"Today, the price for a used commercial aircraft is close to zero. That is lower than the price at which airplanes were selling post-9/11."

 

Does anyone have any data that supports this? I find it hard to believe that commercial aircraft are worth zero. I read the rest of the Guggenheim note referenced above; it seemed lot of blanket observations w/ little supporting data.

 

That's absurd. I believe that transactions could have stopped because buyers and sellers are too far apart on price, so liquidity has dried up. But that isnt the same as the value of the asset going to zero. I'm quite confident that you could sell planes for more than zero - but it would be a bad time to do so.

 

If anyone is aware of commercial aircraft for sale anywhere close to zero (say within a couple million for anything 10 years or newer) let me know and I'm liquidating everything to buy...

[Kaegi2011]

"Today, the price for a used commercial aircraft is close to zero. That is lower than the price at which airplanes were selling post-9/11."

 

Does anyone have any data that supports this? I find it hard to believe that commercial aircraft are worth zero. I read the rest of the Guggenheim note referenced above; it seemed lot of blanket observations w/ little supporting data.

 

That's absurd. I believe that transactions could have stopped because buyers and sellers are too far apart on price, so liquidity has dried up. But that isnt the same as the value of the asset going to zero. I'm quite confident that you could sell planes for more than zero - but it would be a bad time to do so.

 

If anyone is aware of commercial aircraft for sale anywhere close to zero (say within a couple million for anything 10 years or newer) let me know and I'm liquidating everything to buy...

 

Agreed.  Would also like a sweet new(ish) 787 for little more than zero. 

[aglittell]

From the front page of FT this morning: https://www.ft.com/content/24e729c7-a043-40ae-8880-c73a38bdd80d

 

JPM asserting that half of airlines seeking rent relief results in a 15% reduction in revenue seems positive. Not sure how much visibility those analysts have into those rent relief discussions but that reduction would imply that those leases aren't changing materially. Also noted is the likely decline in lease rates over the next year w/ no mention of commercial planes being worth nothing.

 

"As many as half of global airlines are seeking rent relief now, according to a note from JPMorgan Chase analysts Jamie Baker and Mark Streeter. They estimate as much as 15 per cent of revenue could disappear this year either with lessors’ blessings, or because airlines default.

 

Air Lease and “to a lesser extent” AerCap maintain sufficient liquidity to weather the global aviation downturn, Mr Baker and Mr Streeter wrote. “After all, it’s not the aircraft leasing CEOs you see on Capitol Hill.”

 

But aircraft lessors will “very likely have to repossess” planes as airlines fail, S&P Global Ratings analysts Philip Baggaley and Betsy Snyder wrote in a note. They will need to find new customers for those jets, as well as for the 15 to 20 per cent of leases that come due each year. With so many carriers’ worldwide paring schedules to skeleton levels, the lessors lack pricing power when they negotiate new leases.

 

'Lease rates can fall significantly in an aviation downturn, and leases signed in a downturn will therefore depress revenues for years, even after the airline industry starts to recover,' Mr Baggaley and Ms Snyder wrote."

 

 

 

 

 

 

[manuelbean]

Does anyone happen to have that news on PDF?

 

I would say that the lessors will just lease those airplanes for a couple of years and then re-lease them at higher rates. Who in his right mind would sign long-term leases at these prices? (besides airline companies, of course).

[petec]

Am I going mad or does the Aercap 2079 bond yield 17.6%?

[elliott]

They will need to find new customers for those jets, as well as for the 15 to 20 per cent of leases that come due each year. With so many carriers’ worldwide paring schedules to skeleton levels, the lessors lack pricing power when they negotiate new leases.

 

if I remember correctly, aercap management said in their last conference, back in early march or february, that airlines think long term, and given that long term air traffic is growing, airlines were not going to change their feet plans because of this pandemic

 

even if that was said just a few weeks ago, I wonder whether the statement still holds

[Peregrine]

Am I going mad or does the Aercap 2079 bond yield 17.6%?

 

There's very little liquidity on the long-term subordinated bonds so I'm guessing the bid-offer yield spread is huge. But yes, those long bonds have traded more like equity than the other bonds have.

[bizaro86]

Am I going mad or does the Aercap 2079 bond yield 17.6%?

 

Do you have a cusip for this?

[gfp]

Am I going mad or does the Aercap 2079 bond yield 17.6%?

 

Do you have a cusip for this?

 

Assume he is talking about 00774YAA7

[Spekulatius]

 

Agreed.  Would also like a sweet new(ish) 787 for little more than zero.

 

I have a good sized property but I still think that parking would be an issue.

[Jurgis]

 

Agreed.  Would also like a sweet new(ish) 787 for little more than zero.

 

I have a good sized property but I still think that parking would be an issue.

 

You can park it in the desert in Nevada (or even California) for cheap.

[rb]

Or rent space at John Travolta's house.

 

Hell, he might just let you park it for free just to have a Dreamliner around.

[Jurgis]

Or rent space at John Travolta's house.

 

Hell, he might just let you park it for free just to have a Dreamliner around.

 

I had to look it up.  :o

[manuelbean]

Why is an equity wipeout bad for AER or even AL shareholders and not for McDonald's shareholders? MCD has negative equity and it's still alive. Thank you.

[petec]

Why is an equity wipeout bad for AER or even AL shareholders and not for McDonald's shareholders? MCD has negative equity and it's still alive. Thank you.

 

AER is basically a bank: it levers its own equity to buy assets which it rents to customers. If the value of the assets falls, the equity gets wiped out first, and you get to the point where in effect the bank owns the assets, and AER has no business.

 

MCD operates restaurants. I haven't looked at it but I would imagine it started with positive equity, generated a lot of cash flows, and bought back shares, which reduces equity. Some companies  - e.g. those with very good working capital dynamics - can buy back enough shares to take equity negative. MCD still has a highly profitable business, but this has never been marked to market on the balance sheet. If it was, assets would be much larger, and MCD would have very positive equity.

 

To put it another way

[manuelbean]

Why is an equity wipeout bad for AER or even AL shareholders and not for McDonald's shareholders? MCD has negative equity and it's still alive. Thank you.

 

AER is basically a bank: it levers its own equity to buy assets which it rents to customers. If the value of the assets falls, the equity gets wiped out first, and you get to the point where in effect the bank owns the assets, and AER has no business.

 

MCD operates restaurants. I haven't looked at it but I would imagine it started with positive equity, generated a lot of cash flows, and bought back shares, which reduces equity. Some companies  - e.g. those with very good working capital dynamics - can buy back enough shares to take equity negative. MCD still has a highly profitable business, but this has never been marked to market on the balance sheet. If it was, assets would be much larger, and MCD would have very positive equity.

 

To put it another way

 

Thank you for your answer petec. In a hypothetical scenario, could MCD lenders seek liquidation or something like that based on the premise that the equity had been wiped out? And could Aercap lenders just go on with their lives as MCD lenders have done while equity was negative?

 

By the way, you've ended your comment with "To put it another way". Were you going to write something else?

 

Thank you

 

[elliott]

manuelbean, if equity is wiped out, what comes next if there are more losses?

 

also, keep in mind that the share price of aercap is very often compared to book value. some people have argued that it should trade at around BV, others above, etc. in any case, even immediately before this crisis, aercap was trading below book value. if book value were 0, at what price would it trade and where does that leave stockholders?

[johnny]

The most valuable asset of McDonald's is essentially not represented on the balance sheet at all: it is the brand commonly know as "McDonald's". Anybody lending to them implicitly knows this and so tends towards indifference on the question of book value. They care about earnings, which are independent of book value.

 

The most valuable asset of AerCap is the fleet. That is represented, in its entirety, on the balance sheet. Any lender knows this and will be extremely sensitive to any change in the apparent value of those assets, since the assets are themselves priced in the market based on their expected cash generation. Book value becomes a reasonable proxy for future EBITDA, or the probability of it.

[petec]

Why is an equity wipeout bad for AER or even AL shareholders and not for McDonald's shareholders? MCD has negative equity and it's still alive. Thank you.

 

AER is basically a bank: it levers its own equity to buy assets which it rents to customers. If the value of the assets falls, the equity gets wiped out first, and you get to the point where in effect the bank owns the assets, and AER has no business.

 

MCD operates restaurants. I haven't looked at it but I would imagine it started with positive equity, generated a lot of cash flows, and bought back shares, which reduces equity. Some companies  - e.g. those with very good working capital dynamics - can buy back enough shares to take equity negative. MCD still has a highly profitable business, but this has never been marked to market on the balance sheet. If it was, assets would be much larger, and MCD would have very positive equity.

 

To put it another way

 

Thank you for your answer petec. In a hypothetical scenario, could MCD lenders seek liquidation or something like that based on the premise that the equity had been wiped out? And could Aercap lenders just go on with their lives as MCD lenders have done while equity was negative?

 

By the way, you've ended your comment with "To put it another way". Were you going to write something else?

 

Thank you

 

1) mcd lenders could not seek liquidation on the basis of zero equity, and would be mad to do so given cash flows.

 

2) Aercap lenders could in theory allow the company to function with no equity. But no new planes could be bought because they require an equity “down payment”. In effect the company would go into runoff, with cash flows servicing debt and nothing left for shareholders.

 

3) I didn’t mean to say anything more - sorry - bad editing.

 

To understand this further I suggest you look into the impact of buybacks on accounting equity.

[manuelbean]

Thank you for your answers guys. Very enlightening.

 

 

 

[keerthiprasad]

It seems aercap has enough cash to get through the next year or so without a doubt. The thesis is that they can hold on long enough for their customers to mostly recover?

[Edward]

The most valuable asset of AerCap is the fleet. That is represented, in its entirety, on the balance sheet. Any lender knows this and will be extremely sensitive to any change in the apparent value of those assets, since the assets are themselves priced in the market based on their expected cash generation. Book value becomes a reasonable proxy for future EBITDA, or the probability of it.

Incorrect.

 

The most valuable asset of AerCap is not the fleet but its leasing agreements which are not represented on the balance sheet. Only the value of the planes is.

 

It's as if you are looking at a bank, but instead of the mortgage value outstanding you would see the value of the houses that secure the mortgage. The value of the house can vary wildly while the mortgage can still be whole.

 

Another example is the difference between SLG which always has its properties leased for at least 10 years ahead, compared with what would happen if it had only short term leases. The leases provide tremendous value in times like today that the assets by themselves do not.

 

As for the idea of liquidation based on negative equity, there are no debt covenants that provide for mark to market. So no. An event of default has to happen first - i.e. AerCap no paying debt and interest on schedule. Probably not happening for at least 2-3 years even with zero revenues based on their current payment schedule and liquidity sources.

[petec]

The most valuable asset of AerCap is the fleet. That is represented, in its entirety, on the balance sheet. Any lender knows this and will be extremely sensitive to any change in the apparent value of those assets, since the assets are themselves priced in the market based on their expected cash generation. Book value becomes a reasonable proxy for future EBITDA, or the probability of it.

Incorrect.

 

The most valuable asset of AerCap is not the fleet but its leasing agreements which are not represented on the balance sheet. Only the value of the planes is.

 

It's as if you are looking at a bank, but instead of the mortgage value outstanding you would see the value of the houses that secure the mortgage. The value of the house can vary wildly while the mortgage can still be whole.

 

Another example is the difference between SLG which always has its properties leased for at least 10 years ahead, compared with what would happen if it had only short term leases. The leases provide tremendous value in times like today that the assets by themselves do not.

 

As for the idea of liquidation based on negative equity, there are no debt covenants that provide for mark to market. So no. An event of default has to happen first - i.e. AerCap no paying debt and interest on schedule. Probably not happening for at least 2-3 years even with zero revenues based on their current payment schedule and liquidity sources.

 

Slightly depends what you mean by liquidation. Without equity Aercap can buy no new planes. At that point it effectively goes into a slow liquidation.

 

I do not expect this to happen - was merely using it as an example in the comparison with MCD.