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Airline Economics, Issue Seventy

THE OCTOBER-NOVEMBER ISSUE OF AIRLINE ECONOMICS FEATURED THE SERIES "GETTING THE BAND BACK TOGETHER: INTRODUCING HIGH RIDGE AVIATION AND LR AIRFINANCE"

By Victoria Tozer-Pennington

As featured in Airline Economics and shared with approval

View the High Ridge Aviation article here

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Financing growth

Mindful of the need for airlines to secure financing, new leasing company High Ridge Aviation has launched a sister company, LR AirFinance to structure and arrange asset-based financing for the commercial aviation sector. Airline Economics speaks to Maggie Morrow, a founding partner of High Ridge Aviation and Executive Vice President and Group Head of LR AirFinance.

During the heigh of the pandemic, airlines tapped into a variety of funding sources to increase liquidity levels to allow the company to survive the grounding of the world fleet and to fund the recovery period. As the world recovers, air travel demand has returned and even surpassed all predictions, leaving airlines struggling to ramp up capacity and services to serve their customers. As airlines expand their fleets with new technology aircraft, they are searching for new pockets of capital to fund new deliveries. LR AirFinance, sister company of new aircraft lessor High Ridge Aviation, has been set up to assist airlines and aircraft owners with all aspects of aviation finance.

LR AirFinance is headed up by group head Maggie Morrow, who has had a long career in aviation finance, the majority spent with PK AirFinance – the financing arm of GECAS bought from GE Capital by Apollo Global Management and Athene Holding in August 2019. Prior to PK AirFinance, Morrow worked at Lehman Brothers and Capstar Partners, working on financing solutions for airlines and utilities.

Today, LR AirFinance fills an industry need for access to senior debt secured by commercial aircraft and engines. The company sources, arranges and manages optimised financing sources for customers that include airlines, aircraft traders, lessors, investors, and manufacturers.

“The strategy for LR AirFinance is to originate senior secured opportunities in the commercial aircraft space,” says Morrow. “Our remit is to consider different opportunities and structures in order to put together financing structures that meet both our risk and our return requirements while meeting the financing needs of our customers.”

LR AirFinance offers predominately secured senior loans to many aviation companies, mainly airlines and lessors. “Past experience has shown there are very good opportunities in each sector – airlines and leasing - and the two different types of lending complement one another,” says Morrow.

Although the focus is on secured products, LR AirFinance funding solutions will be tailored to the specific customer. “We offer predominantly senior secured loans,” says Morrow. “Where the bespoke aspect comes in is in the type of structure in terms of finding creative financing solutions and structures given the asset type, underlying asset, lessee, lessor, for example.”

The traditional aviation lending market is changing and adapting to the post-pandemic operating environment as players enter and exit the marketplace as strategies adapt to rising interest rates, inflation and the geopolitical situation.

“The aviation lending market is very interesting at the moment,” considers Morrow. “There has been a flux of non- traditional lending platforms indeed (in which I would include LR AirFinance). Some have already left the space while new entrants are still emerging. However, at the same time where non- traditional lenders have played in a certain niche of the market, traditional lenders are now adapting to capture some of that business, and vice-versa. I think we will see more of that cross over going forward.”

Morrow further adds that the current interest rate environment actually benefits alternative lenders in the aviation space: “Today’s interest rate environment is certainly creating a lot of dislocation and uncertainty in this market,” she says. “There is also the disconnect between the movement in interest rates and the expectations on the aircraft trading side and lease rates. I do think this will be favourable to alternative lenders as the more traditional lenders move to other markets in this interest rate environment.”

Margins on secured debt are rising, albeit slowly due to the still competitive environment, but higher interest rates are also causing a higher cost of funds eliminating gains for lenders. Although price is still a major factor for borrowers awarding mandates, volatility in many funding markets is placing more importance on other factors – namely certainty of execution.

For Morrow, borrowers will decide on which debt products for aircraft financing by the lowest price, but she adds that “there are other considerations that might now carry more weight given the current state of play, for example, execution risk, term, repayment profile, and refinancing risk”.

Morrow reports that clients are most concerned by the higher cost of borrowing but also the fact that asset values have not yet adjusted to the current market conditions, with secondary aircraft trades still being priced based on past conditions with sellers holding on to now unrealistic expectations. She says: “There is an imbalance of the speed of movement in the debt market adjusting to the new environment versus the speed on the equity/trading side”.

The lack of equity investor interest in the aviation securitisation market has been well documented over the past year, with yields too high to make the numbers work for leasing companies. With assets to finance, lessors have been relying on warehouse products to fund aircraft purchases and trades but further alternatives may be required if the ABS market remains closed to aviation assets for a longer period.

Morrow sees this interruption in the securitisation market as a “real opportunity for the alternative lenders and commercial banks who can keep the risk on their books”, which she adds is the main alternative now for borrowers that were typically funding through the capital markets.

Morrow agrees that there is appetite in the market for lenders to underwrite medium-term term loans as term-out alternatives to ABS transactions but the size of the deals may prove to be a stumbling block. “I believe the appetite is there, but it will be interesting to see how it plays out,” she says. “These won’t be small financings so that will limit the number of players. However, there’s a number of very nice, well diversified portfolios that will garner a lot of interest from the market.”

New companies are often launched during times of market dislocation due to the abundance of opportunities as existing players become weighed down by distressed books and others exit the market. However, the macroeconomic and geopolitical environment is as challenging as it has ever been. As a new lending platform, LR AirFinance is seeing to capitalise on those opportunities despite the volatile situation.

Morrow believes now is the best and most interesting time to be in the aviation market. “There are still a lot of events that haven’t played out fully, such as the COVID-19 pandemic, the war in Ukraine, delivery delays, and now high interest rates and inflation and the risk of a potential recession,” she says. “This industry is very resilient and continues to attract capital, and it is these events that also create opportunity, so will be fun to see how it all plays out.”

Airline Economics Issue Seventy

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