Aviation Finance: Capturing Opportunities in Private Credit

Text on screen: PIMCO

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Text on screen: Harin de Silva, Portfolio Manager, PIMCO

HARIN: Greg, great to see you at PIMCO's offices. Thank you for coming down to talk to us about aviation finance. Before we kick things off, would you mind telling us a little bit about High Ridge aviation and your plans for the future?  

Text on screen: Greg Conlon, CEO High Ride Aviation

GREG: Well, look, thanks for having me here today, Harin. A little bit about High Ridge Aviation. Really High Ridge was formed as you know, late last year. It's really the ex C-suite of the GECAS management team. GECAS being the aircraft leasing platform at GE Capital, which was the world's largest aircraft leasing platform for the better part of 20 years.

For the aviation leasing space overall, I think it's a tremendously growing market, it's been growing for the past 25 years. The quantum of aircraft that's leased worldwide is now over 60% and that's over double what it was 20 years ago and we see that trend continuing and we're really excited about the opportunity for High Ridge.

HARIN: Yeah, that's great. I mean, in fact, aviation finance has been one of the more compelling opportunities for us in our specialty finance platform, right? Even pre-COVID. And as you alluded to with banks in exiting aviation finance and there has been a lot of tailwinds for private capital to come into this. So, we have been very focused on this. So we share your excitement.

GREG: Well, we see two things in this space that are kind of driving us to why High Ridge is here and why we're here with you at PIMCO. The first and foremost is, again, the growing share of operating leasing in aircraft financing and that's really happening for a couple of reasons. One is coming out of COVID, a lot of the airlines they just had to survive and they took on a tremendous amount of debt to survive.

They took almost 250 billion dollars of debt and just to put it in perspective, that's about five times their annual free cash flow. So that's a tremendous amount of debt to take in, they tripled their leverage, but they had to survive. They did a great job doing it, but now as they come out and look to grow, again, the balance sheets are under pressure, and they need to delever.

In order to delever, you have to generate cash. In order to do that, you need to grow. So operating leasing is a fantastic way for airlines to continue to grow in a dynamic where aviation supply has really been constrained, right?

The OEMs slowed down production, both Boeing and Airbus during COVID, there's a supply chain constrained through not only aviation, but businesses globally and that's going to push out this supply dynamic, we think for the next four or five years. So at least towards the end of the decade, you're going to see a shortage of aircraft, which is driving up values, also in a somewhat inflationary environment that also drives up residual values and lease rates.

So, to get into an operating leasing space like High Ridge is doing now with an experienced team and a clean balance sheet when we have no legacy issues from COVID, no legacy issues from other types of issues. So, we're really able to be selective about where we want to get into the space and help our airline customers grow.

HARIN: That's kind of why we are excited about this opportunity too to partner with you. You bring this tremendous experience in from the lease market in originating and managing leases.

Flip side is we have a relative value approach to investing and we have these analytical capabilities and we apply the same kind of analytical rigor that we apply in other areas and if we combine the two, it can be a very powerful platform in our minds. Together, we can play up and down the cap structure, whether it's buying the metal or financing airlines backed by the aircraft.

As you think in the next 24 months, what are the highlights of your opportunity set?

GREG: Well, the highlights are really twofold. One is, again, continuing those direct opportunities with the airlines. We roughly see that as about 50% of the opportunity set. So as airlines take delivery of aircraft, operating leasing will be probably a primary financing source for them and so that's what we call sale lease back.

So as the airplane delivers, we will buy it and lease it back to the airline on that same day. That's roughly about half the space and to put it in context, there's roughly 70 to 80 billion dollars of aircraft that deliver every year, about half of that is leased. So that's the opportunity set on the direct airline side and on the aircraft lessor side, established lessors that are looking to recycle capital as they have CapEx commitments coming in or debt facilities, they need to pay off are looking to sell aircraft and portfolio.

So that's roughly the other 50% of the market and that's about a 20-to-30-billion-dollar opportunity every year. So, between the direct airline deals and the lessor deals, that's about 60 to 70 billion of annual opportunities we see in the next 24 months.

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Text on screen: PIMCO

Disclosure

As of January 16, 2023. Source: PIMCO, High Ridge Aviation. https://kpmg.com/ie/en/home/insights/2023/01/aviation-leaders-report-2023/the-age-of-leasing.html;

“No legacy issues” refers to the fact that the HRA platform was launched post-COVID and after the onset of geopolitical events such as the Russia/Ukraine war, therefore the company does not have legacy aircraft assets on the portfolio that they have to manage through which differs from other airline lessors.

All $ amounts referenced are in U.S. dollar unless stated otherwise.

Alternatives investments including those in aviation are subject to a variety of inherent risks that may have an adverse impact on the values of, and returns (if any) from, such investments, including: changes in the general economic climate, local conditions, the quality and philosophy of management, changes in operating costs, interest rate levels, the availability of financing, energy prices, as well as natural catastrophes (such as earthquakes, hurricanes, floods and other natural disasters), acts of war, terrorism, civil unrest, vandalism, uninsurable losses and other factors beyond the control of the manager. In addition, there is no assurance that there will be a ready market for resale of investments because aviation investments generally are not liquid. Illiquidity may result from the absence of an established market for the investments.

Statements concerning financial market trends are based on current market conditions, which will fluctuate. There is no guarantee that investment opportunities will work under all market conditions or are appropriate for all investors and each investor should evaluate their ability to invest for the long term, especially during periods of downturn in the market. Outlook is subject to change without notice.

Actual events or results may differ materially from those reflected or contemplated in any opinions contained herein. Certain information presented herein is as of a specified reference date, and may have changed significantly since such date.  Neither PIMCO nor any of their affiliates shall have any duty to update any of the information presented herein.

High Ridge Aviation and PIMCO are separate and unaffiliated entities.

This material contains the opinions of the manager and such opinions are subject to change without notice. This material has been distributed for informational purposes only and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed.

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