Doric Asset Finance and Nimrod Capital successfully listed an investment company, Doric Nimrod Air Two (DNA2), on the London Stock Exchange on 14-Jul-2011 - a new company created to fund three A380s for lease to Emirates. Managing Director of Aviation at Doric Asset Finance Paul Kent told CAPA exclusively about this alternative source of funding for carriers and broke down the structure of the new investment body.
DNA2 comes off the success of DNA1 – Doric and Nimrod’s first partnership, which financed one A380 for Emirates. DNA2 will work in much the same way: it will purchase the three A380s and lease them to Emirates each for 12 years. Upon leasing of the three aircraft, DNA2 will aim to pay a dividend of GBP 4.5 pence per share per quarter, equivalent to an annual dividend of 9% per GBP 200 pence share. In additional to the regular yield of 9%, once the lease has expired, the aircraft are likely to be sold and investors paid out from a residual value. Under the terms of the lease, Emirates is responsible for insurance and all other service, maintenance and repair cost.
Doric Asset has long been focussed on the German KG Market, structuring funds into predominantly retail investments. The company felt that if this had application in continental Europe to a retail investor base, there would be no reason why it should not have application to an investor base in another jurisdiction. Doric Asset has an office in London (as well as New York and Frankfurt) so it decided to explore the different routes in the UK. “We found there was actually a sizeable investor interest in amongst institutions for this kind of product, that could deliver this kind of return profile,” stated Mr Kent. “Once we established the demand was there on an institutional basis the next step in the process was finding the most appropriate delivery mechanism in terms of listed company structure with the daily price requirement. As soon as we had established what was the most appropriate vehicle for those institutional investors to invest in, given the establishment amount that was in place, then we knew we had something that would work.” The investors in DNA2 are mainly institutional asset managers, pension schemes and private wealth managers.
The commercial aspects of the risk in this investment are the same as in any aircraft leasing transaction. The factors are the credit rating associated with the carrier (Emirates) and the asset risk associated with the aircraft (A380). However in this transaction, it is structured so there is more weighting to the credit risk aspect rather than the asset risk – because the A380 is a less liquid asset than, say, an A320. As traditionally seen with widebody aircraft transactions, the initial lease term is longer (12 years) and the initial rent is higher.
“For that reason, the primary risk in the transaction is the credit risk against Emirates, the underlying lessee,” stated Mr Kent. “What we tell investors if that you have to evaluate first and foremost the credit quality. In that sense we are very pleased to have a counterparty like Emirates who are one of the most profitable airlines in the world with a very strong business plan and good business rationale. When we explain that to investors there is a reasonable degree of comfort because of the credit risk that is associated with the lessee.”
Emirates reported its 23rd year of consecutive profit in May-2011 with a net profit of USD1.5 billion (GBP930 million). Mr Kent continues: “If Emirates pays its rent for the entire duration of the lease, the underlying residual exposure, the asset risk, is actually pretty well managed exposure. Ultimately, we will need to realise the value in the aircraft.” In that respect, the A380 is somewhat an untested market – no one knows how the A380 will trade in 12 years’ time. According to Mr Kent there are some interesting developments in the A380 space as to who its secondary market opportunities could be: he mentioned the likes of Air Austral and its on-order, all economy configured A380s giving rise to the potential of the aircraft entering the long-haul/low cost segment.
“A number of my colleagues and I date back to the days of some fairly highly structured, tax-driven transactions. It was always nice to do transactions where the primary purpose behind it was the tax benefit because in many ways, from a business perspective, the rationale for those transactions was very simple, even if structurally they could become unbelievably complicated.
"In contrast to that, today’s transactions are certainly much more simple from a structural perspective. In the case of DNA2 we have a vehicle and we have a lessee. It’s not terribly exciting structuring from that point of view. The trick nowadays is that the transactions are not tax motivated at all, they are wholly commercially motivated and driven by the yield that the transaction produces, which is very much the case of the DNA transaction. There is no gimmick or clever structuring that generates some kind of tax benefits – this is purely investors investing for the yield.
"This means that while the structuring behind the transaction is relatively simple, the commerciality behind it is very much more important and needs considerable focus to ensure the development of an investment case that works but is still stable, and that investors can believe in for the long-term. In that sense, it raises different, but in many ways more difficult, challenges because aviation is a volatile industry and you have to therefore take that into account when you are structuring long-term transactions - you need to engender some stability in the transaction from an investor rationale point of view to ensure you have a safe investment case or investors for the long-term."
Doric Asset Finance fleet data
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