Bertrand Grabowski, member of the board of managing directors of DVB Bank SE, shares his insight into the leasing industry with a fresh perspective. In this exclusive CAPA interview, Mr Grabowski breaks down the world's top lessors, talks about DVB Bank's platform, and picks the "winners" of sale and leaseback opportunities.
Do you believe American carriers are too dependent on capital markets?
No. American carriers have impressively reacted to the 2008/09 crisis. Among other things, a tight control on capacity combined with various initiatives on consolidation have brought an excellent outcome. Also fuel prices have remained reasonably low during that period. The results of all this is an impressive cash at hand. Markets have reacted positively to this news and beside an excellent access to bank-secured funding, American carriers can effectively tap unsecured and secured capital markets. If, for some reason, capital markets close or shrink, most if not all of American carriers can still rely on the bank market – and their own cash – to finance a modest book order.
Who is best positioned to finance aircraft and US carriers today and in the longer run?
First, let me repeat again that the book order of all US carriers is somewhat modest and does not represent any challenge to finance. As of today, the total book order of US carriers is estimated at USD80 billion versus a total estimate of USD500 billion for all manufacturers and all carriers. Given the credit performance, the widest possible range of financing will be available for them.
Is the end in sight for the mega-lessors? How are the emerging leasing companies affecting the sector?
It is certainly the end of ILFC as one of the two mega lessors that was dominating the market for years. But GECAS remains as strong as ever – and with whom no one can actually compete – and certainly the smartest and strongest long-term significant player in the market. AWAS, with the backing of two strong shareholders, has clearly the intention to grow to the top of the league. Air Lease has more money today than most of us would have expected a year ago, while not talking about Avolon and Jackson Square who possibly aim to raise more money. Conversely, the future of DAE, which was announced with fanfare a couple of years ago. "The largest order in commercial aviation" is very uncertain. So the lessors landscape has changed dramatically over the past 18 months and this is good for airlines which are seeing an increasing competition on the supply side for sale and lease-back. The new lessors have amassed a considerable amount of money and their management is paid to spend it all. So the DVB view is that we are seeing too many of them chasing the same deals (typically the new narrowbody on medium and long term lease to a "good" brand) with prices that may not be compatible with the return that most of them said they would achieved.
How does your portfolio strategy, as a fund manager, differ from that of a regular aircraft lessor?
DVB Deucalion is not a lessor but an opportunistic fund manager that seeks profitability as opposed to growth, contrary to most of the new lessors whose strategy is clearly subject to an "exit" in a short or medium-term and thus where the growth story is critical. We invest DVB money but also third party money from a wide range of investors in the US, Europe and Japan. DVB Deucalion is also taking an advantage from the whole of the DVB Aviation set up, including Total Engine Support, our Cardiff-based subsidiary specialising in engines management and tear down. As such, we are picking up unconventional deals: tear down with the recent purchase of six B747 passenger aircraft from JAL, passenger to freight conversion at Bedek with another four 747 that were acquired from various sources and mid-life 330s on long-term leases. This strategy, uniquely focussed on profitability, allows us to perform above most of our peers in the Industry.
Are sale and leaseback opportunities becoming more competitive?
Yes, too much money chasing the same deals ... the winners are the Air Berlins, Wizz, or Indigos of this world that can offer sizeable deals for new narrowbodies to those new buyers. Interesting to note that the abundance of equity chasing relatively few deals begins to show elsewhere, as less desirable sale and lease-back combination are becoming more competitive .
Can you explain the ECA's financing moving from 10% of value of new deliveries to 35%? Will this percentage continue to rise?
First, let me state that the 10% you mention was an historic low reached in 1989 while the average over the past two decades is around the 20-25%. Saying this, in the midst of the 2008 crisis and the drying up of the financing markets, DVB was the first to attract market attention on the possible funding gap for financing new deliveries. We were absolutely right, and ECAs had to increase their commitment by approximately USD8 billion between 2008 and 2009 to avoid this gap. Post 2008/09, the market was expecting the share of ECA financing to go south but this did not happen. Our view is that it won’t be happening in 2011 either for a variety of reasons: airlines have been bruised by the change of ECA rules and the rush to take advantage of ECA financing before it may change again, and we are also seeing in 2011 an increasing number of aircraft that are, for various reasons, difficult to finance on the bank market (the first 787s, A380s). So DVB predicts that again 2011 ECAs will remain a key player, above the 30% market share again.
Can you comment on the controversy surrounding the home country rule?
ECAs ‘Founding Fathers’ have designed the system to assist export to countries, or airlines, or aircraft, or combination of these three that made access difficult to the financing markets. But the world has changed and it is difficult to support the idea that Emirates, or Ryanair, or the Koreans have trouble accessing financing today. Post 2008, there was a need to restore some kind of level playing field and thanks to the efforts of all, this has been mostly achieved at the end of last year. Of course the home country rule stays, and this is a complex issue, but our opinion is that with the new pricing grid now in place, the controversy around this rule will evaporate.
Can you talk a little about the platform that DVB Bank offers? As a bank you are extremely specialised, but what else makes you different?
DVB is a truly hybrid institution in the aircraft financing landscape. Cross platform, we aim to deliver to our clients the right cocktail of capital and services that they may expect at any point of the industry cycle. By far, with more than USD2.5 billion at risk deployed each year since 2008 in commercial loans, we are the largest commercial bank for financing aircraft. We don’t do ECA, a commodity product with no franchise value. And as a senior lender, we like to take residual risk: out of a portfolio today of USD7.5 billion, almost 25%, or USD1.8 billion, is asset recourse only. We do what others are not doing, in particular for financing used aircraft, and this is the reason why our average portfolio margin on new business stands at 350 bps, well above the industry average. To build that model, an “in-depth metal knowledge” is a must: we have a research team of five spending its entire time monitoring values and market trends, and we have an asset management team providing lease management and remarketing services to third parties that does enlighten us with a truly instant updated informed knowledge on where the market is moving. Last addition to the platform was TES, Total Engines Support, our specialised engine management and tear down platform, which is also providing us with a great insight on end of life assets. Last, DVB Deucalion has invested about half a billion of our own money in aircraft, and this is also a unique feature among "aviation banks". We are here to stay.