Capital Markets and Financing3 November 2015

Wui Jin WoonSenior Director, Capital Markets

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Agenda

• Airline funding of aircraft deliveries• Delivery financing options for lessors• Operating lessor funding

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Airline funding of aircraft deliveries

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How are aircraft financed?

Source: Boeing

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Airline Financing Considerations• Cost v Diversification

• Manage financing risk• Financial markets change over time and a particular

source might be unavailable at a point in time• Balance

• Relationship• Execution risk• Flexibility• Regional v Global Banks

• Lease v Buy

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Consider the various cycles

Aviation Cycle• Aircraft Values• Airline Profitability

• CMV ≥ CBV• 6th consecutive year

Debt Cycle• Bank Sentiment• Bond Market Appetite

• Margins at historical lows• All eyes on the Fed

Equity Investor Cycle• Return Requirements• Long Run Appetite

• Strong interest • TBD

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Delivery financing options for lessors

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Capital markets an increasingly significant financing source

Source: Boeing

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Lessor Financing Considerations• Cost v Diversification

• Cost is key to leasing competitiveness• Similar diversification considerations to airlines

(financing risk, market risk, balancing other issues)• But a wider scope to diversify due to portfolio of lessees

• Trading flexibility• Fleet strategy• Liability management• Ratings considerations

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Financing strategy is connected to fleet strategy

Portf

olio

Size

0-50

50-100

100+

Growth Rate (aircraft added per year)0-10 10-20 20+

Bilateral (non-recourse)

Bilateral (full-recourse)

Secured portfolio financing

Unsecured debt

Note: box sizes are not strictly representative. Chart excludes export credit financing

Warehouse facility

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Operating lessor funding

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Lessors have a constant need for funding

• Aircraft are depreciating assets, so lessors have to buy aircraft just to stay the same size

• To achieve IRR targets, aircraft under 15 years of age need to be financed

• Aircraft usually need to be re-financed at least once while they are owned by a lessor

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Lessors must adapt to changing financial markets

1990 2000 2010 2015

Post Gulf war and GPA• GPA workout refinancing• First ABS transactions• Many banks in market

Post 9/11• FI backed lessors• ABS markets re-opened• Banks re-entered as market improved

Financial crisis and recovery• Increased ECA borrowing• Use of recourse• Portfolio finance in bank market• New capital markets issuance

Currently• ABS for debt and equity• Growth of capital markets• Diversity of banks

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Lessors need to pay attention to the liabilities side of the balance sheet

Recipes for trouble:• Borrowing short/lending long

• Excess leverage leading into a downturn

• High refinance risk

• Unmatched funding

• Concentration of relationship banks

• Dependence on capital markets

• Structures that are difficult to unwind

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Credit Rating Considerations• Rating agencies differ in the sector teams that

cover lessors (S&P: corporates, Fitch, Moody’s: FIG)• While the rating methodologies are different, there

are some common considerations: Like Dislike

Diversified fleet by customer Concentrated fleet

Mainstream liquid aircraft Out of production aircraft

Unsecured debt /Unencumbered assets

High proportion of secured debt

Large and well-positioned in industry Small and relatively new in industry

Diverse earnings Monoline businesses

Shareholder has a positive influence on financing (support, franchise)

Shareholder treats business as non-core / short term