Risk Management in Operating Leasing Ri Paul Sheridan, Accipiter 2 - - PowerPoint PPT Presentation

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Ri Risk Management in Operating Leasing

Paul Sheridan, Accipiter

2nd November 2016

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Accipiter: A Growth Focused Lessor

43 Aircraft ~$1.9bn assets 89% Narrowbody Fleet (by CMV)

Shareholder Committed Growth Capital Wholly owned subsidiary of CK Hutchison Holdings Limited (Reuters Code 0001.HK) Aircraft Manufacturers Airbus (51%)/Boeing (49%) Diversified Global Customer Base 21 Airlines, 14 Countries 4 years Average Age Expertise 27 employees with 200+ years experience in Aviation 6 years Average Remaining Lease Term

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Presentation overview

Risk management framework Asset Structure Credit Structuring deals within the framework Portfolio management

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Risk management priorities

Asset Structure Credit

Do I understand the future value of the asset? Can I get it back as quickly and efficiently as possible? What are the chances of me having to do this?

Understanding the interaction between these three areas leads to better deal decisions

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Asset risk

Best value retention with lowest volatility Focus on purchase price Core to lessor core to lessee Remarketable specification

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Valuation depends on perspective

Airline What routes can the aircraft fly? How much will it cost to fly it?

• Direct costs
• Ownership costs

Lessor What rents will I get for the aircraft? What risk am I taking on finding a new lessee? Can I trade it on?

However, if the airline wants to fly the aircraft the lessor will want to buy it

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Easy to forget in today’s market: Aircraft values depreciate and are cyclical

Aircraft historical value index

Source: Ascend Source: Ascend Source: Ascend

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What do lessors want to invest in?

Source: Ascend

A380 – 800 A330 – 200 737 – 800 A330 – 200 CRJ200 777 – 200LR 737 – 300 767 – 300ER MD – 80 747 – 400 717 – 200 777 – 200LRF High MV volatility Low MV volatility Hi BV depreciation 787-9 Low BV depreciation A320 – 200

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A320-200 value retention

Source: Ascend

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737-300 value retention

Source: Ascend

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Key drivers of aircraft values

Point in economic cycle, oil / fuel price, inflation, global trade and tourism Macro-economic Supply of aircraft (duopoly manufactures), demand for aircraft (stored aircraft fleet size, airline profitability and regulatory changes), lead time for production of aircraft Industry Position in the production cycle, number of units produced, geographical fleet distribution, number of airline operators, engine choice, product support provided by manufacturer Aircraft type Age, weight, engine thrust, interior configuration, physical and maintenance condition and hours and cycles Aircraft specific

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The best aircraft types show value recovery

Global financial crisis Second Gulf war/SARS

• utbreak

737 – 800 new A320 – 200 5yr 2005 2006 A320 – 200 new 2007 2008 737 – 800 5yr 45.0 40.0 35.0 30.0 25.0 20.0 15.0 10.0 5.0 0.0 Constant age market value (US$m) 2000 2001 2002 2003 2004 2009 2010 2011 2012 2013

25+ year useful life V alues oscillate around economic cycles Long term value trend is predictable through the cycle Key asset management philosophy is not to dispose of assets at the trough

• f the cycle

Not all aircraft types are equal –some types experience more valuevolatility than others

Source: Ascend

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Structure risk

Repossession risk

Country risk analysis Cape Town protections

Good lease protections

Deregistration Reserves and security deposit

Low risk financing

No restrictions/permissions on repossession and remarketing

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Credit risk

Ability to pay rents Strong franchise and solid business plan Lease terms reflect credit quality Ability to maintain and redeliver the aircraft

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Airline credit analysis

Quantitative analysis

• Free cashflow
• Adjusted debt/EBITDAR
• Adjusted debt/Equity
• RASK/CASK
• Cash balance
• Profit margins

Qualitative analysis

• Business model
• Franchise in market
• Position at hub airports
• Management team
• Access to finance
• Profitability record

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Combine asset and credit risk in deal decisions

When should you do:

Shorter lease terms? Non core assets? Widebody aircraft? Leases without reserves?

Does the deal add to the portfolio?

Top tier credit Region of the world with under-exposure Modern technology asset

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Portfolio management – concentration limits

Usually measured by: Geography Aircraft class Lease return date Individual name Credit quality All portfolio metrics should be calculated by number of aircraft and by total book value

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Typical concentration limits - geography

Historically, apart from 2008, regions of the world have shown relatively weak correlations for airline profitability

Region % of portfolio Asia Pacific <40% Europe <40% North America <35% South and Central America <25% Middle East <20% Africa <15%

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Typical concentration limits – lease return

Key to ensuring stability of earnings Monitor lease return dates regularly Limit returns in any year to 20%

• f portfolio

Having sister ships with reasonably close redelivery dates can be an advantage Monitor competitor aircraft for less liquid types

0.0% 2.0% 4.0% 6.0% 8.0% 10.0% 12.0% 14.0% 16.0% 18.0% 20.0% 2017 2018 2019 2020 2021 2022 2023 2024 2025 2028 % of the fleet redelivering

Fleet by lease return date

A320-200 A321-200 A330-300 B737-700 B737-800 B737-900ER B777-300ER

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Other portfolio metrics

Average age Remaining lease term Single name concentrations Narrowbody/widebody mix Credit tier Core/non core aircraft Metrics depend on investor strategy as much as risk management policy

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Qu Questions?