Understanding Risk December 7 th , 2017 Paul Lyons - - PowerPoint PPT Presentation

www.iba.aero Minimising Risk, Maximising Opportunity

Understanding Risk

December 7th, 2017

Paul Lyons Paul.lyons@iba.aero

www.iba.aero Minimising Risk, Maximising Opportunity

Enhancing Decision Making

Full service

„Aviation Intelligence, asset management, Advisory „Only consultancy that also appraises (7 ISTAT Appraisers), manages (130+ assets, $4bn), and remarkets „Global approach

Independent

„No vested interest in a deal progressing „No conflict in treatment of assets under management or for sale/re-lease

Diversified talent pool and inputs

„Imaginative solutions from a breadth of backgrounds „30 years of trading experience „Quantitative and qualitative approach „Unique access to critical data and human intelligence Entry „Market entry and analysis „Competitive intelligence „Fleet/Asset selection

1

Identification

3

Building Value

2

Acquisition

4

Exit Opportunity „CDD, ODD, TDD „Valuations „Benchmarking The Deal „Negotiation „Critical factors „Risk assessment Exit „Sell side advisory „End-of-Lease options „Remarketing Addressing Issues „Risk monitoring „Dispute support „Repossession Managing the Asset „Technical and regulatory advisory „Transition management „Maintenance and costs analysis

Minimising Risk, Maximising Opportunity www.iba.aero

Searching for yield

Returns, Competition and Premiums

„ Lower margin is, we think, driving alternatives. In the last six months we’ve seen increases in enquiries around:

Freighter conversion and investments

• h

Engine leasing

• h

Part out activity and acquisitions

Riskier credit requests And that is where this morning comes in….

Minimising Risk, Maximising Opportunity www.iba.aero

Volatility up?

Why the uncertainty?

„ 3.7% growth forecast „ Bubbles? „ High profile defaults „ Gulf challenges „ HNA „ Legacy vs disruptors „ Geopolitics „ WB concerns „ Argentina and India return „ Oil „ Brexit Minimising Risk, Maximising Opportunity www.iba.aero

(Sources: Transparency International Corruption Perception Inde 2016, IBA.iQ November 2017, IMF October 2017)

66.8% / 2.0%

Minimising Risk, Maximising Opportunity www.iba.aero

Focus on the big three areas – Asset, Operator and Jurisdiction

Asset

„ Horizon scanning – New tech? Oil? Defaults?

Operator

„ Performance, reputation track record

Jurisdiction

„ Can I manage risk and recover assets if need be?

Minimising Risk, Maximising Opportunity www.iba.aero

The asset – what impacts residual values

It’s a long list..

„ ADs/SBs „ Age „ Aircraft size/range „ “Aircraft pedigree” – country of origin from first lease „ Commonality „ Competing types „ Convertibility „ Concentration of operators „ Demand „ Engine type & generation „ Fuel burn „ Fuel price „ GDP „ Geographic distribution „ Government regulations „ Inflation & interest rates „ In-production or out-of-production „ Maintenance „ Manufacturer status „ Market forecasts „ New aircraft pricing „ New technology and aircraft „ Number stored „ OEM support programs „ Operating costs „ Position within the production cycle „ Reconfiguration costs „ Reliability „ Speed „ Supply/availability „ Teardown liquidity „ Technology

Minimising Risk, Maximising Opportunity www.iba.aero

The asset – Softening that impact

Large market share Lots of operators Good geographic spread Popular among lessors Large and consistent orders, deliveries and backlog Strong performance from

• perator base

Numerous end of life options Four engined aircraft Niche aircraft – either by type

• r by subset

Small operator base OEM-influenced aftermarket Lots parked or available Last off the line/First off the line Reliability

HOT NOT

Then at the MSN level:

„ Age „ Utilisation „ Maintenance record and status „ Internal and external condition „ Lease quality and length „ Reserves and return conditions „ Specification

Minimising Risk, Maximising Opportunity www.iba.aero

The operator – high level

Less risky characteristics

„ Robust backing from markets, states, or large shareholders familiar with aviation „ Strong financial track record „ Established and understood strategy „ Access to capital to fund expansion or opportunities „ Knows what they’re doing

Riskier characteristics

„ Targeting a niche, especially one tried previously without success „ Poor marketing „ Unclear and/or shifting strategies „ Established player not adapting to change „ New to leasing or patchy track record Employ Quantitative and Qualitative means of establishing these traits

Minimising Risk, Maximising Opportunity www.iba.aero

Quantitative – Financials and Credit

Where to focus:

„ Revenue trend „ Earnings trend „ Leverage „ Cash „ Ownership/Access to funds „ FX exposure

Tier 1 Tier 2 Tier 3 Tier 4 Min 1.0 0.3 0.1 0.1 Max 22.2 11.1 1.9 0.7 Avg 4.1 2.2 1.1 0.3

Fixed charge cover spread Essential, but imperfect

„ Dated „ Accuracy „ Consistency – variety of business models

Minimising Risk, Maximising Opportunity www.iba.aero

Fleet and operations: Data drives opinion

Taking a view on the data:

„ Fleet Size – How big? How important will your A/C be? „ Fleet Composition/Type Split – one type? Strategic mix or “unique blend” „ Owned Fleet (%) – Are they used to leasing? Where are you in the food chain? Convertible assets? „ Employees per A/C „ Load Factor the usual suspects. Any red flags? „ Passenger Trend

www.iba.aero Minimising Risk, Maximising Opportunity

Qualitative: Market Intelligence

The Intelligence Cycle

Contextua

• lise

Refine Analyse Fill in gaps Filter Combine Discard

Analyse Disseminate Collect

Primary Sources include

„ Lessors „ Investors „ Lawyers „ OEMs „ MROs „ Suppliers „ Journalists „ Investment analysts „ Conference attendees „ Former employees „ Industry colleagues „ Planespotters

Secondary Sources include

„ Annual Reports/Filings „ Corporate registries „ Press releases „ Business press „ Trade media „ Analyst reports „ Databases „ WARI „ Academic studies „ Slideshare „ Aviation Forums

Plan

Minimising Risk, Maximising Opportunity www.iba.aero

Qualitative: Building the picture

Experience and Intelligence

„ Operational efficiency: records, maintenance, payments and redelivery track record. What do you know and what can you find out? „ Strategy: Is it clear? If not why not? If it is, do we agree with it? „ Ownership: Unclear shareholders or owners are always a concern, as is appetite. „ Access to capital: Tied to the above, we assess whether the operator has access to capital markets, or other debt or equity. „ Management team: Who calls the shots in subsidiaries, JVs and government backed airlines, Are they favoured by external influences? How long they have they been in position?

Minimising Risk, Maximising Opportunity www.iba.aero

The Jurisdiction – Key questions to answer.

Will it go bad and can you get your kit out?

„ What economic or political factors might impact growth, or increase instability? „ What is the likelihood and impact of regime change? „ How robust and bureaucratic is the legal system? „ How straightforward are repossessions? „ Is corruption a concern?

Minimising Risk, Maximising Opportunity www.iba.aero

Mitigation

Three Paths

• 1. Financial: Finding are used in negotiations around reserves, lease rates, and security deposits.
• 2. Technical: You might also explore the operator’s technical competence. Especially important when

taking on a new lessee or delivering new-gen aircraft.

• 3. Monitoring:

„ Records management „ Maintenance rescheduling „ Utilisation trends „ Payment delays

Contextua- lise Refine Analyse Fill in gaps Filter Combine Discard

Analyse Disseminate Collect Plan

„ Employee unrest and departures „ The increase of contract disputes „ Route changes and/or cancellations „ Rumours and reports of deferrals