Chinese buyers are elbowing in on the territory of General Electric Co. and Japanese banks, showcased most recently by a potential $4 billion deal to acquire the plane-leasing arm of U.S. lender CIT Group Inc. and its portfolio of 350 jets.
Leasing companies already own 40% of the world's jet fleet, a number that is rising as more carriers opt for the flexibility provided by renting rather than buying planes. Cheap capital and generous accounting policies can sometimes offer aircraft investors double-digit yields, and deals are being pursued by more Chinese companies that often have a funding advantage over Western counterparts.
Chinese conglomerate HNA Group last year joined the top 10 of global aircraft-leasing operations with its $2.6 billion acquisition of Ireland-based Avolon, and has its sights on more deals to claim a top-three spot. HNA's Bohai Leasing assumed around $5 billion in debt in the deal. State-owned banks including Bank of China Ltd. already have large jet portfolios, and others are trying to cut into the business.
Demand for air travel is skyrocketing. Traffic from China's airlines increased 11% in the January-through-April period from a year earlier, according to the CAPA Centre for Aviation, an industry consultancy. International travel from China surged 29% in that period.
Bidders for the CIT business include Ping An Insurance (Group) Co. of China, Japan's Century Tokyo Leasing Corp. , Irish aircraft-leasing company Avolon, and Aircastle Ltd. , a midtier U.S.-based leasing company, according to a person familiar with the matter.
Initial offers came in at more than $4 billion, another person familiar with the matter said. Second-round bids are due next week, and CIT is expected to pick a winning bidder shortly thereafter, the people said.
Ping An has a leasing arm, while Century Tokyo Leasing has a joint venture with CIT.
New York-based CIT is reshaping its operations to focus on lending to midsize businesses. Its aircraft business offers leasing, advisory and financing services for commercial airlines. It works with customers ranging from Delta Air Lines Inc. to China Eastern Airlines Corp. across 50 countries. CIT shares were up 2.9% early afternoon Wednesday, after rising as much as 6.2% earlier in the day.
Western banks are increasingly pulling back from aircraft leasing because of tougher capital requirements from regulators, and that is creating an opening for Chinese bidders and others just as two other top-10 leasing operations come on the market.
U.S. insurer Pacific Life Insurance Co. has said it may float a minority stake in its Aviation Capital Group business, while private-equity group Terra Firma Capital Partners Ltd.'s Awas Aviation Capital Ltd. has long been the subject of a potential sale or initial public offering.
Deal making in the aircraft-leasing sector is taking off in a red-hot environment for outbound Chinese acquisitions. Chinese buyers have notched $159.24 billion in outbound deals this year, compared with $105.71 billion for all of 2015, according to data provider Dealogic.
While the forays in the aircraft-leasing sector make up a sliver of the total, the center of gravity of the global aviation industry is moving toward Asia-Pacific, and China in particular.
Chinese banks were active in lending to local airlines for several decades before moving into leasing, and in recent years have focused on growing rentals to overseas carriers, in part to escape tough competition for domestic deals.
Some public investors have been less taken with China's thirst for aircraft assets. Singapore-based
BOC Aviation, which is controlled by Bank of China, is down 9% since its Hong Kong IPO in June.
The company received cornerstone backing for its $1.1 billion offering from Boeing Co. and China's sovereign-wealth fund. BOC Aviation was itself an acquisition. Originally founded as Singapore Aircraft Leasing Enterprise, it was bought by Bank of China in 2006 for $965 million.
Equity investors world-wide have been concerned about a potential bubble in demand that could depress rates. Shares in AerCap Holdings NV, the biggest listed leasing firm, are down 11% this year, with much of the sector trading around the book value of their jet fleets. China Development Bank Financial Leasing Co. raised $799 million in an initial public offering in Hong Kong last month, near the lower end of its targeted range. It is down 3% from its IPO price.
Source: Wall Street Journal by Julie Steinberg and Doug Cameron
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