Friday 23 June 2017

In for the long haul: Peter Barrett's journey with aircraft leasing giant SMBC

SMBC CEO Peter Barrett spoke to Group Business Editor Dearbhail McDonald as the firm celebrates yet another milestone

Peter Barrett Picture: David Conachy
Peter Barrett Picture: David Conachy
Dearbhail McDonald

Dearbhail McDonald

When it launched its debut $500m bond last year, SMBC Aviation Capital, the Dublin-based aircraft lessor, found itself inundated with offers from investors.

In theory, SMBC could have raised close to $4bn as the inaugural capital markets foray was eight times oversubscribed.

But Peter Barrett, SMBC's founding ceo, resisted such heady overtures, keeping his feet on the ground even though the day job requires his head to be kept firmly in the clouds.

Last year was a landmark one for SMBC, which saw its revenues surpass the totemic $1bn mark and its aircraft asset exceeding $10bn. Last year also saw SMBC take delivery of its first Boeing 787-7 Dreamliner, in turn delivered to Air Europa, the Spanish carrier that has a major presence on South American routes.

In December 2015 SMBC, which has a 700 strong fleet (one of the youngest fleets in the industry with an average age of 4.7 years) was upgraded by Fitch Ratings from BBB to BBB+ affirming its position as one of the highest-rated aircraft leasing companies in the world.

And tomorrow SMBC reaches another milestone as the IFSC-based company marks the sixth anniversary of its acquisition by Japan's Sumitomo Mitsui Financial Group (SMFG) and Sumitomo Corporation (SC).

But Barrett will have little time to blow out the candles on the proverbial birthday cake with the arrival in Dublin of 1,400 delegates from more than 65 countries who are attending Airfinance Journal's 19th annual conference. The airlines registered to attend the conference at Dublin's Convention Centre have a total estimated current market value of $325.2bn and hundreds of meetings have been scheduled.

The return of the global conference to Dublin reaffirms Ireland's reputation as the pre-eminent centre for aviation finance and leasing.

"It reflects well on Dublin and Ireland's position in aviation finance that one of the biggest if not the biggest global [aviation] conferences is here in Dublin," says Barrett, who says Ireland is home to some of the most seasoned aviation finance, leasing and legal specialists in the world.

Aviation is one of Ireland's corporate runaway success stories, albeit one that tends to distort our GDP because of the way in which aircraft - that may never touch Irish soil - are measured.

But it's a phenomenal record nonetheless. Seven out of 10 of the world's leading aircraft lessors have operations here and half of the world's leased fleet of commercial aircraft are leased or managed through Ireland.

To put it another way, an Irish-leased aircraft takes off every two seconds.

Like many of aviation's high-fliers including AerCap's Aengus Kelly and Avolon co-founder Domhnal Slattery, Barrett is a descendant of the late Dr Tony Ryan's Guinness Peat Aviation (GPA). The original leasing business set up in Shannon in 1975 by Ryan, dubbed "Ireland's Gatsby," also launched the careers of other prominent Irish businessmen including Ryanair ceo Michael O'Leary and Digicel founder Denis O'Brien, both of whom served as personal assistants to Ryan.

Barrett, a qualified civil engineer and keen amateur photographer, doesn't dwell too much on his salad days in the GPA. But he says the experience with Ryan, whom the late Taoiseach Garret Fitzgerald said had "showed us how to transcend Ireland's geographical isolation," was formative and "great".

"GPA is in the past, it's history," says the married father of three, who spends on average two weeks a month travelling overseas to meet customers in Europe, Asia and the Americas.

"The thing I learnt most [from GPA] is that you can, as somebody who comes from a small island on the western part of Europe, a relatively insignificant place in some respects, if you have the hard work and the perseverance - and you need a lot of luck as well - but we can hold our own with anybody around the world," says Barrett.

"I think that sense of confidence is probably the thing I learnt the most."

It's a confidence that has been cemented by SMBC's acquisition by its new Japanese owners.

Prior to that, SMBC (formerly RBS Aviation Capital) entered a period of turbulence when its owner, the Royal Bank of Scotland, sold its aircraft operating lease company to the Japanese consortium following RBS's spectacular collapse and bailout by the British taxpayer.

"That was a very difficult time," says Barrett. "There was a lot of uncertainty for the business and in particular for the team. It was a period where we had to make some people redundant and scale back activities.

"The concept of our shareholder literally going or pretty much going bust, wasn't something that was high on our risk [analysis].

Barrett says having two leading Japanese institutions as its shareholders has enabled him and a staff of some 160 to grow SMBC in a very "considered way" over the last five years.

"In business, it's not all about the deal that's in front of you but your long-term strategy and delivering on that," said Barrett, adding that's the long-term outlook of SMBC's Japanese shareholders is "a real strength of our business".

"It's not perfect all the time, no relationship is, but it has been a very good experience. The Japanese are very thoughtful people and they're very erudite, they don't do things on whims. So that long-term, thoughtful approach suits an industry like ours".

Barrett, who has already traded 29 aircraft this financial year, is coy when asked if SMBC ran the rule over last year's aviation mega deal. This saw Slattery's Avolon, previously listed on the New York Stock Exchange, agree to pay $10bn to buy the leasing business of the CIT Group. He won't comment on specific deals, nor will he rule out future ones and is on record as saying that scale, on its own, has never been an objective.

"Scale is important, but chasing scale for its own end?," he asks. "We're a big business, we make quite a bit of money."

They certainly do.

Last year pay to key management personnel at SMBC more than doubled to $28.8m. In 2015, Slattery received a discretionary $2.6m bonus.

Whatever about the long-term, the airline sector is facing into fresh headwinds. Prolonged low oil prices have led many airlines to defer orders for new aircraft. The sector is also bracing itself for a higher cost environment with the bottoming out of the interest rate cycle.

Many of SMBC's customers are also based in countries where a strengthened dollar will weaken domestic currencies and increase their costs.

Barrett is also concerned about political unrest in countries such as Turkey, the rising tide of populism in Europe and beyond and the threat of protectionist policies following the election of billionaire Donald Trump as US President.

"Inevitably oil price in industries change," he says. "It's the volatility and the pace of change is very often the thing you need to watch for.

"Risks are inevitable and no market goes on forever, but its the pace that is critically important." Brexit is one such risk, but Barrett says that the departure of Britain from the European Union offers an opportunity for Ireland to focus on new markets.

"The nature of what we do is a global business. That's something that Irish people and Irish businesses should not be afraid of," he says. "We're certainly not disadvantaged, we're well able to hold our own."

Part of the reason why Ireland has been able to hold its own and dominate the global aircraft leasing sector is due to a delicate financial ecosystem in which tax policy and a host of non tax advantages have been key.

There is Ireland's 12.5pc corporate tax rate. Tax treaties also play a vital role by reducing or eliminating withholding taxes on inbound lease rental payments. Ireland has some 70 double tax treaties with countries in key aviation markets such as the US, Hong Kong, Japan, Singapore and Malaysia.

But Ireland's tax regime is under sustained threat in the wake of the €13bn Apple ruling and plans by Europe to forge ahead with the Common Consolidated Corporate Tax Base (CCCTB) and a common Anti-Tax Avoidance Directive.

The pace of change in international taxation is bewildering and it's other low-tax jurisdictions such as Singapore and Hong Kong that are snapping at the heels of Ireland's aviation pioneers. "Tax policy is critically important," says Barrett who has praised successive governments for supporting the development of the aviation finance and leasing industry.

"Obviously, we have our European partners that we need to take into consideration, we need to act in a prudent and sensible way, but it's important that we make sure that the things that are important to our country are well-articulated and well understood."

Infrastructure such as housing and office stock as well as schooling to attract overseas talent is also key, according to Barrett.

Aircraft leasing and finance was once the preserve of self-confesses "aerosexuals" - people who love planes. But Barrett says trading aircraft assets has moved from being a niche financial asset to being something more mainstream. It is certainly something that captivates Barrett who is in the sector for the long haul.

"I consider myself very fortunate and privileged," says Barrett.

"I've been fortunate. This is going to sound trite - I'm thankful every day, because it's been a great journey."

'My priority is to spend time with family'

What do you do in your spare time?

I spend a lot of time travelling around the world to meet with our investors and airline customers, so when I find myself with any spare time in Ireland my priority is to spend it with my family.

What book are you reading?

I read widely, but have a particular interest in history.

What's the best piece of business/career advice you've received, and who gave it to you?

I learned early on in my career the importance of working with bright and talented colleagues.

I've been very fortunate that I've managed to do so throughout my working life.

Sunday Indo Business

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