Thursday 19 September 2019

Avolon launches $5bn refinance, tweaks loan rate

Refinance move comes as market watches Chinese parent struggle with debt, writes Gavin McLoughlin

Domhnal Slattery has moved to reassure the market that Avolon is insulated from HNA’s issues.
Domhnal Slattery has moved to reassure the market that Avolon is insulated from HNA’s issues.
Gavin McLoughlin

Gavin McLoughlin

Aircraft lessor Avolon has launched a fresh refinancing effort that will be watched closely as parent company HNA Group continues to attract attention for its high debt level.

The Irish-founded, Chinese-owned business is looking to refinance a loan of around $5bn (€4.2bn) in an effort to cut the cost of its debt. The loan was previously refinanced in September.

On Friday the company changed its offered terms on the loan, offering a higher interest rate to lenders in a signal that its initial plan was too ambitious.

It will now offer 2pc above the Libor rate, as compared to 1.75pc above it which was offered on Monday, with a target maturity date of 2025. The loan is currently due to mature in 2023 at a rate of 2.25pc above Libor.

A spokesman for Avolon said the company is "extending the maturity of the term loan while lowering the interest rate attached to it.

"This is consistent with their ongoing process of extending their debt maturity profile, and continually reducing their cost of debt."

Avolon has been the subject of intense scrutiny amid the difficulties of HNA.

Chief executive Domhnal Slattery has moved to reassure the market that Avolon is insulated from HNA's problems. In its latest credit report on the lessor, dated February 22, Moody's said HNA was weighing on Avolon's rating.

"Bohai (Avolon's direct parent within HNA) has been slower to reduce leverage, extend debt maturities and improve liquidity than Moody's anticipated.

"In Moody's view, the weakened profiles of Bohai and HNA remain a source of operating and financial risk for Avolon because of an existing inter-company loan to Bohai and leases to HNA's airlines," the Moody's report said.

But the report said the outlook for Avolon is stable, "reflecting our expectations that the company will capably manage its leverage and liquidity levels, its aircraft leasing and re-marketing risk, and generate strong operating results".

HNA, which was once one of China's most acquisitive companies, has sold more than $13bn of assets this year, including its stake in hotels group Hilton.

It spent more on interest than any non-financial company in Asia last year, a $5bn bill that represented a more than 50pc increase from the year before. A sprawling conglomerate with roots in a regional airline that was founded on China's sleepy, tropical Hainan Island, HNA carried a total of $94bn in debt at the end of 2017.

"At the end of the day, it's a cash-flow issue," said Victor Shih, a professor of political economy at the University of California at San Diego, who studies the Chinese financial sector.

"HNA actually had higher interest payments than net profit, which is very dangerous."

Additional reporting Bloomberg

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