Business Irish

Tuesday 14 August 2018

Avolon targets global number one slot after sealing €2bn Orix deal

Domhnal Slattery
Domhnal Slattery
John Mulligan

John Mulligan

Dublin-based aircraft-lessor Avolon still has its sights set on the being the world's top player in the sector, but will most likely have to get there via another large-scale acquisition, according to CEO Domhnal Slattery.

It's currently ranked number three, behind Gecas and Aercap.

Speaking to the Irish Independent after Japanese firm Orix confirmed it's buying a 30pc stake in Avolon for $2.2bn (€1.9bn), Mr Slattery said that the focus for the Irish firm and its ultimate parent, Chinese conglomerate HNA, in doing the deal was securing an investment grade rating for Avolon that would spur the Irish company's growth.

He said that investment-grade rating will probably be achieved some time next year. Avolon has 890 owned and managed aircraft in its portfolio, and has orders and commitments for another 328 jets. Orix has 230 owned, managed and committed aircraft in its portfolio.

To achieve its investment-grade rating, Avolon needs to increase its level of unsecured borrowing, and also needs to have a certain level of interest cover on its debt.

"The only issue is when do we issue more unsecured debt," said Mr Slattery.

"We've got a $5bn term loan, which is secured debt. We can effectively prepay that at any time and swap it into unsecured [debt]. But it's all about price."

The price being paid for the 30pc stake in Avolon is not far off the $2.6bn equity valuation that was placed on Avolon in its entirety when Bohai acquired the leasing firm in 2015, when it was listed in New York.

Avolon tripled in size after acquiring CIT's leasing arm for more than $10bn in 2017.

HNA, which has spent billions on an acquisition spree in recent years that included stakes in the Hilton hotel group and Deutsche Bank, has been offloading assets to cut debt. Avolon is currently wholly owned by HNA's Bohai Capital.

Mr Slattery said that HNA remains committed to being a long-term shareholder in Avolon, and that no other stake sales of the leasing firm are planned.

"The executive view of the two shareholders and management is that the 70-30 split is a stable, long-term position for Avolon," he said.

"There is no plan - short, medium or long-term - to change that structure, to look at alternative ownership structures, to increase Orix's share or decrease Bohai's share."

The deal with Orix will close by November.

"HNA said repeatedly that they deem Avolon to be a long-term strategic hold, and unequivocally, will not sell a controlling interest," he added.

Mr Slattery also said that there were no other parties with which talks had been held about selling the stake. There had been reports that Hong Kong tycoons Li Ka-shing and Henry Cheng were among suitors that had held talks about buying either a stake in Avolon, or some of its jets.

"We were not in discussions or dialogue with any other party about an equity investment in Avolon," he said. "There was no process. All of that was idle speculation."

He said that last January, Avolon's management team sat down to identify who an ideal partner for the firm would be.

He said that in selecting a potential partner, the "primary objective" was a partner that would help Avolon accelerate the securing of an investment grade rating.

"Orix came at the top of the list," he said. Orix's aircraft leasing unit is based in Dublin.

Although Orix will have a 30pc stake, Avolon will be run as an equal partnership, and the Japanese firm will have a veto over major decisions.

Two Orix executives will serve as directors at Avolon, where Mr Slattery will remain CEO. He co-founded Avolon in 2010.

He said there were never any discussions about Avolon management re-taking a stake in the business.

"Our vision was to get Avolon to investment grade," he said.

"Our aspiration for the growth of this business over the next five to 10 years is pretty significant.

"The right answer was not management trying to figure out a deal for itself.

"The right answer was to stick to the balance sheet. That was our fiduciary duty and we delivered on it."

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