Wednesday 12 December 2018

'We're like Ireland - we've punched above our weight, particularly on financing'

Dublin-based Goshawk Aviation differentiates itself in the leasing sector by how it engineers financial solutions for clients its boss Ruth Kelly, tells John Mulligan

Ruth Kelly caught the aviation leasing bug after training as an accountant
Ruth Kelly caught the aviation leasing bug after training as an accountant

It's a freezing Tuesday morning on Dublin's Harcourt Street. The harsh weather is at the other end of the spectrum to that which the aircraft-leasing industry is enjoying. It's basking in the warm glow of surging global air passenger traffic, which is in turn spurring demand for jets.

But there's still a fleeting frosty moment inside Goshawk Aviation office (actually, it's a meeting room belonging to Investec on the floor above Goshawk) as Ruth Kelly is reminded - as if she needed to be - that she's probably the only female chief executive of any global aircraft-leasing company.

"Is that relevant?" she asks pointedly. The remark has clearly irked her.

But if not relevant, it's at least interesting given the male domination at the top echelons of the industry, which conducts the bulk of its business out of Ireland.

Goshawk Aviation is a relative newcomer to the sector, which has grown rapidly in the past number of years to the stage where about 40pc of the world's global commercial aircraft fleet is now leased, rather than owned by airlines.

"We tend to focus on thinking a little bit differently," says Kelly.

"We approach the market a bit differently. Everybody here tends to be entrepreneurial. There's a big drive to do things really well, and an ambition to build a great business. That's shines through in what we've done on the debt side in particular. We've more than 60 lenders now from all over the world."

Four-year-old Goshawk was set up by Investec, Hong Kong conglomerate Chow Tai Fook Enterprises (CTFE), and Cheung Kong Holdings.

The latter was owned by Hong Kong billionaire Li Ka Shing, and he merged Cheung Kong with his Hutchison Whampoa group in 2015, to form CK Hutchison.

But Cheung Kong had sold its stake in Goshawk to stock market-listed NWS in 2015 for $222m (€178m), while Investec sold out in 2016. That left the Dublin-based leasing firm entirely owned by NWS and Chow Tai Fook. The latter is privately owned by the family of the late Hong Kong billionaire Cheng Yu-tun, and is a major shareholder in NWS.

The circles can start to make you feel dizzy.

Goshawk Aviation has a 114-strong committed portfolio of aircraft valued at $5.5bn (€4.4bn), mostly young, single-aisle Airbus A320s and Boeing 737s - workhorses of the global aviation fleet - but also a few Boeing 787 Dreamliners and other jets for good measure. About half are deployed in Asia, 15pc in the Middle East and the balance split between Europe and the Americas.

"Since we set the business up, we have probably raised about $5bn of debt," said Kelly, pointing out that while the Hong Kong shareholders stump up equity, all of the other finance is raised independently on the open market by Goshawk's team.

The debt raised has included private placements secured in the US, as well as so-called Schuldschein issuances - the German equivalent of a private placement, and a smaller tool that has steadily become more utilised by international companies (Goshawk has done two of those, including one last month that raised $100m, even though Schuldscheins are more typically denominated in euro).

"We're like Ireland - we've punched above our weight in terms of what we've done, particularly on the financing side," says Kelly (43), adding that diversification of Goshawk's funding pool creates pricing tension between markets, effectively forcing lenders to compete for the lessor's debt raising activities.

"Our business is such that we can be quite innovative on a transaction-by-transaction basis," adds Kelly. "We can be very focused on a customer's specific needs, particularly their balance sheet needs.

"We can be quite innovative in terms of how we solve those problems for airlines. We tend to win some mandates that way."

The parent Goshawk firm is based in the Cayman Islands, but accounts for Goshawk Management (Ireland) show that in 2016 the Irish entity generated $11.3m in revenue from asset management fees, and $11.9m in advisory fees. Its pre-tax profit was $3.8m (€3m).

Kelly points out that despite the pace at which the aircraft leasing business evolved as an asset class over the past number of years, it still remains relatively niche, out-gunned by other sectors such as property.

But there's still been a flood of capital directed into the leasing sector, increasingly so from China.

Among the beneficiaries has been Dublin-based Avolon, now the world's third-largest aircraft lessor, which was co-founded by Domhnal Slattery. It's now owned by Bohai Leasing, which is in turn 52pc-owned by China's HNA conglomerate.

"If you look at the big picture, we're operating in a sector that's growing," Kelly says.

"There's $4trn (€3.2trn) worth of aircraft at list price due to deliver over the next 20 years. There's a lot of capital needed to finance those aircraft. On the other side of the equation, we are seeing a lot of new capital coming into the market place. We are seeing that putting competitive pressure on our business. It's really about how that's going to play out in terms of the balance between the two."

Stable returns offered by aircraft leasing are always touted by lessors as one of the main attractions of the sector to investors, and Kelly reiterates that mantra.

"The key is to invest in the right business at the right risk profile," she adds, pointing out that the cyclical nature of the aviation sector will result in fallout at some stage.

"Lots of credible, long-term leasing businesses will have built themselves to be resilient to a downturn, like we do. But there will be investors out there who have invested in a different way in the sector - not that there's anything wrong with that - but inevitably there will eventually be, just generally, less capital in the world and therefore less capital being invested in this sector."

For the time being though, it's flush with cash.

Late last year, one of Goshawk's founders - chief financial officer, Anand Ramachandran - resigned to help establish Dublin-based Airborne Capital.

Another Goshawk executive, John O'Flynn, also parachuted out the door to join the startup, which is backed by Kerry-based financial group Fexco.

Last month, Natixis Investment Managers, one of the world's largest asset management firms, acquired a minority stake in Airborne.

Kelly is philosophical about losing two executives from what is a small team of just a couple of dozen staff at Goshawk's Dublin office (a new CFO is starting soon, but Kelly has been keeping his name under wraps for now).

"That's inevitable as you mature as an organisation," she says. "It wouldn't be feasible to think that you're not going to have any staff turnover. The business goes on. But it's one of the biggest challenges that every leasing company faces. The market is growing and there's lots of competition for people, but there are lots of great people out there."

She says that Ireland Inc's role is to ensure there's always talent coming into the sector.

Kelly, a keen runner who has done a number of marathons, has a long track record in the industry. She grew up in a large farming family in Co Kildare and studied business at UCD before training as an accountant with PWC.

"The only thing I knew was that I didn't want to be a pure accountant," she says. "I didn't go out seeking a job in the aviation world, but like lots of people who work in aircraft leasing I got the bug, and here I am."

In 1999, she got a job with Dublin-based International Aviation Management, the leasing company that was established by Clare man Domhnal Slattery.

He sold it in 2001 to RBS for a rumoured £30m (€36m), and went on to co-found Avolon in 2010.

Kelly says she "grew up" in what then became RBS Aviation Capital, staying for the next 10 years.

And then there was an interlude.

Kelly and other leasing executives joined forces with Domhnal Slattery's brother John in 2009 to establish Greenstone Aviation. John Slattery had also worked at RBS Aviation Capital.

Having secured an initial $100m equity commitment from Jefferies Capital Partners in New York, he and his team set about trying to launch the Greenstone aircraft leasing business.

The global economy was wading into a quagmire, but Slattery still reckoned that with all the aircraft that were on order at the time, that he had a pretty good shot at getting Greenstone off the ground. But it just couldn't generate the required lift.

"I worked on it for over a year and a half," says Kelly. "We did get very close, twice. Ultimately, raising equity is what tripped it up. Everything else was lined up. But you have to remember, it was 2009 and 2010."

John Slattery is now CEO of the commercial division of Brazilian aircraft maker Embraer, while Kelly went on to join Investec as an aviation consultant, and in 2015 was named the CEO of Goshawk as it transitioned into a standalone business.

"That's probably the period of my career where I learned the most," says Kelly of her time at Greenstone. "It was really enlightening in terms of learning about the different investment criteria of different investors. We had to do a lot in terms of marketing ourselves, the business and the sector."

Since then, Goshawk has been keeping Kelly very busy. And with the business ticking along nicely, it's natural to wonder if Goshawk's shareholders will be looking for an exit at some stage.

"They have common interests," says Kelly of NWS and CTFE. "They are part of a financial conglomerate that invests in lots of different asset classes (they include energy, a huge chain of jewellery stores, and property) and they tend to invest long term in assets.

"They look at us - and they're relatively new to aircraft leasing - and they're really supportive of the business. They look at us in the context of their other asset classes, and they really like the risk-adjusted returns that they're getting from aircraft leasing. For that reason, they're continuing to want us to grow. Quality growth is really important."

Kelly aims to continue raising just over $1bn of debt each year to add about the equivalent in aircraft assets.

"There's plenty of scope for us to grow," she says.

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