The impact of Covid-19 on aviation
31 July 2020
As travel restrictions ease after the Covid-19 lockdown, Investec’s Aviation Finance Report examines the outlook for the industry.
7 min read
Investec has 15 years+ in aircraft leasing, owning and managing over 200 aircraft (with a value of USD 9 billion)
Skilful and recognised aircraft manager: since 2014 Investec has originated USD 6.8 billion of aircraft assets and sold / remarketed over 50 aircraft
Strong credit and debt arranging skills: raised and distributed more than USD 10 billion of aircraft debt in the past 10 years
Team of 25+ experienced professionals including origination, technical, remarketing, credit risk management, investors relations, reporting, funds administration and treasury
Investec has established 3 aviation debt funds on behalf of third party investors
Investec established, grew and exited 3 aircraft equity leasing platforms on behalf of third party investors in the last 10 years and an excess of USD 4.5 billion of third party assets under management
Aim to capitalise on both the long-term forecast growth in air travel and the short-term market dislocation created by the impact of the COVID-19 pandemic on air travel, by investing in aircraft under operating lease. Focus on young, fuel efficient new technology aircraft on lease to tier 1 and tier 2 airlines globally.
Investec has recently strengthened its aviation fund management team with several founding managers from DVB’s Deucalion Aviation Funds. The team provides a long and successful track record in originating and managing aviation leasing investments for numerous investor classes, which it aims to leverage to further develop the fund management activities at Investec.
Target IRR USD 10% including a cash yield of 7% p.a. 1st Close USD 145m, targeting USD 250m from subsequent capital raises. Investment horizon 7 years +2 (subject to investor approval). Investec aviation’s most recent equity fund realised net returns of 12% USD IRR inclusive of a cash yield of 8%
We see tremendous opportunity from the market dislocation created by the COVID-19 pandemic, which has caused a long-awaited adjustment in the aviation market, bringing asset values and risks associated with aircraft ownership back into a more balanced relationship.
Aim to generate target returns of USD 4% coupon by investing in a diverse portfolio of senior secured aircraft debt and debt securities. Balanced portfolio with asset & airline counterparty concentrations limits, aircraft age & LTV constraints, loan term restrictions.
Since 2014, Investec aviation debt funds have consistently achieved gross yields of ~USD 4.5 - 5% and maintained an Investment Grade rating.
COVID-19 has brought an abrupt dislocation to a competitive aviation finance market. Despite softer aircraft asset values, the overall security package that characterises aircraft-backed senior debt has proved to be robust even in these testing market conditions. Correctly structured, aircraft loans give lenders significantly more control in a default situation than ABS or EETC instruments. The industry faces a multi-speed recovery that favours domestic travel and younger narrow body aircraft. Shifts in the size and shape of the aviation industry will present opportunities for investors to make sound returns through conservatively structured aircraft backed debt to strong airline and lessor counterparts.