Macquarie Bank's high flying lease portfolio gets a boost

A Macquarie Bank subsidiary is to acquire an 90-aircraft operating lease portfolio from the Dublin-based AWAS Aviation Capital for $US4 billion (A$5.1 billion), the Macquarie Group announced yesterday.

The AWAS agreement will be funded in part by a A$600 million capital raising, with $500 million to come via an institutional placement and $100 million from a share purchase plan involving eligible shareholders, the group said. The placement is equal to approximately two per cent of Macquarie Group's market capitalisation.

The balance would be funded "from existing funding sources combined with third-party financing arrangements," the group told the ASX. The bank declined to provide details on lead managers or underwriters for any of the funding arrangements.

The AWAS aircraft leases, which involve 40 different airlines in 25 jurisdictions, are to be transferred to Macquarie AirFinance. This is the aircraft operating lease division of Macquarie's Corporate and Asset Finance group, which already has a portfolio of 130 aircraft.

As at 31 December 2014, CAF had $A29 billion in assets and loans under management across a range of sectors including aircraft, motor vehicles, mining equipment and corporate and real estate lending.

Details from a presentation to investors and analysts yesterday by Nicholas Moore, Macquarie group's chief executive officer, and Patrick Upfold, the group's chief financial officer, indicate that the acquisition, when completed, will double the size and complexity of CAF's aircraft portfolio, as it will be dealing with 94 airlines in 49 jurisdictions.

Post-transition, the AWAS aircraft portfolio acquisition is expected add net after tax profits of around $115 million per year for the next five years, and to add about five per cent in earnings per share in the first full year of operation.

Settlements for the aircraft acquisitions "are expected to occur progressively over the next 12 months and are subject to customary closing conditions," Macquarie executives said.  

According to a statement to the ASX by Macquarie, the weighted average age of the fleet is approximately two years with an average remaining lease term of 6.5 years. Further, more than 90 per cent of the portfolio (by value) consists of narrowbody Airbus A320-200 and Boeing 737-800 aircraft, with the remainder Airbus A330 widebody aircraft.

All of these are commonly used aircraft, meaning that in the event of a default, it is unlikely the group would be left with a "dead" asset on its hands.

The deal was met with approval by all three major ratings agencies.

Moody's Investors Service said it viewed the combined effect of the aircraft lease acquisition and the capital raising to be credit-neutral.

"The portfolio acquisition underlines the ongoing shift in MBL's business profile towards longer-dated, less liquid and more capital-intensive assets and would, in and of itself, place negative pressure on MBL's capital metrics and credit profile," Moody's said.

"However, the announced capital raising will largely offset the impact of the acquisition. Importantly, it also signals the management's commitment to maintain a resilient balance sheet, which is a key support to MBL's and Macquarie's credit profile."

Moody's added that Macquarie was also engaged in a number of asset sales, as a regular component of its ongoing business operations, "which should also support its capital position."

S&P said: "We consider the acquisition of the portfolio as consistent with Macquarie's current business strategy. We believe the portfolio to be good quality; of a likely manageable size in the context of MGL's and MBL's balance sheets; and in a business line where Macquarie has long-standing presence and expertise ... in risks associated with this business."

Tim Roche, senior director at Fitch Ratings, said the acquisition was complementary to an existing Macquarie business.

He added that, given the way the deal was funded, it would not result in any weakening of the group's overall liquidity or balance sheet strength as, "in terms of the overall group, it's a relatively small part of the overall balance sheet."