Understanding Risk December 7 th , 2017 Paul Lyons - PowerPoint PPT Presentation

Understanding Risk December 7 th , 2017 Paul Lyons Paul.lyons@iba.aero www.iba.aero Minimising Risk, Maximising Opportunity

Enhancing Decision Making Entry Exit „ Market entry and analysis 1 Full service „ Sell side advisory „ Competitive intelligence „ End-of-Lease options „ Fleet/Asset selection „ Aviation Intelligence, asset management, Advisory Identification „ Remarketing „ Only consultancy that also appraises (7 ISTAT Appraisers), manages (130+ assets, $4bn), and remarkets „ Global approach 4 2 Independent Opportunity Exit Acquisition „ No vested interest in a deal progressing Addressing Issues „ CDD, ODD, TDD „ No conflict in treatment of assets under management or „ Risk monitoring „ Valuations 3 for sale/re-lease „ Dispute support „ Benchmarking „ Repossession Diversified talent pool and inputs Building „ Imaginative solutions from a breadth of backgrounds Value The Deal Managing the Asset „ 30 years of trading experience „ Negotiation „ Quantitative and qualitative approach „ Technical and regulatory advisory „ Critical factors „ Unique access to critical data and human intelligence „ Transition management „ Risk assessment „ Maintenance and costs analysis www.iba.aero Minimising Risk, Maximising Opportunity

Searching for yield Returns, Competition and Premiums „ Lower margin is, we think, driving alternatives. In the last six months we’ve seen increases in enquiries around: Freighter conversion and investments • h Engine leasing • h Part out activity and acquisitions Riskier credit requests And that is where this morning comes in…. Minimising Risk, Maximising Opportunity www.iba.aero

Volatility up? Why the uncertainty? „ 3.7% growth forecast „ Bubbles? „ High profile defaults „ Gulf challenges „ HNA „ Legacy vs disruptors „ Geopolitics „ WB concerns „ Argentina and India return 66.8% / 2.0% „ Oil „ Brexit (Sources: Transparency International Corruption Perception Inde 2016, IBA.iQ November 2017, IMF October 2017) Minimising Risk, Maximising Opportunity www.iba.aero www.iba.aero Minimising Risk, Maximising Opportunity

Focus on the big three areas – Asset, Operator and Jurisdiction Asset „ Horizon scanning – New tech? Oil? Defaults? Operator „ Performance, reputation track record Jurisdiction „ Can I manage risk and recover assets if need be? Minimising Risk, Maximising Opportunity www.iba.aero

The asset – what impacts residual values It’s a long list.. „ Fuel burn „ New technology and aircraft „ ADs/SBs „ Fuel price „ Number stored „ Age „ GDP „ OEM support programs „ Aircraft size/range „ Geographic distribution „ Operating costs „ “Aircraft pedigree” – country of origin from first lease „ Government regulations „ Position within the production cycle „ Commonality „ Inflation & interest rates „ Reconfiguration costs „ Competing types „ In-production or out-of-production „ Reliability „ Convertibility „ Maintenance „ Speed „ Concentration of operators „ Manufacturer status „ Supply/availability „ Demand „ Market forecasts „ Teardown liquidity „ Engine type & generation „ New aircraft pricing „ Technology Minimising Risk, Maximising Opportunity www.iba.aero

The asset – Softening that impact HOT Large market share Four engined aircraft Then at the MSN level: Lots of operators Niche aircraft – either by type „ Age or by subset Good geographic spread „ Utilisation Small operator base Popular among lessors „ Maintenance record and status OEM-influenced aftermarket Large and consistent orders, „ Internal and external condition deliveries and backlog Lots parked or available „ Lease quality and length Strong performance from Last off the line/First off the „ Reserves and return conditions operator base line „ Specification Numerous end of life options Reliability NOT Minimising Risk, Maximising Opportunity www.iba.aero

The operator – high level Less risky characteristics „ Robust backing from markets, states, or large shareholders familiar with aviation „ Strong financial track record „ Established and understood strategy „ Access to capital to fund expansion or opportunities „ Knows what they’re doing Employ Quantitative and Qualitative means of establishing these traits Riskier characteristics „ Targeting a niche, especially one tried previously without success „ Poor marketing „ Unclear and/or shifting strategies „ Established player not adapting to change „ New to leasing or patchy track record Minimising Risk, Maximising Opportunity www.iba.aero

Quantitative – Financials and Credit Essential, but imperfect Where to focus: „ Dated „ Revenue trend „ Earnings trend „ Accuracy „ Consistency – variety of business models „ Leverage „ Cash „ Ownership/Access to funds Fixed charge cover spread „ FX exposure Tier 1 Tier 2 Tier 3 Tier 4 Min 1.0 0.3 0.1 0.1 Max 22.2 11.1 1.9 0.7 Avg 4.1 2.2 1.1 0.3 Minimising Risk, Maximising Opportunity www.iba.aero

Fleet and operations: Data drives opinion Taking a view on the data: „ Fleet Size – How big? How important will your A/C be? „ Fleet Composition/Type Split – one type? Strategic mix or “unique blend” „ Owned Fleet (%) – Are they used to leasing? Where are you in the food chain? Convertible assets? „ Employees per A/C „ Load Factor the usual suspects. Any red flags? „ Passenger Trend Minimising Risk, Maximising Opportunity www.iba.aero

Qualitative: Market Intelligence The Intelligence Cycle Plan Primary Sources include Secondary Sources include „ Lessors „ Annual Reports/Filings Combine Contextua „ Investors „ Corporate registries -lise Discard „ Lawyers „ Press releases „ OEMs „ Business press Disseminate „ MROs „ Trade media Collect Refine Analyse „ Suppliers „ Analyst reports „ Journalists „ Databases „ Investment analysts „ WARI „ Conference attendees „ Academic studies Fill in gaps Filter „ Former employees „ Slideshare „ Industry colleagues „ Aviation Forums Analyse „ Planespotters www.iba.aero Minimising Risk, Maximising Opportunity

Qualitative: Building the picture Experience and Intelligence „ Operational efficiency : records, maintenance, payments and redelivery track record. What do you know and what can you find out? „ Strategy : Is it clear? If not why not? If it is, do we agree with it? „ Ownership : Unclear shareholders or owners are always a concern, as is appetite. „ Access to capital : Tied to the above, we assess whether the operator has access to capital markets, or other debt or equity. „ Management team : Who calls the shots in subsidiaries, JVs and government backed airlines, Are they favoured by external influences? How long they have they been in position? Minimising Risk, Maximising Opportunity www.iba.aero

The Jurisdiction – Key questions to answer. Will it go bad and can you get your kit out? „ What economic or political factors might impact growth, or increase instability? „ What is the likelihood and impact of regime change? „ How robust and bureaucratic is the legal system? „ How straightforward are repossessions? „ Is corruption a concern? Minimising Risk, Maximising Opportunity www.iba.aero

Mitigation Three Paths 1. Financial : Finding are used in negotiations around reserves, lease rates, and security deposits. 2. Technical : You might also explore the operator’s technical competence. Especially important when taking on a new lessee or delivering new-gen aircraft. Plan Combine 3. Monitoring : Contextua- lise Discard „ Employee unrest and departures „ Records management „ The increase of contract disputes „ Maintenance rescheduling Disseminate „ Route changes and/or cancellations „ Utilisation trends Collect Refine Analyse „ Rumours and reports of deferrals „ Payment delays Fill in gaps Filter Analyse Minimising Risk, Maximising Opportunity www.iba.aero