Avation plc (LON:AVAP) Executive Chairman Jeff Chatfield caught up with DirectorsTalk to discuss the company’s recent $300 million bond issuance, its impact on risk management, and the outlook for fleet expansion and funding access.
Q1: Avation has recently issued a $300 million 2031 unsecured bond to repay the 2026 unsecured bond. When investors see the coupon is 0.25% more than the last one, how do you maintain that it is a good result for Avation?
A1: Well, it de-risks it. The idea was the first bonds was due and payable in 2026 and therefore within a year it becomes a current liability which investors don’t like, and banks don’t like because they’re going to say, how do you come up with $300 million this year? So, we decided to get rid of it early through a bond process to see the outcome.
Now, the outcome was good in the sense that we’ve shifted the maturity out five and a half years. It’s good in the sense that the new bond, although it’s issued at eight and a half, the environment was different then. If you remember the interest rates when the last one were issued were close to zero and so, if you like, the relative credit spread from then to now is better, although the base rates are higher. So, it’s a good outcome.
Not that we would do this and I’m not saying we would do this in the near term, but during the next five and a half years, you can buy and sell bonds as you want. So, for example, if we think we’re paying too much interest on the bond, we can finance aircraft with banks and buy in $20/ $30/$40 million, whatever it is and that lowers the coupon effectively the absolute amount of money you need to pay at any one time. So, they’re good facilities because you can buy them in, by the Treasury, sell them and so on and so forth. They’re very flexible tools and we get a lot of attention because we’re small. We get in the in the league tables, if we grow a lot and want to do another one, it’s easy. So, they’re absolutely worth doing.
A company of our size couldn’t rely on that being the sole source of finance, we also have to use banks as well to get an average lower costs. So, that bond, although it’s a 0.25% higher in coupon, it doesn’t change our LTV, that’s the same, but it won’t change our coupon very much because we have a lot of bank finance mixed in with.
So, it’s a good outcome in terms of risk. They’re great facilities in terms of your ability to buy and sell bonds and also raise more money. If you needed more money, you could always increase the size of it or reduce the size of it.
Q2: As part of the bond process, Avation obtained upgraded credit ratings from Moody’s and Fitch. Do you expect the ratings to continue to improve going forward and if so, why?
A2: We now have three credit ratings and they’re all quite good. So, today, like this very day, Standard and Poor’s issued a new credit rating for the company, which was materially better than what it was, actually a lot better than what it was. So, they’ve raised the company rating to six solid single B and the notes, the actual bonds, are also rated single B. That’s important because often the bond is one level below the company’s credit rating and that makes them more expensive.
Fitch is a good rating. Moody’s is a good rating. So, we’re well positioned.
I think after talking to the ratings agencies, the main thing that drives ratings is scale. Our ratios and our numbers and what we’re doing is very good, but they would want for us to have a better credit rating, they just need to see us getting bigger. Ideally being more frequent user of the debt capital market and doing on a more frequent basis bond activity. So, what they’re hoping for is more business growth, and then you’ll probably get a better credit rating.
Not that it matters much, it matters, but not that it matters in this instance. I think the timing of our bond issue, there’s been a bit of volatility lately, most of the money we could was eight and a quarter, it landed at eight and a half because remember it’s the most expensive money that prices at for 300.
The day we did it wasn’t a fantastic day. There’d been a fairly weak issue the day before, they’d been a bit of volatility in the market, the US government was shut down. The day you do the thing is very important to get the coupon and your credit ratings sort of anchor that, but that half a percent coupon spread is the day you do it issue.
Q3: Now, Avation recently agreed to extend the EVA Air lease on its A330 widebody aircraft and that’s to 2031. How valuable is this to Avation and are widebody aircraft part of the company’s focus going forward?
A3: Well, that’s super valuable. That means it’ll be a 16-year lease on a very expensive aircraft generating lots of rent so it’s a fantastic extension. It’s the most valuable extension the company’s ever done.
So, the biggest leasing company in the world at the moment is called AerCap and it’s managed by extremely smart people, and the boss is called Gus Kelly, and he’s very, very smart, a genius in this business. He was arguing, I think last week, the week before, that widebody aircraft, twin-aisle aircraft are super important and super valuable investments at the moment.
The reason for that is you get a lot of money, a lot of rent over a very long term and there’s no supply. There’s a radically undersupplied market from the manufacturers so they’re just not making it up to an aisle aircraft. So, as an investor, it’s a fantastic thing to get involved in.
Would we do more of them? In theory, we could. A great way to grow your business. We like them, but they’re big amounts of money, big investments, and there’s a lot of competition to get them.
Q4: More than 57% of Avation’s fleet is in narrow-body aircraft. You’ve said that you want to increase that but how easy is it to acquire narrow-body aircraft from the secondary aircraft trading market and SLB market?
A: It’s a matter of price. There’s plenty of deal flow out there., there’s plenty of people buying and selling aircraft all the time and they’re principally narrow-body commercial aircraft. It’s just you’ve got to get them at the right price. There’s deal flow every day. Today, just in that management meeting we just had, we’re looking at half a dozen different planes so it’s easy, but you’ve got to not overpay.
Q5: ATR turboprops are not always fully understood or appreciated by the aviation investors, especially in the USA. What’s the business’ view of ATR turboprops and how important are they in the global aviation industry?
A5: They’ve got a monopoly on the regional 72-seat markets, they’re super important. North America is the world’s largest turboprop market but the US, it’s not really a passenger market yet because there’s a lot of turboprops in Canada. There’s actually a lot in the US, but FedEx use them, they’re freighters. So, the market in the United States will probably develop over the next few years.
They’re an important and useful tool. We’re one of the players with an order book, we’ve got very little inventory, even potentially available so if you look at our position in it, there’s very, very, very few planes that we can even talk about placing in the near term. think we’ve got one at the end of next year.
So, they’re an important thing, there’s not a lot of volume there. Investors actually do like them, investors like volume in terms of money, and there’s not a lot of volume there.
Q6: Over the next 12 months, you have some aircraft transitioning and some new aircraft delivering. Can you provide a bit of colour on the outlook that investors can expect going forward?
A6: Well, the outlook’s fairly steady. We’re sold out until the end of next year so what investors need to look for is some growth. What would excite them the most, I think, is some acquisition of narrow-body commercial aircraft, that’s what we’re working on.
It’s a very steady, stable company now, bonds are out five and a half years, everything is pretty steady. So, what you want to look for is growth.
Q7: Finally, aircraft leasing requires large amounts of debt or equity funding. Does Avation still have access to plentiful supply of both?
A7: The thing is there’s an incredible undersupply of aircraft and there’s an inflow of money. So, it’s an ideal time for debt raising, either from banks or the bond market, there’s plenty of money out there. Last week we had a conference in Singapore, and there were many, many banks, and we had dinner and lunch with a few of them, and they all want more volume. They want to lend us money, which is good. So, there’s plenty of money out there on the debt side.
The equity side, we’ve been buying in our shares rather than issuing shares, so we’ve brought back 10 or 11 million shares in the last four months. So, the equity side, there’s issues around the London market and valuations and all that sort of stuff but in terms of money, we repaid $300 million today, we raised $300 million last week. There’s every bank in the world wants to lend us money. So, there’s plenty of money out there, if that’s your question, maybe not for shares, but there’s plenty of money in the debt market.
