Cash-rich Japanese banks are rushing into aircraft finance in the hope of getting fatter profit margins than straight corporate loans. Banks including Sumitomo Mitsui Financial Group Inc (SMFG) and Mitsubishi UFJ Financial Group Inc are also venturing into aircraft leasing as more airlines opt out of owning fleets in favour of leaner balance sheets. “Aviation finance is a very good market at the moment, and continues to be better than other areas. Japanese banks and leasing companies are increasingly active in the field of financing,” says Hisao Hirose, finance and aviation partner at Squire Sanders in Tokyo. The firm represents several Japanese airlines and low-cost carriers, as well as major banks and leasing companies, on finance and leasing matters.
out of owning fleets in favour of leaner balance sheets. “Aviation finance is a very good market at the moment, and continues to be better than other areas. Japanese banks and leasing companies are increasingly active in the field of financing,” says Hisao Hirose, finance and aviation partner at Squire Sanders in Tokyo. The firm represents several Japanese airlines and low-cost carriers, as well as major banks and leasing companies, on finance and leasing matters.“We see opportunities to earn spreads we cannot ever charge on corporate loans,” says Takeshi Sasaki, senior manager of structured finance at Sumitomo Mitsui Trust Bank, which set up an aircraft financing team in October last year.
Japanese banks are playing a bigger role in global finance - from trade credit to syndicated loans - as they diversify from a lacklustre home market. Japan's lenders, as entrants to aircraft financing, also stand a good chance of making their mark with their European rivals in retreat, says Sasaki.
“Compared with European banks, Japanese banks are healthy, more confident, and have enough liquidity,” says Hirose. Also, given the weakening yen to the U.S. dollar, Japanese banks are finding it worthwhile to make dollar-denominated investments into the aviation market, says Hirose. He adds that the exchange rate, as well as the stronger position of Japanese banks compared to European banks, are two key factors fuelling Japanese demand for aircraft financing and leasing.
Banks are also drawn to aircraft financing because it is perceived to be safer than general corporate loans. In the event of a default, lenders recover a bigger share of the loans by selling the jet. “Aircraft are gaining popularity as hard assets,” says Masao Masuda, director of state-run Development Bank of Japan’s (DBJ) global aviation team. “It is relatively easy to forecast future asset value. Also, unlike real estate, aircraft can be moved around, from weak markets to the strong.”
DBJ told Reuters recently its global aircraft financing business was likely to more than double from an initially forecast 120 billion yen ($1.5 billion) in the three years through 2013. Boeing says airlines worldwide will need 34,000 new jets valued at $4.5 trillion through 2031, including replacement aircraft. Bank loans accounted for 28 percent of financing of total Boeing deliveries valued at $30 billion in 2011, the aircraft manufacturer's data shows.
Insulated from swings
Others are betting on the growth of aircraft leasing. In 2011, leased planes accounted for 36.5 percent of the worldwide fleet, according to Boeing data, up from less than 15 percent 20 years earlier. Earlier in 2012, SMFG bought RBS Aviation Capital, the world's fourth-largest aircraft lessor, for $7.3 billion.
While the airline industry can be highly volatile, subject to economic downturns and shocks like terrorism and epidemics, leasing operations are relatively insulated from such swings. “Even in times of difficulties, airlines make it an utmost priority to make good on lease payments to continue their business,” says Naoki Sato, managing executive officer at Mitsubishi UFJ Lease & Finance Co. The firm agreed in October last year to buy U.S. aircraft leasing firm Jackson Square Aviation from Oaktree Capital Group LLC for about $1.3 billion.
Still, the true test for new entrants hoping to reap profits is yet to come, industry veterans say. Mitsui & Co, which began rebuilding its aircraft leasing operations last year, had to shrink its business drastically when airplane prices plunged after the Sep. 11, 2001 attacks.
“Experience matters in aircraft leasing. It needs experience to successfully repossess airplanes from bankrupt airlines and find the next lessees,” says Kiyotaka Tanaka, managing director at Orix Corp, one of Japan's oldest aircraft leasing players.
For law firms too, very specific experience is needed in the aircraft leasing industry, says Hirose. He adds: “The volume of business is increasing, but the number of people in the industry is quite limited, so it is difficult for law firms who have not been involved in this area before to get into the market.”
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