North America Financial Bond: AerCap’s US$1.25bn five-year bond

IFR Awards 2020
3 min read
William Hoffman

Turbulent times

With air travel suspended for much of the year due to the pandemic, the companies that lease aircraft to airlines found themselves extremely stressed and without public access to the capital markets for months.

Even as hotels, airlines, cruise lines and automakers tapped the market for new bonds, air leasing companies went into June still searching for fair value in a volatile market.

AerCap Ireland Capital broke the stalemate with a US$1.25bn five-year that opened the market for US$10.35bn of follow-on issuance from others in the sector.

“AerCap is in a very challenged industry,” said Peter Aherne, head of North America capital markets for Citigroup. “This was an early June transaction from a company that went from trading on a spread-to-dollar price to trading on yield given the challenges in the space.”

While AerCap paid up to be first with a 6.75% coupon, spreads on the senior unsecured note tightened by 150bp from initial price thoughts in the 8.25% area. And leads said IPTs started more than 100bp tight of where the banks initially advised the client the week before the announcement.

Some might argue leads Citigroup, Deutsche Bank, HSBC, Mizuho and Morgan Stanley should have started pricing tighter. But, with the company’s outstanding 3.50% 2025s trading at 6.95% before the announcement, the bond still landed some 26bp inside the outstanding curve when accounting for the dollar price, according to IFR calculations.

Bookrunners initially sought US$750m, but when books swelled to US$11bn at their peak the deal was upsized to US$1.25bn.

Competitor Air Lease followed two weeks later pricing an US$850m five-year at nearly half the cost, but AerCap also returned to the market for three more tranches at attractive pricing later in the year.

Additionally, AerCap was working against the clock as it is a frequent issuer and had US$2.5bn of bonds coming due in 2020, according to Deutsche.

“The client was particularly challenged to source liquidity from the market and this bond gave them a means with which to repay banks, satisfy their obligations and keep the powder dry in the event there was another downturn,” Aherne said.

Not only did the bond support AerCap’s balance sheet but it also restored investors’ faith in the sector.

The marketing around the deal touted the air leasing sector’s ability to come out of the pandemic stronger than ever as cash-strapped airlines look to sell off their old, expensive and higher polluting aircraft and replace them with more efficient aircraft leasing deals.

“The feeling is airlines will have to pay down their debt rather than buy the aircraft,” said Roger King, air finance analyst at research firm CreditSights. “It’s been a long-term trend but we think it will accelerate.”

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