In February, IBJ Leasing (IBJL), which is part of Mizuho Group, formed a joint venture (JV) with Aircastle as part of a wider move by the Japanese equity arranger to expand its business in the aviation sector.

IBJ has a 75% stake in the JV with the remaining 25% held by Aircastle.

Already a well-established financier with a Japanese operating lease with call option (Jolco) business, IBJ Leasing wanted to diversify into pure operating leases.

“We think that in expanding our aviation business, diversifying our business is important to diversify the business risk. While the Jolco has been our core business for a long time, it is a tax-oriented product and a tax lease that naturally has been exposed to potential tax reform risk,” says Kenji Kawahara, deputy general manager, aviation business department, IBJ Leasing.

He adds that IBJL has found it difficult to enter the sale and leaseback business on its own because of the competitiveness of that market, saying that his company would have to agree to underwrite five or 10 aircraft with a low lease factor to win a sale and leaseback request for proposal.

Kawahara believes the operating lease and sale and leaseback businesses need a strong operational experience, including repossession skills, operational skills and leasing and remarketing skills. Such skills are very difficult to acquire at a very short time.

He argues that the establishment of the joint venture creates a “symbiotic” relationship between IBJL and Aircastle, whereby the two companies can better manage their fleets.

“The operating leasing business will help us optimise our aviation portfolio,” he says.

“Aircastle could easily purchase a package and transfer the aircraft which would not meet Aircastle’s target to the joint venture. Of course, we want to judge whether we will purchase it or not, but generally there will be a high possibility that IBJ Leasing will prefer to purchase, so the remaining portion of the package might be a good credit with low lease rental internal rate of return which could meet IBJ Leasing’s priority,” explains Kawahara.

The joint venture could also help IBJL secure Jol business, he say

“We might build a stable pipeline for Jol aircraft from Aircastle. We have not discussed this with Aircastle yet, but we envisage this for the future,” says Kawahara.

The Aircastle-IBJL joint venture is the second such agreement that Aircastle has entered into.

The first was formed in late 2013 with Ontario Teachers Pension Plan, an organisation responsible for administering pensions to schoolteachers in the Canadian province of Ontario. The company is a 10% shareholder of Aircastle, having replaced the original majority shareholder Fortress Investments.

The Ontario Teachers joint venture now has nine aircraft; the Aircastle-IBJL connection so far has just one, which was placed during the second quarter of this year.

“What this JV enabled us to do was go out and maybe take a larger position with an airline that would not otherwise be prudent from a diversification perspective,” an Aircastle source tells Airfinance Journal.

The source uses the example of the JV’s first deal to illustrate his point. Aircastle acquired four aircraft with leases attached to Garuda Indonesia and sold two of them into the Ontario Teachers JV.

“We were very comfortable with buying those planes, which may have taken our exposure to Garuda temporarily up to 14% of the overall book at the time, but by selling these two A330s into the JV brought our exposure down to 7% or 8%,” says the source, who explains that the formation of the IBJL joint venture was for a “slightly different reason” to the one with Ontario Teachers.

“It enabled us to be a little more competitive in a part of the market where the return thresholds are below hurdle rates,” says the source.

“We have a partner that has an interest in newer narrowbodies with higher quality lessees that may not have as much built-in return in terms of leverage and such, but it gives us the ability to provide that product to our clients with a partner that has a risk appetite that’s a little bit different.” Marubeni Corporation, which holds a minority stake in Aircastle, introduced Aircastle and IBJL and facilitated the discussions.

“For IBJL, it’s very comfortable the fact that Marubeni invested in Aircastle, as IBJL have limited knowledge about American companies.” says Hitoshi Kawabata, business administration secretary, aerospace and defence systems department, Marubeni.

SMTB-Novus: seeking higher returns

Another aircraft finance partnership between a Japanese bank and a foreign lessor was announced in June.

Tokyo-based lender Sumitomo Mitsui Trust Bank (SMTB) and Dubai-based lessor Novus Aviation Capital established a joint closed-end fund.

The 50/50-owned fund, Ortus Aircraft Leasing, has a target size of $200 million and will purchase aircraft with investors’ capital and from “other finance sources”. The investors will receive dividends based on the cash flow coming from the lease rentals and sales proceeds of the aircraft.

From the Novus side, the creation of Ortus was led by George Young Ho Ai’s team from the company’s Hong Kong office, with Novus acting as the general partner on the fund.

Mitsuru Koguchi, who is associate general manager in SMTB’s structured finance department and is leading the fund from SMTB’s side, as a trust bank has experience offering various types of funds to Japanese institutional investors.

However, since the introduction of Japan’s negative interest rate policy earlier this year, investors’ appetite for new asset classes has been accelerated. As a result, Koguchi is seeing emerging interest from investors to put their money into aircraft investments.

“Interest rates are now at minus levels. Clearly we have seen appetite for investors to start shifting some of their money to new asset classes that offer higher returns,” he says.

Koguchi adds that the Ortus fund has a target return of 10%, and though there are no guarantees it offers the potential for consistent returns. Koguchi sees the potential total number of aircraft investments for the fund as being between six and 10, depending on the aircraft type and the balance between narrowbodies and widebodies. 

He says the reason for choosing Novus is different to other operating lease companies.

“Novus has a large pool of co-investors that they work with and customise their search for aircraft according to the co-investors’ needs,” explains Koguchi. He adds: “We have done some financing for the aircraft agreed by Novus before, so we know their behaviour and business type. We have been discussing with Novus for one-and-a-half years and have come to the conclusion that we can work together again.”

Although this fund has the potential of bringing benefits to SMTB and Novus, as well as its investors, Koguchi does not believe that the establishment will influence other Japanese aircraft finance players to create similar products.

“The fund business is a kind of unique product mainly done by banks or asset management companies. IBJ Leasing and Century Tokyo Leasing are leasing companies, so basically they don’t do asset management in their business,” he says.

Ortus differs significantly from the Aircastle- IBJL partnership in that it is not a joint venture but a fund. As with Aircastle- IBJL, SMTB and Novus will both contribute monies to the fund, but unlike with Aircastle-IBJL, they will also invite outside investors to join. The investors would not be small-to-medium enterprises as with Jolcos, but institutional investors such as pension funds linked to large Japanese conglomerates.

“I’m guessing it’s not Ma and Pa investors – it’s big pension funds who have got Ma and Pa’s money,” says a legal source.

“ have got all that money and they are thinking, ‘I have got to put this into something low risk’. The fund is well-hedged because it’s all sorts of airlines. It looks like Novus will be buying new aircraft or buying aircraft on the secondary market. They might use an airlines’ existing sale and leaseback agreement to get aircraft.”

The fund is structured through the Cayman Islands, one of the world’s foremost tax havens. However, the lawyer says that, while the lack of corporate tax would certainly be a factor, lots of funds are set up in places like Cayman because there is a light touch on regulation and lighter touch on what documentation companies have to make public on a public register.

SMTB says that going through Cayman is “standard practice for the establishment of limited partnership”.

Nothing new

These partnerships are not the first time that Japanese companies have sought out overseas partners for their aviation businesses.

IBJL’s Kawahara admits that his company is “kind of a latecomer” and that Orix, Nomura Babcock & Brown, Mitsubishi and SMBC Group already have their own well-established overseas ventures.

“I feel that there is a trend in the Japanese market that Japanese banks try to have a chance to make good returns other than in the lending business. The margin for aircraft finance has dropped. One idea is to enter into an operating lease business, but Japanese banks could not do an operating lease business on their own. Teaming up with overseas players might be one of the alternatives,” he says.

A Japanese banking source says that to diversify the Japanese aircraft finance market away from reliance on the Jol and Jolco structures could be a good thing.

“Japan is a country that is subsidising foreign airlines with potential tax payment, so with a holistic view this doesn’t bring any benefit to the Japanese market,” says the source, adding that the Aircastle-IBJL and Novus-SMTB partnerships are only “the tip of the iceberg”.

The source says: “While the market has already passed its peak in the aircraft value trend, other reasons like ample liquidity or older aircraft types approaching the end of the line could spur the formation of similar partnerships.”