The coronavirus crisis maybe the toughest situation he has experienced in his professional career, yet CDB Aviation chief executive officer (CEO) Patrick Hannigan says he is able to sleep soundly at night.

This is not meant as a flippant remark, but is rather a reflection of his faith in the management team as the lessor navigates its way through what may be the greatest challenge it is facing. “It’s easy enough to deploy capital.

It’s very hard to manage a multi-locational platform with assets and customers all over the world through the cycle and we are seeing that now. This is as tough as I have seen it, but I can sleep at night because I have quality people here that have been doing this for decades,” he tells Airfinance Journal.

Hannigan had been at the helm of CDB Aviation for just a month when the virus began its inexorable spread through China in January 2020, followed by Asia and then across the rest of the world.

But he was no stranger to the business, having worked closely with former CEO Peter Chang for the previous three years, first as chief commercial officer and then as president, to jointly work through remodelling CDB Aviation’s C-suite and move its headquarters from Hong Kong to Dublin.

“Peter and I probably started around the same week actually, not far apart from each other, so we were very close to each other in the early days”.

“We have developed strategies. We are both quite like-minded, we shared a lot of ideas,” he says. “It was very much based around building a high calibre team and building a full suite of products for our airline customers.”

Hannigan says it was necessary to centralise the team from its previous “fragmented” state, where a seven-hour time difference between Ireland and China makes it “hard” to manage the business effectively. The transition was not without its challenges. The move saw the departure of CDB Aviation chief financial officer Will Gramolt, who left the lessor rather than relocate.

Hannigan is pleased with the team he has now in place, which he has faith in to deal with the current crisis and beyond. “The market is changing all the time. I found that in my old position when I tried to manage both the assets and the new money/trading sides. I wasn’t giving it the focus it required. Now we are in a much better position to do that.”

“In Dublin we split the commercial function into placement of assets, which is our new aircraft from the manufacture, and transitioning of our old aircraft reporting to Peter Goodman who has decades of experience of doing exactly that and the new money investment/trading platform being run by Craig Segor.”

Hannigan himself brings a wealth of experience to the role, having worked for some of the top lessors in the business. Prior to CDB Aviation, he was head of Europe Middle East and Africa (EMEA) for Avolon and was a founding shareholder of the lessor in 2010.

Before that he served as senior vice president, marketing, for RBS Aviation Capital (now SMBC Aviation Capital), where he was responsible for managing airline relationships within the EMEA region and aircraft and engine manufacturer relationships.

He also held the role of vice president marketing at GECAS.

Coronacrisis

The crisis that now grips the world is one which will have a deep, wide-ranging and long impact on the OEM, airline and leasing sectors, Hannigan predicts.

Lease rates will rise, aircraft trading conditions will become more challenging and the asset-backed securitisations (ABS) market will be “frozen” for some time, as a result of the coronavirus (Covid-19) pandemic, he believes.

For one thing, the crisis is likely to herald a period of much more “disciplined” period in leasing conditions, after several years of ample cheap liquidity that marked a time when lessors and financiers had “not been pricing credit properly”.

“Credit spreads are widening considerably for a lot of lessors, particularly the publicly traded platforms. The smart lessors got in as soon as they could and accessed whatever capital was available in the last few weeks, drawing down on their RCFs and large facilities, but it’s getting more expensive,” he says.

Hannigan says that there is now a question mark as to whether the lessors, which historically bid on sale and leaseback (SLB) transactions at “very tight lease rate factors”, when there was ample liquidity around, will still be in this market for the rest of 2020.

“Some of these operators are not going to be able to borrow at near the same levels they could a matter of a few weeks’ ago, so the market could change considerably later in the year. Access to liquidity will be key.”

“I expect lease rate factors to go up, it’s as simple as that,” he added.

While the stimulus enacted by the US Federal Reserve may help to “steady the ship and might bring T rates down”, Hannigan believes it won’t bring credit spread down.

His main fear is that some airlines will not survive the current crisis, with many having been on “thin” levels of capital even before the virus hit.

The OEMs face the cancellation of orders and falling demand, not to mention the physical disruption to their production and delivery processes. He says this is “really serious stuff” and represents a huge disruption.

While CDB Aviation does not need to tap the capital markets now, Hannigan says that if the Chinese lessor has to do so, it would probably get a “fairly unpleasant surprise” as regards credit margins. Hannigan believes that, even for strong rated lessor platforms, margins have moved “quite a bit” over the past couple of weeks.

While he expects trading conditions to be “challenging”, Hannigan feels there will “definitely” be further sale and leaseback transactions mandated this year. “When you are pricing and structuring deals, you will be doing it very differently than has been done the year before.”

For him CDB Aviation has been “a little bit fortunate” to have shied away from ABS deals in favour of direct trades with Chinese lessors - a strategy he plans to continue once conditions begin to normalise.

“To the extent to which the market comes back sooner, we will be able to get back to business because we have good relationships with buyers in the Chinese market that we can go back to; to do follow-on deals, which are important to us,” he stresses.

CDB Aviation has focused on trading efforts with other Chinese lessors and Hannigan suggests more Chinese deals are planned for this year.

“That’s probably why we haven’t done an ABS deal yet, because our focus really has been on developing relationships with trading partners.

“We always have a choice to do deals with various partners depending on their appetite for the different types of assets and airline credits. We wanted to build up that list, that rolodex effectively.

An ABS would have been one big deal and it just didn’t suit us.” CDB Aviation has completed four aircraft trades in the last two weeks, reflecting a busy trading quarter, which Hannigan says was mainly deals set up in the latter part of last year.

In 2019, the lessor had concluded 89 aircraft transactions, including signing 54 aircraft leases, 22 aircraft sales while CDB Aviation acquired 17 aircraft.

For 2020, Hannigan does not anticipates the same level of trading, as volumes are dependent, to some extent, on how long the impact of Covid-19 on the aviation sector persists. In terms of liquidity, he believes the business is in “pretty good shape” and possibly in better shape than other lessors.

CDB Aviation has credit lines and a revolving credit facility in place. Hannigan admits that CDB Aviation, as a dedicated leasing arm of China Development Bank, is in the “privileged position” and enjoys a “quasi sovereign rating”.

Prior to the crisis, CDB Aviation had secured investment grade rating from the major agencies. “Having said that, we take nothing for granted in the eye of this storm, because we have not seen anything like this before,” he says. Hannigan discloses that a “significant majority” of the lessor’s customers will be requesting deferrals.

The decision on whether to grant these does and will comes down to the airline’s credit profile.

Other important considerations include whether their owners will support them or if they are deemed strategic assets by their governments.

“The basic theory says you agree to a deferral, you collect it over a period of time – normally fairly shortly thereafter, you don’t try to let deferrals go on for too long, lest they end up never being repaid because something else may happen in the future,” Hannigan notes.

Looking longer-term Hannigan opines that the crisis could even accelerate consolidation in the aircraft leasing market.

Some entities, especially new entrants, could be vulnerable to take over as trading conditions worsen and credit becomes more difficult to access.

“Some of the newer entrants will have underwritten a lot of deals at very low lease rate factors and are now probably suffering,” he says.

Reacting to historic commentary from some European and US lessors that new entrant Chinese platforms would be among the first targets Hannigan says he does not believe that consolidation will be a “China-specific point”.

“In fact, if anything, some of the Chinese lessors have been backed by some very strong financial institutions,” he says.

Max challenge

An existing challenge, which has been further complicated by Covid-19 is CDB Aviation’s Boeing 737 Max orderbook. The lessor had two aircraft in service, at the time of the grounding in March 2019.

Its orderbook stood at 101 Max firm orders, with deliveries due through 2025. It has now reduced its commitment to 70 aircraft.

Hannigan says the lessor has to be “practical” regarding the need to balance current demand with supply. He is still awaiting clarification from the US manufacturer regarding the recertification of the aircraft following deadly crashes in 2018 and 2019.

Future expansion

Since its founding in 2006 CDB Aviation’s core business has naturally focused on China. Airfinance Journal’s Fleet Tracker shows that the lessor has 223 owned aircraft and another four units under management. Of these, 106 aircraft or more than 47% of the total placements, are with Chinese airlines.

Europe is the next largest market, with 33 aircraft placed with operators in the region, followed by South Asia, Latin America and the CIS.

China Southern Airlines is its biggest customer, with 26 aircraft on lease to the Guangzhou-based carrier, followed by Loong Airlines with 18 units and Indigo with 12.

Chinese-based airlines make up seven of CDB Aviation’s top 10 customers. Hannigan says China is and will remain a “very important” part of the business noting that “ultimately our DNA is Chinese”.

However, the lessor has expanded its remit over recent years for a number of reasons. A lot of CDB Aviation’s early leases were with Chinese carriers and the lessor knew that ultimately those aircraft would come back off-lease and will need to be placed in other regions, Hannigan notes.

The second argument was that there was only so much growth coming out of the Chinese market. “If we wanted to put capital to work, we needed to deploy our capital outside China. Pretty much all of the deals in the last three years have been outside China.

“We have a number of customers in Latin America, such as Gol, Avianca, and Jetsmart. But we intend to have more, frankly. If I like the airline credit and the asset type, I can definitely take a more significant exposure in the Americas.

“We like doing large deals where we put our balance sheet to work, because we have got a trading function in the business that we can manage down that exposure over time,” he says. One region CDB Aviation is targeting is the USA.

The lessor has a Fort Lauderdale office and recently bolstered the team based there with the addition of Jorge Garcia as senior vice-president and Alan Mangels as vice-president.

Hannigan says there are no structural issues preventing the lessor expanding its business in this market. In terms of fleet expansion plans, CDB Aviation has commitments for 50 Airbus A320neos, 31 A321neos, 70 Max aircraft and two 737-800s.

This includes SLBs, direct OEM orders and aircraft subject to purchase from other lessors. On the widebody front, the lessor only has commitments for three A330-900s.

Hannigan says that the lessor’s strategy in terms of widebodies is sale and leaseback transactions, where an investment decision can be made “there and then”. Despite the current challenges, Hannigan believes CDB Aviation has built a business that can be scaled and predicts the lessor is well placed to expand further over the coming years.