Apollo Global Management’s acquisition of GECAS’s PK Airfinance lending business in 2019 may appear to some like an ill-timed bet given the global crisis that was about to engulf the aviation industry.

The sale of the platform, along with the parallel acquisition of PK Airfinance’s loan book by Athene, was announced in August.

Financial details of the transaction were not disclosed, although it was announced that the $3.6 billion of PK Airfinance financing receivables that were held for sale in the second quarter of 2019 were sold at a premium to book value.

The sale closed in December just weeks before the Covid-19 pandemic’s impact began to be felt. Apollo is well known for making well-timed opportunistic plays for distressed businesses, so does the US alternative asset manager regret the acquisition in light of the circumstances?

“The timing of buying an aviation business just before the pandemic, is obviously not the optimal time, but I don’t know if this business would have been available three months later because it might have been tougher to execute,” Gary Rothschild, partner and head of aviation at Apollo, tells Airfinance Journal.

“We are happy with the purchase. It’s a great team and a great franchise and, at the end of the day, it’s a debt book and so we are well protected from an asset value perspective and we have the ability to work through this,” he adds.

From a strategic point of view, the acquisition of PK Airfinance did and still does make sense. Apollo, a giant of private equity and credit investing, already had several channels for investing into the aviation space, a sector in which it has long been active. 

Its leasing arm, Merx Aviation, has been an active player primarily in the secondary aircraft market since 2012. Apollo has also been known to make opportunistic equity plays in the space from time to time, such as in late 2017 when it took over control of Sun Country Airlines.

The acquisition of PK Airfinance gives the US firm the opportunity to provide credit lines to airlines and lessors at a time when the need for such financing is acute. Also, while Apollo is known as a private equity specialist, its credit business is larger and arguably more significant.

Of the $433 billion of assets it had under management at the end of the third quarter, $312 billion was credit.

“A lot of people still think of Apollo as a private equity shop. Our private equity is top tier, but the reality is also that twothirds of our assets are now in credit,” says Rothschild.

“Our credit business has more than $300 billion in assets that span the riskreward spectrum, whether we’re investing opportunistically or being able to utilise, for instance, our insurance affiliate Athene’s balance sheet and much more costeffective or efficient capital.

“Across these different pockets of capital, we can invest in many different areas of aviation. We have been an active player in a lot of the US capital market issuances. We have pockets of capital in bonds from airlines and other lessors, and we have been able to participate all the way up to debtor-in-possession (DIP) financing for some of these airlines.”

Integration of PK Airfinance and synergies

With PK Airfinance, Apollo now has a multitude of channels into the aviation space. Rothschild says that the integration of the platform is going “quite well”.

He says: “It gives us a better coverage for the airlines. We have originators from both the leasing and lending sides talking to the airlines and, of course, PK Airfinance relies on the Merx team for technical assistance.”

But it was to be some time until the first PK Airfinance transaction was closed. Rothschild explains that immediately before the pandemic it was already a “bit frothy” in the market, both in the leasing and the capital markets, and Apollo was “sensitive to that”.

This led to what he describes as a tapping of the brakes to avoid additional lending exposure in the market while it remained in flux.

Apollo has closed its first deal since the acquisition with a secured loan to US carrier Allegiant Travel Company.

“We were happy to support Allegiant. It was a one-off negotiated deal of $84 million of financing secured against both core assets and spare engines at a spread that we thought was reflective of the current environment, obviously much wider than prepandemic,” says Rothschild.

He further sees an “acceleration” of similar opportunities that are actionable by the PK Airfinance platform.

With what he sees as a contraction in the banking world and the availability of funds that are willing to take asset risk, Rothschild believes the market is ripe for Apollo to grow the PK Airfinance business in the current environment.

Aeromexico investment

Apollo’s appetite for distressed lending came to the fore in August when it agreed to provide $1 billion of DIP financing to Aeromexico as part of that carrier’s Chapter 11 bankruptcy proceedings.

The superpriority funding is secured and is being provided in two tranches: one of $200 million and the second of $800 million. Apollo has the option potentially to swap the latter for equity in the Latin American carrier. Rothschild says Apollo carefully considered the rationale for the restructure before investing.

“With any of these investments you are looking at the importance of that airline in a particular region or sector, and bottom line: is there a reason for that airline to exist? We certainly think so and are pleased to provide Aeromexico with capital to continue operating as they restructure the company,” says Rothschild.

He believes that the funding provided to Aeromexico is another example of the breadth of the Apollo platform.

“Across the Apollo aviation platform we have access to capital that spans the riskreturn spectrum, from investment-grade secured paper through pure equity risk.

“And, of course, we also have the more metal-focused asset financing which are the leasing and the PK lending businesses. Then you add private equity’s understanding of the industry dynamics or a particular company or management team.

“We can bring that expertise together in a DIP of this kind, and get comfortable investing in a sector that’s undergoing significant real-time change. So, I do think it’s a powerful platform,” he adds.

Rothschild says Apollo has yet to decide whether to acquire a stake in Aeromexico.

“I think the option to take some equity is just that: it’s a developing situation; it potentially creates some upside if things work out in a particular way, but it’s not a definitive outcome that there would be an
equity interest in the airline,” he says.

Airbus A220 deal

Rothschild, who has been chief executive officer of Merx Aviation since its inception, explains that before the crisis, 80% to 85% of its business was secondary market transactions.

Airfinance Journal’s Fleet Tracker shows that Merx’s owned and managed portfolio consists of more than 100 aircraft, including some Kornerstone and Orix units under management.

The lessor was not involved in new sale and leaseback transactions because it felt the economics of those were “too thin” for its capital at the time.

All that changed with Covid-19. In early July, Apollo and Merx closed the acquisition of 10 2019-vintage A220-100s from Delta Air Lines.

The transaction marks the first A220 in the Apollo and Merx portfolios. “Since the crisis started, I would say that ratio has reversed. Now it is more like 80% to 85% sale and leasebacks and 15% to 20% secondary markets, and even in those secondary market transactions, only a subset of those are actionable,” notes Rothschild.

“If you make a venn diagram between where values are and where a seller is willing to move, those overlapping assets might be quite small,” he adds.

Growth opportunities

In a crisis as deep as the one created by Covid-19, Rothschild sees opportunities for further investment across the spectrum.

While government stimulus has helped the airline industry, Rothschild says that adding up all that support compared with the total need for the sector that is projected or the business, there remains a “big gap”.

“I still think there is some runway here on distressed asset opportunities. The banks have been very happy supporting the airlines on their own balance sheets as have the capital markets in the USA, but there will be limits to that,” says Rothschild.

He sees opportunities for platforms such as Apollo/Merx to step in. This should continue to play out over the next six, 12, 24 months, he explains.

Coming out of the current crisis, Rothschild sees the aviation market becoming smaller, but while Apollo’s position as a relative player within it, growing.

“We still see some aggressive bidding being done on the leasing side which, if you look at on a relative value basis and where let’s say you can quote the capital market bonds, it may not make sense, but there is still capital in the market, particularly from some of the overseas jurisdictions, just dedicated to leasing looking to invest in hard dollardenominated assets,” he adds.

With the exceptional levels of distress in the market providing multiple investing opportunities, is there a risk of Apollo and its channels losing their strategic focus?

Rothschild believes not, pointing out that both PK Airfinance and Merx Aviation have been in the market well before the pandemic and remain “totally focused” on aviation.

“There are, of course, parts of the firm that are more opportunistic and dynamic and shift to areas of distress in certain periods of time. But our commitment to the aviation space is strong and will be persistent across the firm,” he says.

Neither are there plans to take synergies one step further and integrate the various aviation platforms into one integrated business.

“There are no plans to create one company, but there are many synergies as far as how we look at the market, how we see opportunities creating some crosscollateral benefits across some leasing opportunities and some debt opportunities that we can take advantage of,” adds Rothschild.

Deferrals and pandemic response

With such wide-ranging exposure to the aviation industry, it comes as no surprise that it was susceptible to the initial wave of deferrals and debt restructuring requests that characterised the early months of the crisis.

“It is no secret that the airlines are seeking deferrals, so our first priority right now is to manage our current exposures and make sure we preserve the capital there and walk through those processes.

“On the leasing side, I would estimate 75% lessees originally came in for deferrals, consistent with what others are reporting in the market as to a term of three months, with a payback period over next six, nine or 12 months with some imbedded interest rate,” says Rothschild.

Echoing the comments of many leasing peers, Rothschild sees the next phase as being more complicated, with negotiations focusing on areas such as reserve offsets and end-of-lease adjustments.

Rothschild says that the lessor portion of the PK Airfinance book has held up “pretty well”, noting that many of the lessors will seek to cure their debt defaults in order to protect their equity value.

“We are getting a lot of equity cures from our lessor community – in some cases, we have been paid out. Obviously, there has been amortisation in the book, so the book has shrunk a little bit with that.

“There are several cases where the airline is paying its debt service on assets they own to protect their equity value, but are in deferrals with their leases.

“The market kept airlines honest in past crises. If things became too aggressive, you had a bid away – there was a more readily discernible value to the asset. Right now, there is still so much uncertainty that it’s difficult to determine what the bid away is to place aircraft,” says Rothschild.

“There aren’t too many airlines, if any at all, that are looking to acquire aircraft that they don’t already operate. There’s no secret that the leverage is most decidedly in the airline’s camp,” he adds.

In one positive development, Rothschild says that the weekly calls with customers are spending less and less time on deferrals.

The list of open deferrals is now much shorter, he discloses, because Merx has finalised written arrangements with a large percentage of its lessees, and with many of the airlines now coming out of their deferral period and starting to pay again.

“And then there are some that are pushing out to the right and extending those deferrals. The issues tend to be focused somewhat in Latin America and particularly Indonesia right now, but it’s not a surprise given the continued stress in themarket,” he adds.

Future vision

Rothschild believes that with the distress in the market set to continue for some time, the window for Apollo to make opportunistic purchases is far from over.

“From my perspective,” he adds, “the opportunity, given the experience and relationships across the platform, is greater than before for us to deploy capital across the broad range of aviation product offerings available to us at Apollo. I do think that the opportunity to get enhanced returns with better downside protection is out there if you are selective.

“I think the appetite that Apollo has and our access to credit capital, we are going to grow our aviation business and we have the team and the expertise to do it.”