In our sixth podcast episode in series 1 of “Conversations With Coopman”, Stan Barnes, Chief Financial Officer and Head of HR at Aergo Capital, joins co-hosts Andrew Murphy and Mark Fallon to discuss the opportunities and challenges for the aircraft leasing sector in Ireland.
Stan has over 13 years’ experience in the aircraft leasing business, starting his career with Standard Chartered Aviation Finance in 2007. When Standard Chartered Bank (SCB) acquired Pembroke Capital Limited in 2007, Stan oversaw considerable growth in the portfolio and the finance team. In 2010, SCB established a shipping operating lease function in which Stan headed up a bank-wide project to integrate the aviation and ship leasing contracts management system and general ledger with the SCB general ledger and other downstream reporting systems. Prior to SCB, Stan worked for over 10 years as a Financial, Project and Regulatory Accountant in the banking sector.
In this episode, Stan discusses 2020 from Aergo’s perspective and the current market conditions, along with opportunities and challenges facing aircraft leasing companies, and shares his predictions for the company and wider industry for 2021.
Key takeaways from the conversation include:
1) A LOOK BACK AT 2020 FOR AERGO
2020 was the toughest year in the aircraft leasing industry and this down point in the cycle has impacted the whole world, whereas in prior crises, only some jurisdictions were impacted.
In 2019 however, Aergo made the decision to de-risk its portfolio and to let go of aircraft in countries where they were over exposed. They spent a lot of time at the start of the 2020 looking at rent deferrals and disposals and were able to leverage off their parent company CarVal, who have a wealth of experience working in difficult environments and in the transport industry.
Carval saw an opportunity for growth and in the latter half of 2020, Aergo hired senior personnel in the market, particularly in the area of structured finance, and focused on developing its leasing platform.
2) CHALLENGES FACED BY AERGO IN 2020
In February/March of 2020, it became evident that Covid-19 was going to have a big impact and at that time of year, it is the budget process for Aergo. Budgeting is a big task and takes weeks of preparation in anticipation of presenting to CarVal for approval in February. Each part of the business and budget needed to be looked at, in particular where Aergo factored in agreed lease deferrals and cost cutting measures.
Looking at the company’s expenses and income, one of the casualties was its intern programme. This was very difficult for the company as many team members had joined via the programme and it was a great way to develop the skills of professionals. Naturally, this created some uncertainty among permanent employees, but it was a necessary measure to take which was communicated within the company.
In Stan’s role as CFO, it was very difficult to get external debt financing in the markets as the banks were not engaging as much as they normally would. Although tricky, Aergo was able to secure bank debt for a lease back to British Airways.
In his other role has Head of HR, one of the main challenges was managing an international team from Canada to Hong Kong and relying on calls through digital platforms such as Microsoft Teams and Zoom. It was a constant challenge to work effectively, particularly when it came to virtually conducting finance-related activities, however Aergo ensured it implemented innovative ways to maintain team engagement and communication – one event saw the team host a virtual pizza cooking session.
3) AERGO’S EXPECTATIONS BEFORE COVID-19 VERSUS REALITY
As previously mentioned, Aergo was de-risking as they felt the market was over-heating. They expected a continuation of new money into the sector, as returns were generally strong and stable. In the past, an increase in capital and competition led to undisciplined underwriting, which resulted in a lot of closed deals being risky and this impacted returns. Aergo also expected some of the lessors that had entered the market to come under pressure as a result of such deals, which would give the company more opportunities with the equity that was available to them.
During 2020, Aergo sold a lot of aircraft. Buying and selling is part of the DNA of the company and as CarVal expected a market reset (although not as serious as it was), they started to raise capital to take advantage of it, so Covid-19 has therefore further benefited the company.
As a company, Aergo was well positioned for the downturn and with their current team, they should be in a good place for 2021/2022.
4) COLLECTING REVENUE, PROVISIONING OR RAISING CAPITAL – AERGO’S FOCUS
At the beginning of 2020, Aergo focused on talking to lessees, working on deferrals and ensuring that they were not putting too much pressure on the airlines. Collecting revenue was needed but Aergo wanted to come up with long-term plans to alleviate the pressure.
Fast forward to 2021, capital raising is not an issue for the company but more deploying the capital at their disposal, looking for new deals and sale lease backs with stronger carriers. The company is also expecting more lessor-to-lessor deals, so they are working on supporting the clients in the portfolio.
5) AIR TRAVEL ACTIVITY ACROSS DIFFERENT REGIONS
Aergo deal with some of the more testing environments worldwide. Europe is trending towards strict lockdowns at the moment, unlike Asia where travel corridors are opening in numerous locations especially with business and leisure travel. China has continued to see a steady increase in travel trends and Aergo is currently in the process of closing a deal with another lessor to purchase a Chinese leased aircraft.
With harmonised systems of test and trace in the short-term and the rollout of the vaccine a long-term solution, accelerated travel should return. Changing rules and continued uncertainty is holding back a faster recovery, however it is Stan’s hope that Q2 will see the start of an upturn.
6) PREDICTIONS FOR 2021
From Aergo’s perspective, the company will consider any viable opportunity that presents itself. They will look at all deals in the market, for example, a widebody with a tier one lessee with long term lease is highly attractive.
Aergo anticipate an increase in bank repossessions and see an avenue of growth through the asset management side of the business where they can assist banks in this area. Furthermore, they are expecting more insolvencies due to continued pain for the industry in the first half of 2021.
There is a prediction that air travel will return to only 50% of 2019 levels this year, an increase from 2020 but still a low level. Like Aergo, other companies in the market can take advantage during this time, with lessee portfolio sales accelerating in 2021 as other airlines come to the market which will provide long-term profits.
Leasing used to be a 7-year cycle before a downturn, however with increased new entrants and large capital inflows from China, the sector was artificially kept afloat for the 10-year bull run. CarVal felt 2019 was the peak of the cycle and if Covid-19 didn’t happen, the downturn may not have happened as it has, but the 7-year cycle days are gone.
Overall, the market should pick up, although it will be a tricky market to navigate. Aergo is optimistic but remain cautious for 2021.
TO WRAP UP
2020 has been the most difficult year for the aircraft leasing sector, with Covid-19 causing chaos in markets worldwide – a situation never before experienced. Aergo’s parent company, CarVal, felt the market had reached a peak in 2019 and so, performed a de-risking of their portfolio. This better positioned Aergo to deal with the challenges presented by Covid-19, and the company even identified opportunity for growth through its asset management side of the business. While recovery of the market may be slow in 2021, there is optimism of improving trends for the aircraft leasing sector.
This podcast episode was recorded in December 2020.
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