As well as leasing aircraft, Boullioun Aviation is starting to develop a core competency for being sold. The lessor has already had three different owners in the past 10 years ? and is looking for a fourth.
In 1994 it was acquired by Sumitomo Trust & Banking, which owned it for just four years before selling it to Deutsche Bank. Deutsche Bank encouraged the lessor to grow, with Boullioun purchasing 30 new 737s and 30 A320s, before eventually deciding to move out of aircraft leasing in 2000. WestLB bought the company in January 2001 and, because of its own internal problems (see box, page 17), it is looking for another buyer.
?WestLB has appointed Citigroup to assist it in reviewing its strategic options with Boullioun,? says John Willingham, CEO of Boullioun. ?This could include a strategic disposal of the portfolio.?
Of course, Boullioun is not the only lessor for sale; in fact, practically every leasing company is available at the right price, but the Seattle company is different for two reasons.
First, WestLB wants to sell as soon as possible ? with only Abbey National, which is trying to dispose of IEM Airfinance, in a similar hurry. While several other lessor owners, such as Morgan Stanley with Awas (formerly Ansett Worldwide) and Rolls-Royce and GATX with Pembroke, may want to get out of leasing, they are waiting for aircraft values to rise. WestLB, however, is keen to dispose of as many of its principal finance ventures as possible to reassure investors.
The second reason that the lessor is exciting potential buyers is its portfolio. Boullioun's fleet of 124 owned and 31 managed aircraft, on lease to 49 airlines, is arguably the most marketable out of all lessors. All but three of the aircraft, two 1988 757-200s and one 767-300ER, are modern A320s and new-generation 737s, and the average age of the portfolio is one of the lowest in the business.
Boullioun also has firm orders for two 737-700 aircraft and 19 A320s and a 35% stake in Singapore Aircraft Leasing Enterprise (Sale). Sale also has a portfolio of 58 owned and managed aircraft and firm orders for 17 A320-family aircraft.
WestLB's 2003 accounts valued the group at ?2 billion ($2.4 billion), down 28% from 2002 after write-offs. However, Boullioun valued itself at $2.7 billion in Airfinance Journal's 2003 operating lease survey.
Boullioun's orders make it more difficult to value the portfolio, with bidders having to decide what the true value of these aircraft is. It also means that any buyer must be committed to growth.
Even though Citigroup has not yet issued a formal request for proposals, a number of potential buyers have already lined up. ?There has been a lot of interest in the portfolio,? says Willingham. ?What we are looking for is a strong capital background to help us expand and leverage our strengths.?
Most buyers can be split into three categories: other lessors, private equity firms and institutions not yet involved in aircraft leasing.
Only a few lessors are likely to have the appetite for Boullioun. While AIG, ILFC's parent, could no doubt raise the cash, ILFC has historically been less interested in acquisition, leaving GE Capital Aviation Services (Gecas) and Royal Bank of Scotland's RBS Aviation Capital the most likely leasing company buyers.
If Gecas really wanted to buy Boullioun it could no doubt afford it, but any purchase is unlikely to fit in with its strategy of diversifying into other types of lending, including loans and securitization. In fact, in the past two years Gecas has sold more than $2 billion of new aircraft of similar quality to Boullioun's portfolio to RBS Aviation Capital. One official at Gecas says that it is not convinced that it needs Boullioun. RBS Aviation Capital has grown surprisingly quickly since Royal Bank of Scotland acquired leasing boutique IAMG in 2001, and the Scottish bank is clearly committed to aviation.
Now the third-largest lessor, buying Boullioun would allow RBS Aviation Capital to grow its portfolio by about another third and as the world's fifth-largest bank by capitalization, it could fund it. However, the resignation of Domhnal Slattery, its chairman, could change its strategy.
Pegasus Aviation is also another possible contender, having recently received $150 million to form a joint venture private equity firm, Oaktree Capital. However, while Oaktree manages a $25 billion portfolio for institutions and rich individuals, it has $2.5 billion available for principal investments and, having just invested $125 million in Spirit Airlines, it is not known how much aviation exposure it wants.
Another buyer could be Aviation Capital Group, which is believed to have mandated Deutsche Bank to advise it. Owned by insurer Pacific Life, Aviation Capital Group has access to cheap funding and refinanced the debt in its portfolio with a $2 billion securitization in 2003.
Babcock & Brown Asset Management is also believed to be looking at Boullioun, although with the subsidiary's parent considering an Australian IPO, it is perhaps unlikely to have the time. Babcock & Brown is also likely to highlight its Australian property investments when selling to investors and is unlikely to want to increase its aircraft business before floating.
Most of the 15 largest lessors will no doubt want to examine the portfolio, but it is unlikely that their management and owners will have the appetite for the whole portfolio, although they could bid for parts.
Boullioun's Willingham would not comment on the number of potential buyers, but says: ?If we are bought by another lessor we would want it to be one that shares our view of the market.?
Boullioun's 60 staff would no doubt prefer to be bought by a private equity company rather than a competitor and a number of firms have expressed an interest in the lessor. As well as Oaktree, Texas Pacific Group, Blackstone Group, Cerberus and Indigo Capital are all believed to be considering bids.
After its success with AerFi, where it bought out Gecas' share of GPA before renaming the lessor and selling it to debis AirFinance, Texas Pacific Group must be considered a possible buyer, although at the recent New York Airfinance Conference Rick Schifter, the partner who specializes in aviation, said that the firm believes the aviation market has changed significantly since then.
Texas Pacific's most recent aviation investment was in airline catering firm GateGourmet, which it bought from SAir Group in 2003.The firm could also bid alongside Blackstone Group, which created Blackstream Aviation in 2003.
Headed by Patrick Blaney, former CEO of GPA, and John Morrissey, a founder of IAMG (now part of RBS Aviation Capital), Blackstream has access to about $750 million in equity for aviation investments.
?We will definitely look at it,? says Blaney. ?But price will of course be a consideration.?
Blackstream is not the only private equity firm specializing in transportation, and bankers have also mentioned Indigo Partners and Greenbriar in connection with Boullioun.
Indigo, whose principals, Bill Franke, a former CEO of America West, and Steve Johnson, another experienced airline manager, focuses on air transport and has recently invested in Hungarian start-up Wizz Air and Singapore's Tiger Airways. But it is unclear if it has enough capital to afford Boullioun.
Bankers have also named Cerberus Capital Management as a potential bidder, although if its C$250 million ($184 million) bid for Air Canada goes ahead, it is unlikely to have much appetite for another aviation company.
The last category of buyer is harder to narrow down. Bankers say that at least one company with no exposure to aircraft leasing has expressed an interest and Boullioun could be attractive to companies looking to diversify or reduce tax payments.
AIG and Pacific Life both benefit from owning leasing subsidiaries and Boullioun could be attractive to other insurance companies.
However, it is unlikely to appeal to a bank. Morgan Stanley has attracted a lot of negative analyst comment for owning Awas. This was made worse by its decision to buy back the securitization of the portfolio in June 2001, and the bank had been hoping to sell the lessor before the September 11, 2001 terrorist attacks on the US.
Narrowing the field
While WestLB clearly wants to sell the lessor, it is not a distressed seller and could still choose to keep the portfolio. Abbey National tried selling its IEM Airfinance portfolio in April 2003 but only received a small number of heavily discounted bids. Ironically, it then chose to hand over management of its portfolio to Boullioun.
Although Boullioun's portfolio is stronger than IEM's, Citigroup's will need to interest at least two serious bidders if it wants to get the price up.
The acquisition of Boullioun is also going to present a finance challenge to whoever buys it. Before September 11, buyers could have been confident of financing the debt portion through securitization. With spreads for junior notes still trading far wider than at launch, and deals still being downgraded, securitization is no longer as cheap an option as it was before the downturn. This means that some bridge financing will be needed and that private equity investors may not wish to rely on securitization as an exit strategy. Financing the lessor's outstanding orders will also complicate financing.
There will be no shortage of lessors and private equity investors interested in looking more closely at the business but only two or three are likely to have a real interest.
Anyone looking to bet on the outcome should not write off Gecas until it officially pulls out. Punters may want to put some money on RBS Aviation Capital. Blackstream says that it will definitely be looking closely and Texas Pacific Group has a strong track record. Aviation Capital Group is also sounding serious and, of course, there is the chance of a strategic investor. Willingham is just hoping that the next investor holds on to the lessor for longer than its past three owners.
WHY WESTLB IS SELLING
WestLB's decision to sell Boullioun is largely based on problems the German bank has had with its investment in Boxclever, a UK television leasing company.
In May 2003, German regulator BaFin launched an investigation into WestLB's risk management, particularly of its investment in Boxclever. BaFin's investigation led to a scandal in Germany, with many investors, including North Rhine-WestPhalia. the bank's largest shareholder, to question why the bank had chosen such a high-risk strategy.
WestLB later made provisions of ?430 million ($522 million) against Boxclever, part of an extra ?1.9 billion of provisions for 2002, which contributed to an overall loss of ?1.73 billion in 2002. In 2003, the bank wrote off another ?200 million for the company.
So how did WestLB end up owning a TV leasing company and an aircraft lessor?Like other German Landesbanks faced with the loss of their state guarantees, WestLB sought to compensate by expanding aggressively into new business, including investment banking, international lending and principal finance.
Principal finance, led by Robin Saunders, a former head of securitization at Deutsche Bank, was the most high-profile part of this strategy. Her team closed a number of innovative deals, including rescuing Morgan Stanley's securitization of Formula One in 1999 and financing the rebuilding of London's Wembley Stadium. It also bid for a number of ambitious financings, including a bid for UK retailer Marks & Spencer by retail entrepreneur Philip Green and a WestLB bid for Railtrack, which runs the UK's railways.
However, losses from Boxclever and BaFin's investigation into the company quickly changed WestLB's appetite for principal finance, and also led to the resignation of CEO Jürgen Sengera and board member Andreas Seibert in May 2003. Saunders resigned in December.
Although the acquisition of Boullioun was led by WestLB's transport team, part of the bank's special finance group, and not Saunders' principal finance team, which was part of the bank's equity investment division, the risks involved in leasing aircraft were also seen as too high after Boxclever.
Thomas Fischer was appointed WestLB's new chairman in January 2004 and quickly set about changing the bank's direction.
?WestLB´s financial statements for 2003 are characterized by systematic consolidation and an uncompromising elimination of all remaining risks on its balance sheet,? he said when announcing the bank's ?1.897 billion loss in 2003. ?This is the basis on which we are now building the new WestLB. We will focus our business activities increasingly on the home market, tapping hitherto unused market potential primarily among medium-sized companies and in the private banking field. WestLB will no longer operate purely as a wholesale bank: that is no longer a competitive long-term option given the changing legal framework in which we must work.?
In total WestLB wrote off ?1.18 billion in risks for 2003 with the bank making provisions of ?416 million established to cover Boullioun risk as part of its new risk management policy. While some analysts believed that the bank did not need to make these provisions, because they were unnecessary under the US accounting standards that Boullioun uses, it was a clear sign of its new conservative attitude.
Fischer also announced that the bank would continue selling off its principal finance business, having successfully sold WestLB Panmure and UK pub chain Pubmaster in 2003. Boullioun is next.