Competition for new aircraft sale and leaseback transactions remains fierce, with a recent request for proposals (RFP) mandated to a lessor at less than a 0.6% lease rate factor (LRF).
The RFP, covering three A321neo deliveries, was mandated last month at under 0.59% LRF. Airfinance Journal was aware of bids of 0.65% for those aircraft.
The Airbus A321neo aircraft is progressively becoming the hottest asset in the narrowbody market, benefiting from a halt to the Boeing 737 Max deliveries and a gap in the marketplace, probably until the arrival of a new midsize aircraft.
Airbus’ backlog of aircraft remaining to be delivered as of 31 August 2020 stood at 7,501, including 6,034 A320neo-family units. The European manufacturer has delivered more than a quarter of its A320neo backlog with 1,044 units. But on the A321neo side, it has handed over 370 units, or less than 11% of its orderbook for the model.
Airfinance Journal’s Fleet Tracker recorded about 48 A321neo sale and leaseback transactions or mandates worth almost $2.45 billion since February.
Wizz Air and Indigo Airlines have been active sellers in this market this year. Easyjet mandated financing of five deliveries to Bocomm Leasing as well as SMBC Aviation Capital for six units in the summer.
Appetite has mainly emerged from Asian lessors with Avic Leasing, CDB Aviation, BOC Aviation and SMBC Aviation Capital particularly active.
Currently Frontier Airlines is in the market with a sale and leaseback RFP covering several deliveries, sources say.
Appetite is plentiful from leasing platform, and this is driving fierce competition.
"It is hard to get diversity when you are focused on next generation assets and the only other alternative Boeing still does not have the Max in service," comments on asset manager. "For now, diversity will mean we add some A320neos to complement our A321neos."
The model has featured in many RFPs that Airfinance Journal has been made aware of over the past few months, as airlines continue to accelerate their transitions to next generation models. However pricing has been inconsistent.
Airfinance Journal saw an RFP in the summer for an Airbus A321neo aircraft scheduled to be delivered in the first half of 2022, with an asking price of around $73 million. The transaction included pre-delivery payments, buyer-furnished equipment and a forecasted escalation to delivery date.
In a recent Airfinance Journal podcast, Split Rock Aviation partner Andy Mansell says of the deal: “I believe this is not what the deal will be done at. It is the minimal criteria to participate. There are a lot of industry observers who would shake their heads and ask why would you do business at that lease rate factor?”
Mansell adds that other deals have been done at what is considered “pre-covid-19 levels”, but points out that “some money is out there that is very eager to be put to work”.
“There is some money sitting on the sidelines ready to deploy. But it is going to be risk-adjusted money and risk-adjusted is not going to be lease rate factors in the 0.6 percents,” he comments.
Another A321neo sale and leaseback request mentioned a 0.54% LRF on a purchase price of $53.2 million.
“That lease rate factor for a sale and leaseback transaction seems very low. The entry price does not sound unattractive for the carrier it was done for,” Mansell says.
He suggests the A321neo deal may have been a low gross weight aircraft and given the fact that most airlines operate high gross weight aircraft, when one adds the cost of that back it may not be particularly appealing.
One leasing company representative says it has seen some A321neos pricing at $60 million, with low lease rate factors making more sense comparatively.
“The devil is in the details but the A321 is as complicated as a widebody aircraft as it includes many variants and additional fuel tanks as well as gross weights and thrusts,” says Mansell.
Another leasing source says the disparity between models can translate into as much as $20 million. The source says the timing of the purchase agreement with Airbus can be a factor, as well as timing for deliveries, in addition to the versatility of the model.
One lessor’s representative thinks that there is still too much money on the sidelines waiting to be invested. “And if people can invest in good long-term assets such as the A321neo with a 'good' credit then there will be competition, which will drive pricing down to unsustainable and unjustified levels,” he adds.
He points out the secured debt transactions recently done by US carriers.
Delta priced at 4.5% $2.5 billion of securities, while $2.5 billion of senior secured notes priced at 4.75% against loyalty programmes. The debt issuance, which is expected this week, also includes a $3 billion term loan facility. The debt issuance has a blended average annual rate of 4.75%.
“Rates close to 5% per annum also creates a mark to market which drives leasing pricing lower,” says the lessor.
The lessor adds that the $30 billion-plus of orders for Delta's $9 billion issuance shows the amount of liquidity searching for homes. “Some of that will spill over into the lease market when it can’t get satisfied in direct lending deals,” he comments.
Still, he thinks a 0.61% LRF on a Neo aircraft is reasonable in the current context of some airlines restructuring fixed leases and moving into flight-hour-based deals.