USA-based asset manager Sky Leasing raised a further $450 million in the second quarter of this year from the banking sector through a term loan.

The funds will support the manager’s Fund V in addition to the $540 million initial limited-recourse aircraft acquisition facility signed in early 2021 to support future acquisitions.

“It was part of our core financing plan and we took assets that were part of the financing warehouse and upcoming aircraft deliveries. We looked at alternatives such as capital markets and, in the end, we opted for a term loan. The term loan structure was a clear winner where we see strong demand for next-generation assets,” comments Sky Leasing chief executive officer Austin Wiley in an interview.

“We have seen the pullback in the capital markets and the debt market stepping in and be very efficient. It continues to provide attractive pricing inside what is implied by capital markets. We continue to evaluate the ABS market as part of financing considerations.”

Wiley agrees that traditional banks, which have backed the sector in term loans and revolving credit facilities as well as secured loans in the past few years, are stepping up their presence on bilateral asset transactions.

“The appetite for mid-life assets or portfolio of that age remains muted, but certainly for new technology targets there is good demand,” he says.

Wiley says the rapid recovery in the narrowbody sector has provided more confidence to lenders.

“A year ago demand from Asia was still weak and confidence on the recovery was not as clear as in Europe and North America. People need data to make forward looking decisions and it was a matter of looking at the trends continue for a couple of quarters. Now everyone can see we are in a good dynamic of high demand and tight supply.”

Wiley says asset managers and lessors have adapted to match the cost of funding. “We are seeing leasing rates increase driven by a combination of tight supply and higher borrowing costs. Our view is that this is part of uncorrelated nature to a broaden credit markets that is aviation. We are locking in 8-12 years’ rents and they don’t reset based on credit markets are over this period, so at a certain point in the cycle when you are refinancing, you will pay more, at other times, less.”

The asset management platform continues its re-fleeting programme after the sale of 35 aircraft on lease to DAE Capital in the final quarter of last year.

Wiley hopes Sky Leasing will end the year with 60-65 assets either managed and committed.

Widebody assets
Sky Leasing’s primary focus in the first half was on Boeing 737 Max- and Airbus A320neo-family aircraft as the asset manager rebuildt its portfolio.

But the asset manager also invested in widebody aircraft in the first half of this year and Wiley explains that this market is coming back strongly.

“We have invested in two Boeing 787-9s, one of which is on lease to Aeromexico. Both were secondary market acquisitions for Fund V.

“The widebody market at the moment has attractive dynamics with tight supply and clearly the 787s and A350s/A330neos are the long-term winners. There is no replacement on the horizon and a lot of the concerns that the current generation of widebodies face are not the same risk factors that you face when investing in new technology aircraft.”

He sees lease rates on new technology aircraft improving further. “The reduction in supply was far greater on a percentage basis than the reduction in supply for narrowbodies.”

Wiley says that while there is a window of asset values going up, they will not forever. There is also an element of recovery from the depressed levels of the pandemic and that is an attractive opportunity to take advantage of. “But the widebody market comes with risk and especially a transition risk. The risk and reward are correlated in this business.”

Wiley says Sky Leasing will look at historical precedence of 20% of asset costs for widebodies in its portfolio. “This is where we have been historically and we are just reverting back at the moment to the mean, where we were approximately 10% during Covid.”

Sky Leasing is also developing a presence in the turboprop market but not necessarily on a strategic basis. “We are partnering with airlines where their network requires that type of aircraft. The ATR72-600 is core on what they are doing on a profitability level.”

He adds: “There are routes at Indigo and Azul that are not economically viable with the A320neo. The ATR72-600 is a good asset for them and we think there is a good relative value in that space without looking to acquire a large portfolio of ATRs.”

Wiley says Sky Leasing has also valued the A220 market on similar grounds.

“We like the A220 and we have looked at this aircraft with a number of operators. Ultimately it will find its way into our portfolio.”

The company continues to invest in narrowbody aircraft from airlines transitioning to new technology aircraft. UK operator Jet2 and Icelandair are prime examples.

“We have always liked Jet2’s business model and believe the B737NG will continue to be core to their strategy despite the induction of A321neos/ For Sky Leasing, beyond the opportunity to acquire assets on medium terms, it is a matter of understanding the residual values and making sure it has the option to lease the engines, and/or convert to freighter to extend the life of the asset.

“It is not a strategy shift for sure, as we keep investing primarily into new technology assets, but when we invest in those mid-life narrowbody aircraft it is with the view of assessing the timing of the transition and where is the airline in that transition cycle. Jet2 operated 757s for more than 20 years, and they have the availability to eke out values of older aircraft versus a low-cost carrier that are more aggressive in replacing current generation aircraft.”

Sky Leasing found a new home recently for the 12 ex-Norwegian aircraft with Smartlynx Airlines, Norwegian and Icelandair.

The asset manager sold three aircraft to DAE Capital and has lined up two more lessees for the remainder of the fleet, says Wiley.

Given its size compared with its peers, Sky Leasing has to react quickly to macro-dynamics.
LATAM is one region the company has considered for leveraging its presence in Europe and North America.

“The region is recovering well. LATAM carriers were able to use the Covid restructuring period to create consolidation and restructure more quickly and so there is a healthier supply-demand dynamic,” he explains.

The market will present more opportunities in Asia next, he says.

Wiley points out Sky Leasing does not set rigid targets for regional diversification. “We are much more interested in where the supply and demand dynamics are at in a given region.”

Equally lessors and asset managers need to have a clear strategy in place when sourcing new feedstock, he thinks.

“It is important to have both origination channels and sale and leaseback market as well as secondary market as part of your strategy. Usually one channel presents more opportunities than the others,” adds Wiley.

He recalls that the dynamics in the industry are different in 2023. “We are seeing asset values going up significantly and one need to assess on how long values of Max and Neo will increase for. And accept that what used to be considered ‘high price’ may be more like ‘base price’.”