The Long and Short
AerCap jumbo debt launch funds GECAS purchase
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AerCap Holdings (AER: Baa3/BBB/BBB-*-) officially launched their cash/debt funding for General Electric’s (GE: Baa1/BBB+*-/BBB) aircraft leasing business, GE Capital Aviation Services (GECAS), in a 9-part $21 billion jumbo debt deal. Back in March, AER made official their plans to merge with GECAS, agreeing to pay $24 billion in cash, plus an AER equity interest worth $5-6 billion, and $1 billion of AER notes for total consideration of around $30 billion. AER attained $24 billion in committed capital at the time from Citigroup and Goldman Sachs to cover the cash portion, which would ultimately be termed out in this large-scale public debt launch before the scheduled closing by year end 2021. The company is reportedly eyeing a smaller EUR debt launch next week for the remainder of the funding.
Exhibit 1. AER launch levels and expected fair values based on secondary market valuation (see exhibit 2 below)
Source: Bloomberg LP, Company Announcements, Amherst Pierpont
The new debt is being issued out of AerCap Ireland Capital DAC / AerCap Global Aviation Trust, which are unconditionally guaranteed by the parent company AerCap Holdings (and guarantor subsidiaries) and rated in-line at Baa3/BBB/BBB-*-. All tranches of the debt launch contain 101% Change-of-Control puts, as well as 101% Special Mandatory Redemption (SMR) language, which will be triggered if the deal does not close before the date June 9, 2022 (scheduled for year-end 2021). Bondholders would receive $101 per $100 par plus any accrued and unpaid interest if the deal fails to close before that date. SMR language has become fairly standard among M&A debt funding launches. Despite what has already been a surprising week of new issue volume, with roughly $30 billion priced as of the prior day, the AER order books reportedly reached more than 3x the intended volume of $21 billion on the day of the launch.
All three of the rating agencies weighed in on the proposed transaction at the time of the announcement. Both Moody’s and S&P affirmed AER at Baa3/BBB with a stable and negative outlook respectively, while Fitch was the only agency to threaten IG ratings by placing the BBB- rating on watch negative. Fitch stated at the time that they could resolve the review if and when “AerCap makes sufficient progress toward securing term financing, provided that there is no material deterioration in the company’s unsecured funding mix or the surrounding operating environment.” On the day of the launch, S&P revised their outlook to Stable from Negative, stating that it reflects their “expectation of a continued gradual airline recovery and diminished requests for lease payment deferrals, lease restructurings, and repossessions and the company’s commitment to reduce debt to equity to 2.7x within the next year.” Meanwhile, Fitch came out a day ahead of the launch reiterating that they would remove the rating watch negative if and when long-term debt financing was in place but have yet to do so.
Exhibit 2. AER secondary bonds vs Aircraft Leasing peers prior to launch
Source: Amherst Pierpont, Bloomberg/TRACE Indications
Upon completion of the transaction AER will become the global leading aviation leasing company by a longshot with over 2,000 owned and managed aircraft in its portfolio, servicing roughly 200 customers worldwide. This would dwarf their closest current competition by nearly 4x. Average fleet age will be just under 7 years with an initial split of 59% narrowbody and 40% widebody, which the company expects to improve to 66%/33% within the first three years of operation, as a result of the two entities’ combined order book. The acquisition will also enable AER to write down the book value of about half of their fleet to help minimize future write-downs and unexpected charges over the near-term.
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