More bonds on radar for Asia's top aircraft lessor

* BOC Aviation treasurer eyes regular issues in global and local markets

By Frances Yoon

HONG KONG, May 25 (IFR) - When Asia's richest man, Li Ka-shing, announced plans last year to enter Asia's growing aircraft leasing market, the move instantly put the sector on the radar screens for global investors.

Li's Cheung Kong Holdings agreed to buy 60 aircraft for US$2bn in November. Cheung Kong is also in discussions to buy a US$5bn aircraft portfolio from global player AWAS Aviation Capital (Other OTC: CGHC - news) , and is teaming up with Japan's Mitsubishi Corp.

He is far from the first to ramp up investment in Asia's growing aircraft-leasing market.

Bank of China (HKSE: 3988-OL.HK - news) made its move into aircraft leasing with the acquisition of the former Singapore Aircraft Leasing Enterprise in 2006 and has built BOC Aviation into the largest aircraft lessor in Asia, with a fleet of 250 owned and managed aircraft.

The Singapore-based lessor is now using the growing appetite for the sector to raise long-term funding at competitive rates and increase the amount of debt it issues in the international bond markets.

In the interim, BOC Aviation has become less dependent on bank funding, a sign of a maturing company that is diversifying its funding resources to fuel growth. Bond issuance now accounts for a third of its debt from less than 5% before its first dollar bond in 2012.

"Many lenders and investors now look at aircraft lessors as being the most prudent way to get exposure in the aviation space with lessors intermediating airline risk through strong asset management capability and diverse portfolios," said Peter Davis, head of treasury at BOC Aviation.

The company planned to issue bonds of US$1bn to US$1.5bn per annum over the next few years and possibly more to refinance existing maturities, said Davis.

Offerings will be a combination of US dollars, as well as local currencies, such as Australia, Singapore dollars and offshore renminbi, or CNH, which can be swapped back to US dollars.

BOC Aviation has already been benefiting from growing interest from fixed-income investors. It first issued international bonds in 2012, raising US$500m, but printed nearly double that in 2014.

So far this year, it has already issued almost US$900m in bonds, including its first foray into the 144A/Reg S market. The latest US$500m five-year bond, priced to yield 170bp over US Treasuries, not only brought its pricing in line with more established US peers, such as Air Lease Corp, but also saw half of the offering allocated to US investors.

"Following on from our debut 144A/Reg S issuance, we would like to revisit that market at least once a year as part of this issuance programme," Davis said.

BOC Aviation's pace of growth should support these ambitions. The company reaped a record net profit after tax of US$308.6m, an increase of 11% year on year, according to its annual report. It also earned an upgrade to A- from BBB in March.

Davis says the lessor will continue to issue in Asian local currency markets, which gives it an benefit of lowering funding costs versus US and European peers. BOC Aviation priced a SGD145m (US$109m) 10-year bond at 3.93% earlier this month.

At 1.9%, BOC Aviation has one of the cheapest average interest costs relative to other aircraft-leasing companies last year, according to a recent deal prospectus. However, the company also has a moderately higher leverage than similarly rated peers, according to Standard & Poor's.

BOC Aviation will maintain a ratio of funds from operations (FFO) to debt of 9%-10% and a ratio of debt to capital of about 80% over the next 24 months, the credit agency said this month. This is why funding options like securitisations are not viable, says Davis, since it may cost more than an unsecured bond. It will also put constraints on its ability to lease and sell aircraft.

However, the company's plan to expand its debt-issuance programme comes as the market environment threatens to become more volatile in the coming months with the US Federal Reserve looking for the right time to raise interest rates. Still, Davis says he does not plan to sell short-term bonds to counter that prospect.

"We don't see ourselves issuing in shorter tenors in a higher interest-rate environment as, while there is obviously a cost saving from doing so, it needs to be balanced out against the additional near-term refinancing requirements that are created as a result."

Boeing (NYSE: BA - news) estimates that China alone will need over 6,000 new aircraft over the next two decades, a growth rate that could outpace the developed markets.

Other aircraft leasing peers are also taking stock of rising investor appetite. Singapore-based Avation Capital sold a US$100m bond from its new MTN programme last week. A fast-growing market also means more competition from the likes of Cheung Kong. Other Chinese lenders with similar leasing businesses, such as China Development Bank and ICBC (HKSE: 1398-OL.HK - news) , are also looking to expand.

Nevertheless, Davis is keen to highlight the growing interest as a sign of the market's appeal.

"Cheung Kong's involvement in the sector as an equity investor in aircraft leasing is a good indication of the increasing Asian investor interest in our business, which offers consistent and stable risk-adjusted returns." (Reporting By Frances Yoon, editing by Dharsan Singh, Steve Garton and Daniel Stanton)