US Airways

Leasing could be attraction for China's carriers

PUBLISHED : Wednesday, 15 June, 1994, 12:00am
UPDATED : Wednesday, 15 June, 1994, 12:00am


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ALTHOUGH Boeing has this month revised downwards its projections for the number of aircraft likely to be sold over the next decade, demand from China is likely to remain at a high level. But where will the money come from? This year, at least, the answer seems to lie in great part in Japanese pachinko parlours, whose owners, the myth goes, provide the funds for Japanese leveraged leases (JLLs).

Robert Hui, a partner at asset-finance boutique InterCap, said: The JLL market looks a lot better this year than last, and a number of deals have already seen JLL proposals submitted.

''All of the Airbus sales - one to China Eastern, three to China Northern and two to China Northwest - have JLL commitments.'' The JLL market was hit by Japan's economic recession. Last year saw too many deals chasing too little equity, as large numbers of aircraft were bought, while the taxable profits of the small and medium-sized companies that provided the equity had not yet recovered.

''The JLL market is still about half what it was five years ago,'' said Masato Kimeda, deputy general manager of Japan Leasing Co's Aircraft Business Department in Tokyo.

''But we find that investors who were involved five years ago are now back in the market looking for new assets,'' he added.

There has been an upturn in the real estate market in Japan and many types of investor have returned, particularly in the manufacturing, wholesale, and real estate rental sectors.

But the supply of transactions is limited. European market activity is now virtually over, with the last deliveries there in April.

Japanese airlines are using JLLs much less this year. Traditionally, Japanese carriers see aircraft as good collateral and after using leases in the past few years, will now want to book aircraft on their balance sheet.

As to the US, investors continue to have concerns about certain US airlines. So Chinese carriers seem to be in luck.

JLLs are often combined with export credit loans or guarantees to shave the pricing even finer. This is why they are used more often for Airbus than for Boeing sales.

Mr Hui said: ''The JLL in theory can be combined with a US Export-Import Bank loan, but the structure is very difficult. The main problem is the loan amortisation schedule.

''Usually, a lease requires a large final 'balloon' payment, whereas under US Eximbank rules, only mortgage-type level payments or equal principle and interest payments are possible.

''This would mean that there would be no value to be gained from the lease. The European agencies are more flexible.'' China poses an interesting problem in its own right. Japanese investors do dot accept China risk, and transactions always involve a standby guarantee from international or Japanese banks.

These, in turn, still require the guarantee of the Bank of China, even for large airlines such as Air China.

There has been some concern recently over the status of a Bank of China guarantee. The bank is thought to have about US$2 billion of contingent liabilities on aircraft guarantees.

''It is difficult to evaluate its exposure,'' said Bertrand Grabowski, first vice-president and head of the Aerospace Group Asia and Australia for Banque Indosuez in Tokyo.

''In any case there is no real alternative. There was a financed lease done in August last year with a guarantee from the People's Construction Bank of China. But we have no evidence of a successful syndication.'' At least one lessor feels that the Chinese market is ''improving day by day'' and said that ''GE Capital Corp has apparently found that aircraft received back from China at the expiry of their leases are in far better condition than those from US airlines.'' Even the world of JLLs is full of surprises.