Hong Kong listings by aircraft leasing firms in China could raise US$5 billion

Subsidiaries of Bank of China and China Development Bank plan to use the offerings to generate capital for new planes now on order

PUBLISHED : Monday, 19 October, 2015, 11:37pm
UPDATED : Monday, 19 October, 2015, 11:37pm

Hong Kong has drawn two major aircraft-leasing companies in China for initial public offerings that together could raise US$5 billion, as the sector moves to tap capital markets.

Rob Morris, head of consultancy at Flightglobal Ascend, said the proposed offer of Bank of China's Singapore unit, BOC Aviation, could be worth US$4 billion. This is based on the leasing firm's portfolio value, which the consultancy put at US$10.2 billion, making it the sixth largest lessor in the world.

"The portfolio value could represent a reasonable surrogate [for its valuation], and thus 40 per cent of the value could be as much as US$4 billion," he said.

BOC Aviation, with more than 250 planes and commitments to acquire 203 more, will put up no more than 40 per cent of the company for the listing in Hong Kong. It would involve the issue of old and new shares "at an optimal market window to be determined", said its parent, Bank of China, in a notice to the stock exchange on Sunday evening that gave no information on the amount it planned to raise.

"The IPO is clearly a mechanism to raise further capital to support the backlog scheduled for delivery over the next few years," Morris said.

The announcement comes as Shenzhen-based CDB Leasing is also eyeing a listing in Hong Kong early next year. The China Development Bank subsidiary has a fleet of 131 planes worth US$5 billion, making it the world's 13th-largest, according to Ascend. It also has more than 200 aircraft on order. It is expecting to raise US$1 billion from the listing, according to financial publication IFR.

"Clearly the financing regime in Hong Kong is becoming increasingly attractive for aircraft lessors, a sector ... backed by assets with well-understood and manageable residual value risk," Morris said.

Geoffrey Cheng, head of transportation research at Bocom International, said the market environment for initial public offerings in Hong Kong had warmed up recently.

"Aircraft leasing has high margins, so the reception will likely be warm" to the two leasing companies' proposed issuances, he said. But he said the arrival of bigger, state-backed aircraft lessors might negatively affect the valuation of China Aircraft Leasing Group, which, with a fleet of 50 aircraft, is the only aircraft lessor listed in Hong Kong.

China's aircraft leasing companies have mainly relied on debt-financing since they began to sprout after 2007, when banks were allowed to set up leasing subsidiaries following Bank of China's acquisition of Singapore Aircraft Leasing Enterprise in 2006. The lessor was renamed BOC Aviation.

A looming interest-rate rise by the US Federal Reserve is expected to increase borrowing costs for capital-intensive businesses like aircraft leasing, prompting some to tap the markets for funds.