ABL Aviation prepares ABS to finance mid-life aircraft
Ali Ben Lmadani, founder and CEO of ABL Aviation, has been an entrepreneur active in the aviation industry since the age of 22, when he started a business leasing ground support equipment to airlines. In 2014, he founded ABL Aviation in New York and began buying and leasing older planes, usually at least 15 years old, and later mid-life planes between five and 15 years old.
These aircraft require significant technical understanding, prompting ABL to strengthen its technical expertise. Staff with expertise in the aviation industry now make up half of the company’s workforce, allowing it to recognize when these categories of aircraft were becoming overpriced. In 2017, ABL instead decided to focus on purchasing new aircraft with financing from Japanese bank Mizuho which it leased to major airlines such as Lufthansa, KLM, El Al and Pegasus.
Soon, however, ABL expects mid-life aircraft valuations to fall to attractive levels [after previous highs]and it is preparing its first aircraft asset-backed securities (ABS) deal for launch in early 2023. Mr. Ben Lmadani spoke to Asset Securitization Report about his company’s approach to aircraft valuation and why it is seeking securitization financing.
RSA: Why did ABL consider mid-life aircraft valuations in 2016 and 2017 to be too high?
Ben Lmadani: There was inconsistent competition. Players were trying to enter the market, but the mid-life market is very specific and knowledge of the aircraft is essential to manage the risks associated with the contract. For example, future values have been accounted for too high or maintenance reserve rates too low; there may be a discrepancy between future values and assumptions about maintenance costs, maintenance events, scope of work, maintenance reserves, delivery terms, market conditions, etc.
We felt that with high mid-life aircraft valuations, any downturn could impact owners and asset managers.
RSA: What impact has this had on the aircraft ABS market?
Ben Lmadani: ABS trades offered returns of between 16% and 18% for equity investors, and we thought the market should have been between 10% and 15% for mid-life trades as managers kept more skin in the game. Many investors in the participation notes ended up being badly affected. We plan to retain some equity for the duration of the transaction.
RSA: Why does ABL expect mid-life aircraft value to drop?
Ben Lmadani: The market is currently changing very rapidly depending on the global situation. Original equipment manufacturer (OEM) production rates, interest rates, oil prices, geopolitical instability, inflation and persistent Covid-19 restrictions in Asia are among the factors that reduce the demand for mid-life aircraft. OEM deliveries continue with a focus on next-generation aircraft, which affects mid-life aircraft valuations as well as inflation and rate increases.
Ben Lmadani: The cost of financing due to current and future regulations makes the purchase of a new aircraft cheaper. Mid-life is an aerospace product where technical experience is essential, which can make it more difficult to obtain debt financing from traditional banks.
RSA: What impact would this hurdle have on the aircraft securitization market and on ABL’s securitization timeline?
Ben Lmadini: During the covid pandemic, there have been few aircraft sales in the secondary market, so premium aircraft leasing companies still have plenty of assets on their books. They need to sell to maintain their quality rating and keep the average age of their planes low. Also, since their specialty is young planes, as the plans approach mid-life, they have to sell them. So we believe there will be plenty of opportunities to buy mid-life aircraft at the right price.
As for the timing of ABL’s securitization, we are in the process of building a portfolio, and once we have critical mass and the market has calmed down, we will look to securitize it.
RSA: How does ABL’s joint venture with SBI Holdings fit together?
Ben Lmadini: SBI is the fourth largest conglomerate in Japan, and the JV gives us access to aircraft owned by Japanese investors that we can acquire and securitize.
RSA: Have you started to prepare the agreement?
Ben Ladini: We have started talking to some investors – a mix of insurance companies, asset managers and private equity – and we are working with Mizuho on a warehouse to hold the assets. Depending on the portfolio size and Mizuho’s guidance, we will initiate the operation in the Rule 144a market or [traditional] private market.
RSA: Does ABL plan to become a regular issuer in the aerospace ABS market?
Ben Ladini: As long as ABS makes sense. ABS should be a means of financing transactions and not an exit strategy, which it became when assets were overpriced and managers sold stocks.
RSA: What are your concerns about the current aircraft ABS market?
Ben Ladini: An important factor that is not talked about much is the technical capabilities of the asset manager. Before issuing the ABS, we will have spent seven years building a technical team and achieving nearly $4.5 billion in revenue. Now you see initiatives that have been around for six months delivering ABS—it’s concerning.