Jetrader - Winter 2017 - 29

the financial objectives because of lack
of cultural integration. So I suppose we
were alive to that risk. We saw it ourselves
firsthand 25 years ago at GPA and GECAS,
and so what we did is we worked really hard
in the planning before the close to define
how we would integrate the cultures and -
this is probably the most important - we
imposed the Avolon cultural set on the
integrated business.
Our culture is defined under the acronym
"TRIBE:" transparency, respect, insightfulness, bravery and ebullience. Then when
we did that, what became very clear very
quickly was there wasn't a big cultural difference between the Avolon team and the
legacy CIT team. What was different was
the history of the companies. Avolon is
young, it's a seven-year-old company, with
a very entrepreneurial background to the
organization. CIT had been in business for
many, many, many decades. That's what
was different, but actually the drive, the
energy and passion of our new colleagues
is right up there with the Avolon team,
so the cultural piece seems to have gone
pretty well.
GB: Going back to something different within CIT, the difference between
Avolon and CIT is obviously the makeup
of the fleet. How did you merge those
two together, and what are the plans in
the future to be able to create that asset
culture, essentially, going forward?
DS: The difference between the Avolon
fleet and the CIT fleet was actually down
to the average age of the portfolio. Avolon
had the youngest aircraft fleet in the
world market amongst the top-ten lessors; the CIT portfolio was a little older.
So in the first instance when you put them
together, what it tells you is we retain
the youngest fleet age of the top three
lessors - top three being defined as ourselves GECAS and AerCap. Then you look
to the older equipment in the portfolio.
Avolon's core strategy and core risk mitigant is to retain the youngest fleet age.
As you know and I know, for many years
in the industry, that equals lowest impairment risk, equals the best opportunity for
financing, etc. etc. Our focus will be to
continue to keep the youngest fleet age,

so therefore, by definition, we will divest
ourselves over time and in a very careful
way of some of the older aircraft that's
in that fleet.
The second is the mix of aircraft. We're
very focused now on new technology
equipment. On the narrowbody side, MAX
and NEO, and on the twin aisle, the 787,
A350 and A330neo, and we are the biggest customer or lessor on the A330neo
platform. What you should expect to see
from Avolon is a divestment of the older
equipment over time. We're still considering what role we want to play in the
regional jets, to be honest. Our position
has been to date that unless we can be a
major player in that sector, we probably
don't want to play in it.
GB: Have some of the skill sets that you
brought in from the employees at CIT
benefitted you in terms of how you're
developing and how you're looking at
these portfolios?
DS: There is a deep reservoir of knowledge in our new colleagues, particularly
in the area of used aircraft remarketing
and all of the technical work streams that
travel with that. You and I have been in
this industry a long time, and the easy part
of this game is buying new airplanes and
putting them out on 12-year leases. The
challenging part is to deal with aircraft
coming off lease, dealing with re-deliveries
and putting them on delivery to the next
lessee. It's much more complicated, much
more involved and requires a lot more
skill set.
That is the one major bucket of IP, if
you like, that has come with this acquisition - a deep reservoir of knowledge in
managing transitions.
GB: Moving away from these topics
and looking at, say, the funding side
of things, where are you seeing that
and where are you on the investment
grade process?
DS: The stats with Avolon are pretty much
as follows, give or take a couple of dollars
here: about $8 billion of equity invested in
the company. Our balance sheet by the end
of this year is going to be close to $30 billion. So, first and foremost, our debt equity

ratio is quite prudent and quite conservative. We intend to continue to manage the
business in that prudent range in this sort
of two-and-a-half to three-to-one maximum
level. That's what you expect to see for an
investment-grade lessor, so that's the first
thing. The second is, given the scale of the
balance sheet and the scale of our growth,
year in and year out for the foreseeable
future, this business must fund itself in the
capital markets. We've been a very successful participant in the bank market over the
last seven years, and if you look at the cost
of our debt that we fund ourselves in the
bank market, it's actually investment-grade
type costs of funds.
However, given the scale of our needs,
we have to diversify, and we started
that earlier this year with the $8.5 billion dollars of debt capital we issued for
the acquisition, which was a $5.5 billion
term loan and a $3 billion inaugural bond.
These were two very large issuances, very
well received by the market and multiple
times oversubscribed. Some will say, 'Oh,
you just hit the market at the right time.'
Others will say it was a good story. I think
it's a bit of both. The question is where
do we go from here?
The facts are Avolon is not yet investment grade. We are on that journey. We
have stated publicly and we continue to
do so that it is our intention to get to
investment grade as quickly as we can. To
get there, we need to issue more unsecured
debt, so we need to release some of our
secured collateral, and we need to increase
our FFO over debts or our funds-free cash
flow from operations, and finally because
we're part of a large Chinese conglomerate,
the rating agencies will look to our parentage, which is Bohai capital and eventually
to our largest shareholder and how that
interaction flows ultimately to an investment grade.
GB: Is the interaction between yourself
and the rating agencies very transparent
in terms of they've given you certain
metrics you have to get to, and if that's
true, are you able to put a finite timeline
as to when do you think you'll get there?
DS: No, it's impossible to put a finite
timeline, so I would say when you're
Jetrader * Winter 2017 29
Jetrader - Winter 2017

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