The Geneva-based leasing company will focus on sale/leasebacks for widebody aircraft during the next year.
When the European Aviation Safety Agency (EASA) banned Air Madagascar from flying to Europe in August, Novus Aviation knew it had a situation on its hands. The lessor asked the airline to return the aircraft and sold it to Pacific Airfinance with a lease attached to Thailand’s Business Air. “We moved on all fronts,” Mamoun Kuzbari, vice president, Novus. “We serviced the aircraft, started remarketing it, we sold it to another lessor and successfully negotiated with an airline to lease it—all in two months. I think that’s quite an achievement.” Already in 2011, the lessor has closed five multi-asset transactions, including extending leases for Condor Flugdienst on two 767-300ERs and selling one 767-300ER to Pacific Airfinance. Since launching in 1994, the Geneva-based lessor has grown gradually through trades and sale/leasebacks. While NOVUS does not have a minimum age requirement for acquired aircraft, most of its purchases have tended to be older, mid-life jets. The lessor has a fleet of 25 aircraft with an average age of 13 years. Over the next 12 months, Novus will expand its fleet through acquisitions. The company will concentrate on purchasing widebodies with sale/leasebacks. Customers include Emirates, Air China, Sky Airlines, Jet Airways and Malaysia Airlines. Novus also has an office in Beirut, which opened in 1995 and focuses on relationships with its financial institutions in the Middle East. The lessor is also considering opening a third office. “The idea is to grow the portfolio and to make it younger,” says Kuzbari. “The widebody market is where we are seeing more opportunities as there is less competition.”
To fund aircraft, Novus typically launches an equity fund. The length of the fund can vary depending on the number of investors. Previously, the terms has been between five and 12 years. The 25 aircraft in its portfolio are spread over six funds worth about $1 billion collectively. “When we launch a fund, we usually have a big purchase at that point. We trade some of it over the life of the fund. Some assets are extended or sold with leases attached, while others are parted out,” says Kuzbari. One of the largest funds, Malc, was launched in 2002. Novus was able to purchase 15 aircraft over a 24 month period. Only nine aircraft remain in the fund with five sold and another parted out. Another large fund, Falak Investments, was launched in 2007. It included 11 aircraft, but two have been sold already. In the last three to four months, Kuzbari says he has seen appetite from investors for more transactions. Novus expects to launch the next fund in the first quarter of 2012. However, the company does not have a set number of aircraft that it is required to acquire by a particular deadline so the portfolio will be built up gradually. “We do have a significant amount of equity coming in, but we’re not looking to have volume acquisitions,” Kuzbari says. “We will only target acquisitions that make sense for the investor return they are looking for.”
Novus’s investors are a mixture of high net worth individuals and institutions, many of which are Islamic investment banks, from the GCC states. Most of Novus’s transactions are Shariah-compliant. In 2010, Novus attempted to launch its first aircraft Sukuk, or Islamic bond. The transaction, which was unsuccessful, would have had to be at least $500 million, but Novus’s Sukuk was too small, according to Kuzbari. Kuzbari says investors need volume because it creates the flexibility required to trade the Islamic bond in the market. Also, getting a rating for a Sukuk can be expensive for the issuer, which made it less attractive. “We learned a lot and it was beneficial to go through the process to understand the market,” Kuzbari says. “We believe the Sukuk market still needs to be more sophisticated.”
Accessing the debt markets
Novus works with European banks, such as DVB Bank, NordLB and PK Airfinance, for debt finance. “Until a few months ago we didn’t have any issues, but we’ve seen all the European banks’ liquidity costs increase,” says Kuzbari. Novus says the European situation is worrisome and the increases in costs will have to be factored in to its expansion plans. “The local banks [in the Middle East] are quite comfortable to come in and help finance. They are also looking for cross selling their corporate banking business from airlines,” Kuzbari says.
Avoiding narrow bodies
During the last decade, second and third tier airlines have started to order new aircraft directly from the manufacturers. With the manufacturers raising production levels Kuzbari believes there is an oversupply of aircraft in the market and aircraft are now being scrapped earlier than before. In addition to the high competition in the sector, Novus is also weary of the new re-engined aircraft and the effects it may have on the residual values of existing narrowbodies. “We’re not sure the A320 values appraisers are assigning the existing aircraft will hold true, especially with both Airbus and Boeing increasing production rates and the new narrowbodies coming in, in the next two to three years,” says Kuzbari. However, Novus will consider sale/leasebacks and older narrowbodies if the transaction provides good returns for its investors. It will also look at long-term deals with tier one airlines in Asia and the Middle East. “We’re very opportunistic and we’re developing an approach for narrowbodies in case we see transactions that make.”
This article appeared in the October edition of Airfinance Journal