AerCap-ILFC deal signals strong aircraft leasing outlook with future M&A opportunities

Fitch Ratings predicts that the expected closing of AerCap Holdings NV’s (AerCap) acquisition of International Lease Finance Corp (ILFC) in Q2 2014 will mark an important and positive turning point for the aircraft leasing industry.

On completion of the acquisition, a long period of lessor ownership uncertainty will come to an end, and strong public market acceptance of the deal is a credit positive for the entire industry.

The sale of ILFC by AIG represents the last transfer of a large fleet of leased aircraft (more than 900), following RBS’s sale of its leased aircraft fleet in 2012 and CIT’s re-emergence from bankruptcy.

Fitch announced in a statement: “Once the AerCap deal closes, we believe material consolidation in the industry will be complete, with two large players (AerCap and GECAS) controlling close to half of all lessor-owned aircraft globally. However, there may still be merger & acquisition opportunities for the smaller players.

“Smaller lessors may feel increased pressure to sell or combine with another player to achieve the critical mass necessary to compete effectively in a more consolidated industry. We believe scale plays an important role in driving lessors’ financial performance, particularly given the need to shift leased aircraft out of underperforming regional markets.”

Returns to scale tend to diminish, however, with reduced benefits appearing once lessor fleets reach 200-300 aircraft.

It added: “Following AIG’s exit from the business, the strategic uncertainty surrounding ILFC’s ultimate buyer will be resolved after more than five years. We think this is an important step for the industry, ending ownership uncertainty and transferring assets to a pure-play lessor.

“Additionally, the mark-to-market of ILFC’s fleet could lead to improved support for aircraft valuations since risks of any further aircraft impairments will be reduced in the transaction. We expect AerCap to continue pursuing an active aircraft trading strategy, which will support activity in the secondary market.”

Fitch forecasts that over time, the increase in AerCap’s market capitalization should lead to improved access to equity markets for other aircraft lessors. This could lead more lessors to contemplate public equity offerings (IPO). Air Lease Corp. has been the only aircraft lessor to IPO since 2007, but Fitch expects more activity as private equity sponsors continue to look for exit opportunities. Increased liquidity and trading volume, supported by strong equity market performance over the last 18 months, should lead to a better funding environment with strong public participation, a positive for credit.