The deal is relatively complex in aircraft financing in that it combines a private enhanced equipment trust certificate (EETC), a Japanese tax lease and a sustainability feature. “This is a pure market transaction where all the participants are, like us, investors,” says Aymeric Angotti, head of aircraft finance at Natixis Investment Managers.
The transaction was conducted using a standardised structure for US airlines, but more unusual for European ones, known as an enhanced equipment trust certificate (EETC). EETCs are debt securities, typically issued by airlines, and secured on the aircraft. They allow airlines to take possession of and use an asset while paying for it over time.
Natixis Investment Managers has now completed five transactions in its current strategy. The average loan to value (LTV) across the portfolio is 70%, which is considerably below the industry standard, says Angotti.
The average margin on the portfolio is around 2.8% above the interbank lending rate. Before the pandemic struck, 150bps or less was more typical for similar names and structures. “Margins are decreasing, but we still see some attractive opportunities arising, even as aviation recovers,” Angotti says.
The pricing of the certificate is linked to green key performance indicators (KPIs). The airline must keep its carbon intensity – CO2 emissions per seat – below pre-defined levels over a set period of time in order to avoid margin increases in its financing.
Angotti says: “We are proud to have made our first investment in a sustainably-linked bond. We cannot brand ourselves as a green fund because of the underlying assets, but we work on energy transition across our portfolio in line with IATA’s goals.”
The International Air Transport Association (IATA) has made a Fly Net Zero commitment to achieve net zero carbon across the industry by 2050. In addition to working towards this goal, Natixis Investment Managers is a member of a relatively new association, Impact on Aviation, a group of financing entities which aim to help accelerate the decarbonization of the aviation sector.
“As a group we look for tangible and practical answers to achieve net zero by 2050,” notes Angotti.
Aircraft financed by Natixis Investment Managers have led to a 24% reduction in carbon emissions compared to the carbon that would have been emitted by the older planes replaced.
The global airline industry demonstrated resilience during the pandemic. Domestic aviation markets are steadily returning to previous levels, while international traffic still lags behind due to a patchwork of different travel restrictions. However, strong pent-up demand for foreign travel has been experienced in countries that eased policies.
Some regional disparities persist. Asia’s recovery has been slower, primarily due to regular and unpredictable lockdowns throughout China as Beijing pursues its zero-Covid policy.
“We have been active and will continue to be active because markets are capable of reverting to normal very quickly,” says Angotti. “At that point, the flight to quality is over – capital rushes back into the sector and margins decrease.”
For further reading:
- OVID-19: What is the impact on the aviation market?
- Ready for Take Off
- Investing in Aircraft Private Debt
- There’s Value in Planes
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