Posted January 20, 2012 12:00 PM
By Fay Sanders
Japanese banks flourish amidst European financial uncertainty
As European banks are forced to rein in their lending, Japanese banks have stepped up their activity in the aircraft finance market. The Development Bank of Japan (DBJ), a new entrant in the global aviation industry, is understood to be looking to add an additional $500 million to its original budget of $1.5 billion to cover its first three years of aviation finance lending. This news service has learnt that DBJ is planning to up its lending activity in 2012 once its budget increase has been finalised.
Tokyo Star Bank, another Japanese newcomer to global aviation financing, is currently looking at a number of deals involving operating lessors and top-tier airlines, according to Fintan Smyth, managing director of the bank’s cross-border finance division. The bank completed its first deal in March 2011 when it underwrote $30 million of ILFC's $1.52 billion loan facility led by Citibank and Credit Suisse First Boston involving the participation of fellow Japanese banks Aozora Bank and NEC Capital.
“We’re seeing a good pipeline of deals and, since pricing is going up, we can get margins that make sense for our bank; even for the top airlines,” said Smyth. “As a new bank we can therefore focus on the more conservative deals while building up our bank's expertise and relationships, whereas previously spreads may have been a bit low for us on such deals.” Similarly to DBJ, Tokyo Star Bank’s resource allocation for 2012 will be firmed up by 31 March.
Meanwhile, European funding prospects look bleaker with Basel III banking regulation looming on the horizon, bringing with it the threat of more costly lending. In some cases, banks have been forced to wind down their aviation finance activities, such as German bank HSH Nordbank which is set to close its aviation branch in London before the end of 2012. Major players in the French banking market, including Société Générale, Crédit Agricole & corporate investment bank, Natixis Transport Finance, BNP Paribas and Credit Industriel et Commercial have all had to scale back lending to the aviation industry, as they struggle to obtain dollar funding.
However, the climate of economic uncertainty in Europe is helping certain emerging aviation banks in Japan to gain momentum, suggested one Asian banker. “Emerging players often miss out on arranging primary deals through not being able to make a quick enough decision, but the current market situation is allowing new players to consider a particular deal at their own pace and to discuss primary deals directly with the airlines or lessors,” he said.
It is thought that Japanese banks will be an invaluable source of financing for the predicted $100 billion worth of new aircraft needing to be financed in 2012. Strong support from export credit agencies, combined with fresh funding from Japan, will “remove the threat of a tremendous funding gap”, according to Bertrand Grabowski, managing director and board member of Germany’s DVB Bank.
DBJ has already closed seven deals in as many months, from June through to December 2011, exceeding its original target of completing seven deals by March 2012. At an average ticket size of $30-35 million, the deals have involved both undisclosed lessors and airlines; such as the recent financing of an Airbus A330 for Thai Airways and a Boeing 777-300ER for Air New Zealand.
Although DBJ has focused on primary transactions, there has been market talk of the bank buying a certain amount of loans from European Banks. However, question marks remain as to whether the group will continue allocating resources with a view to carrying out large-scale secondary transactions, given the costly element of senior debt and the abundance of primary deals. “Nothing has been decided yet; the budget is still under discussion and the bank is reviewing all options,” said Masao Masuda, acting head of DBJ’s global aviation team, who argued the strategic rationale of buying loans from European banks selling off segments of their portfolio. “Secondary deals with banks that are staying in the market could lead to some attractive primary opportunities, as well as giving access to short-term maturity debt,” he noted, adding that there could be some interest in doing secondary deals with banks that have walked away from the market if the margins are as attractive as, or better than, primary transactions.
SMBC’s acquisition of RBS Aviation Capital earlier this week will heighten domestic Japanese interest in the aircraft asset class, several industry players argued. It has already been mooted that the newly-acquired entity would be open to acquiring Mitsubishi regional jet aircraft, prompting further local investment.
By Fay Sanders
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