HONG KONG -- Under the wing of China's acquisitive HNA Group, Avolon Holdings rose in little over a year from being the world's 11th largest jet leasing company to the third-biggest.
Chief Executive Domhnal Slattery, who founded the company in Ireland in 2010, told the Nikkei Asian Review that a deal reached this week for Japanese financial services company Orix, which has its own jet leasing business, to take a 30% stake in Avolon will help it climb higher.
"The addition of Orix, a strong investment grade institution, to our shareholder base will accelerate our path to investment grade, reduce our cost of funding and support our ambition to build the world's leading aircraft leasing business," Slattery said.
The $2.2 billion deal comes as HNA sells off billions of dollars worth of assets accumulated in a ferocious buying spree around the globe to pay down debts incurred along the way.
HNA acquired full ownership of Avolon for $2.56 billion in January 2016, merging it with its own jet-leasing business. Avolon's fleet swelled further in size in April 2017 with the company's $10.4 billion acquisition of the jet leasing operations of U.S.-based CIT Group.
Two months later, however, Beijing identified HNA as one of handful of private companies that would have to rein in its overseas acquisitions and deleverage.
Analysts have been concerned that HNA's credit crunch could be a burden on Avolon. Indeed, Bohai Capital Holding, the Shenzhen-listed company through which HNA controls Avolon, has outstanding borrowings of $237.5 million from Avolon which are to be settled as part of the Orix deal.
"Avolon's ability to execute on its business objectives over the past year has been constrained by the highly speculative credit risk profiles of Bohai Capital and its majority owner, HNA Group," Fitch Ratings said as it raised its rating outlook on Avolon to "positive" from "stable" on news of the Orix deal.
Slattery, however, denied in an interview that HNA's debt problems had much direct impact on Avolon. "We were always running our business in a 'business as usual' mode," he said, calling the HNA's debt crisis "more of a shadow" than an operational complication.
Avolon last year posted a net profit of $550 million on revenue of $2.37 billion. According to the annual report of Bohai Capital, Hainan Airlines and Tianjin Airlines, also both owned by HNA, made 295.71 million yuan ($43.29 million) in lease payments last year to Avolon. HNA owns 53% of Bohai Capital.
Amid HNA's debt troubles, some of the airlines in the group have fallen behind on lease payments. However, in its update on Avolon, Fitch said "HNA-affiliated airlines are now current on all lease payments to the company."
As of June 30, Avolon owned or managed a total of 562 planes, with another 328 on order. Outside of the HNA Group, its 156 customers also include carriers such as Air India and Virgin Atlantic.
Orix Aviation owns or manages about 200 planes. While Avolon focuses on new aircraft acquired directly from manufacturers, Orix buys and manages used planes.
Slattery said that Avolon has for years made deals with Orix, with the Japanese company either buying planes itself or on behalf of banks and asset management clients, as Japan is the world's largest market for aircraft investment.
"The key strategic benefit for us with Orix is our ability to sell and syndicate aircraft into the Japanese investment market," he said. "We will be able to work together to turbocharge that [activity]."
Commenting on the deal, Moody's Investors Service said the tie-up should "provide Avolon with new leasing opportunities and enhanced access to capital in the Japanese financial markets."
Orix will take two seats on Avolon's board, which now includes just five directors. HNA Chief Executive Adam Tan Xiangdong, who this month also took on the title of chairman of international operations, serves as Avolon's chairman. Bharat Bhise, who helps manage HNA's leasing operations, is also a director.
Fitch said that pledges by Avolon to restrain its dividend payouts, and the veto power over major board decisions that Orix's directors will hold, would be "important mitigants to the risk of outsized capital extraction by Bohai Capital." In its note, Moody's said the addition of the new directors "provides an effective counterbalance to the influence of Bohai and HNA over matters of concern to Avolon's creditors."
Avolon hopes to win investment-grade status from Fitch, Moody's and S&P Global which would help the lessor to borrow and issue debt at lower interest rates. However, while Fitch has raised its rating outlook already, Moody's said only that it might raise its rating after the deal closes.
Kroll Bond Rating Agency, a smaller rival, gave Avolon an investment-grade rating of BBB+ last September. Fitch rates Avolon as BB while S&P gives it BB+.
Orix and HNA aim to close their deal by year end, pending regulatory approval. Slattery said he expects the new 70/30 ownership split between HNA and Orix to hold "for the foreseeable future" as HNA wants to retain majority control, seeing Avolon as a "long-term strategic holding."
Hainan Airlines was the original core business of HNA, which then expanded into hotels, jet leasing and then less-related businesses like property development and wealth management.