Bondholders are tracking Global Aircraft Leasing (GALC) ahead of the issuer’s 2024 maturity, on ongoing concerns that parent Bohai Leasing [SZSE: 000415] could maneuver against debtholders, said two sellsiders and two buysiders.
Terms of GALC’s unsecured notes give Bohai leeway to upstream profits from its Irish aircraft lessor Avolon at the expense of GALC, though the Chinese leasing group has not taken any profits to date, the sources said. GALC’s sole asset is a 70% equity stake in Avolon.
In 2019, GALC issued USD 1.75bn 6.5% cash/7.25% PIK senior unsecured notes due September 2024. The notes are structurally subordinate to Avolon’s debtholders and depend on dividends from the company to cover interest payments, according to Moody’s. The agency rates GALC B1 and Avolon Baa3.
Bohai has yet to communicate to bondholders how it plans to address the 2024 maturity, adding to investor angst, said the sources and a source close to Bohai.
Markets are unlikely to support refinancing the debt using the existing GALC structure given that the bonds are effectively an unsecured margin loan, noted one of the buysiders and sellsiders.
Still, Bohai has a strong incentive to address the upcoming maturity given Avolon is worth much more than the bonds, the buysider continued. The group acquired Avolon in 2015 at an USD 2.2bn equity value and sold a 30% stake to ORIX Aviation Systems in 2018 for USD 2.2bn, implying a USD 7.3bn valuation.
GALC’s PIK toggle notes traded 2 June at 91, to yield 14.45%, according to MarketAxess.
The notes have seen wild swings over the past three years amid the COVID-19 pandemic that brought air travel to a halt and an uneven global recovery. Bonds traded into the low 70s last summer, moved to over 92 by early 2023 and have since glided down to current levels.
GALC made three interest payments in kind during the pandemic, according to Moody’s. The company resumed cash interest payments in March 2023, said one of the sources.
A shareholder agreement limits Avolon to paying dividends of up to 50% of its net income to its owners Bohai and Orix. Any dividend payment above this level requires mutual agreement between the two shareholders, according to the source close to Bohai, who added that Avolon operates independently under strict corporate governance.
For 2022, Avolon reported USD 9m in net income and USD 253m in adjusted net income that excluded the write off of lease balances connected to Russia, a jump from USD 47m in net income the prior year.
The company ended March 2023 with USD 403m in unrestricted cash. Adjusted net income fell in 1Q23 to USD 56m from USD 80m in 1Q22.
Bohai declined to comment and Avolon deferred comment to the Chinese company.
