Global Aircraft Leasing Corp (GALC) is looking to attract buyside interest for its USD 1.95bn bond offering with premium pricing, but the borrower could need to kick it up a notch and sweeten the deal even further given concerns surrounding ongoing deal risk, said several sources following the situation.
On Tuesday (10 October), GALC's parent company – China-based Bohai Leasing – launched the five-year senior secured bond via Morgan Stanley for its subsidiary with price talk set at 11% cash/13% PIK. Proceeds are intended to refinance GALC’s existing USD 1.95bn 6.5% cash/7.25% PIK senior unsecured notes due September 2024.
The proposed notes will be backed by a first-priority security interest in GALC, a Cayman Island-based shell that owns a 70% equity interest in Irish aircraft lessor Avolon Holdings, and co-issuer Global Sea Containers Two Limited (GSCL II), a Bermuda-based company that Bohai uses to hold its 100% equity stake in a container leasing business Global Sea Containers Limited (GSCL)—an expanded collateral pool from the existing notes that were just issued by GALC.
Bohai is offering prospective investors a proper offshore security this time around compared to the outstanding notes, said one of the sources. Moody’s Investors Service rated the new notes Ba2, up from a B2 rating on the existing ones.
Still, other investors are wary of the financing, dubbing the offering as nontraditional and effectively a margin loan to Bohai – similar to the existing bond – with difficult to collect collateral incorporated in multiple islands, said the second source. The new notes, while secured, remain structurally subordinated to roughly USD 24bn in total debt issued by the underlying businesses at the end of June, according to a Moody’s credit ratings report published on 10 October.
Further, the issuer and its parent have a rocky history with investors given Bohai’s lack of communication on how it planned to handle the looming maturity of the existing notes. As anxiety took over, before the deal was launched this week, buysiders feared the Chinese group could maneuver against creditors of GALC.
Market concern remains around disclosures and ownership structure, said the third source. And like with the existing notes, the new notes will rely on dividend payments from the underlying operating businesses to make cash interest payments.
The offering gives Bohai considerable flexibility to not pay cash, said the second source, adding that Bohai will likely have to rely on contributions from Avolon and GSCL to cover an interest bill that would exceed USD 200m annually at an 11% cash coupon.
Avolon’s earnings have been on an upswing over the past year as travel returns to pre-pandemic levels. The company reported for 2Q23 that lease revenue and operating cash flow saw double-digit growth to USD 613m and USD 371m, respectively. Net income surged to USD 76m from USD 8m in 2Q22.
GSCL, meanwhile, saw revenue and net income decline in 1H23 YoY with revenue declining 4.4% to USD 395m and net income falling 40% to USD 103m, according to a source familiar with the matter. The company, which operates through Barbados-based shipping container lessors SeaCo and Cronos, had USD 268m in net income for 2022.
Global shipping levels have declined in recent months following a boom in shipping activity during the pandemic, reducing demand for containers.
Debt service coverage will just be over 100% expected pro-forma 2023 earnings at Avolon and GSCL, providing little cushion if operating results come in below expectations, according to Moody’s. The ratings agency said that the notes do enjoy a strong collateral cushion with GALC and GSCL II’s combined equity interest estimated at USD 8.4bn.
To counterbalance the deal risks, GALC's bond offering is one of the yieldier deals carrying a Ba2 rating in the market in recent months. Comparatively, Carnival Cruises priced six-year USD 500m secured notes – also rated Ba2 – at par with a 7% coupon in early August. The notes last traded today at 98.75 for a yield of 7.26%, according to MarketAxess.
Still, the market could push for the addition of an OID sweetener for the new GALC notes, the sources said.
GALC’s outstanding notes last traded at 95.75 for a yield of 11.53% today, according to MarketAxess. The notes traded down to 95.25 for a yield of 12.13% yesterday after trading as high as 98.167 on the deal launch.
Wider debt and equity markets, likewise, sold off yesterday afternoon following a weak auction for 30-year Treasury bonds with the bonds pricing at 4.837% compared to 4.345% in September’s auction.
Bohai and Morgan Stanley did not return requests for comment.
