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Edited Transcript of 2588.HK earnings conference call or presentation 11-Mar-20 10:59am GMT

Full Year 2019 BOC Aviation Ltd Earnings Call

Mar 25, 2020 (Thomson StreetEvents) -- Edited Transcript of Boc Aviation Ltd earnings conference call or presentation Wednesday, March 11, 2020 at 10:59:00am GMT

TEXT version of Transcript

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Corporate Participants

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* David Ryan Walton

BOC Aviation Limited - COO

* Robert James Martin

BOC Aviation Limited - MD, CEO & Executive Director

* Thim Fatt Phang

BOC Aviation Limited - Deputy MD & CFO

* Timothy Ross

BOC Aviation Limited - Head of IR

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Conference Call Participants

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* Aravindan Jegannathan

JK Capital Management Ltd. - Senior Analyst

* Ben Hartwright

Goldman Sachs Group Inc., Research Division - Executive Director

* Gloria Lam;Neuberger Berman

* K. Ajith

UOB Kay Hian Research Pte Ltd - Director of Asia Transport Research

* Paul Yong

DBS Vickers Research - Research Analyst

* Shashank Damji Savla

Liontrust Asset Management PLC - Fund Manager

* Wai Kin Lau

Daiwa Securities Co. Ltd., Research Division - Head of Automobiles, Transportation and Industrial, Hong Kong & China

* Yifan Zhou

BOCI Research Limited - Research Analyst

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Presentation

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Operator [1]

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Ladies and gentlemen, welcome to BOC Aviation 2019 Full Year Results Conference Call. Mr. Timothy Ross, please begin.

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Timothy Ross, BOC Aviation Limited - Head of IR [2]

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Thank you, operator, and welcome everyone to BOC Aviation's earnings call to discuss our final results for the year ended 31st of December 2019.

With me today are our Managing Director and Chief Executive Officer, Robert Martin; our Deputy Managing Director and Chief Financial Officer, Phang Thim Fatt; and our Chief Operating Officer, David Walton.

Please note that some of the information you'll hear during our discussion today may consist of forward-looking statements, which are subject to risks and uncertainties that may cause actual results to differ materially from statements made today. You should not place undue reliance on any forward-looking statements, and you should review our results announcements for full details.

Please also note that all currency references in today's call are in U.S. dollars only. A copy of our earnings announcement is available both via the Hong Kong Stock Exchange and in the Investors section of our website at www.bocaviation.com and the conference call presentation is also available in the Investors section of our website.

This call is being recorded and will be available for replay from our website within the next 24 hours as is a transcript of today's management presentation. I'll now turn over the call to Robert Martin for his comments.

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Robert James Martin, BOC Aviation Limited - MD, CEO & Executive Director [3]

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Thanks, Tim, and good evening to everyone on the line. Thank you for joining us for our 2019 full year results earnings call. We're delighted with the results that we present to you today, which represent earnings growth of 105%, and net tangible assets growth of 88% over the last 4 years since 2015, the year immediately prior to our IPO in June 2016.

We're pleased to report a net profit after tax of $702 million for 2019, up 13% on last year. This is our 15th year of consecutive record earnings. We generated double-digit growth in all 3 of our major revenue activities. Validating the portfolio approach we take to our business, and this helped to drive a post-tax return on equity for 2019 of 16%, above the long-term average of 15%.

2019's ROE was one of our best years ever. Our total revenues and other income rose 15% compared to 2018, approaching $2 billion. We ended 2019 with total assets of $20 billion, which reflects our sustained efforts to grow our balance sheet through investments in aircraft. Net book value of our aircraft over the year grew by 12% to $16.8 billion with a weighted average remaining lease term of 8.4 years, which provides a stable base for future revenue growth. Reflecting the strength of our financial performance. In 2019, our board has recommended declaring a final dividend of $0.2153 per share payable to shareholders of record on 4th of June. This final dividend brings the total dividend for 2019 to $0.3541 per share and represents a payout ratio for the full year of 35% of net profit after tax. This is in line with the board's policy of paying up to 35% of net profit after tax to shareholders in the form of dividends. The full year dividend is equivalent to a dividend yield of 4.8% based on our opening stock price at the beginning of 2019 versus 3.5% for the Hang Seng Index.

During the year in review, both S&P Global Ratings and Fitch Ratings reaffirmed our industry-leading corporate credit ratings of A-.

In terms of operating environment, the relatively benign market backdrop that prevailed for much of 2019 has changed so far in the first quarter of 2020. Airline passenger traffic is measured by IATA, the trade association for the world's airlines, rose 4.2% in 2019 below the long-term trend rate of 5% for the first time in 7 years, as trade frictions and delays of aircraft deliveries impacted growth. The airline industry continued its recent run of profitability and IATA expects it to have generated around $26 billion in profits for 2019. Travel demand in the airline sector has deteriorated since the start of the Lunar New Year travel period in January, as the impact of COVID-19 has made itself felt.

While its effects were initially concentrated in Asia, it has recently become more global in its reach. As we enter this challenging period for our customers, we would like to remind you of our positioning and strategy in such periods.

First, we are a senior creditor of airlines and do not take equity positions in airlines. Second, we have a globally diversified portfolio of airline credits. Third, we see times like this with opportunities to support our customers with well secured liquidity in the form of purchase and leasebacks. And finally, we've already placed all of our new aircraft delivering this year, and we have no unplaced scheduled lease expiries. We've been through similar crisis over the last 26 years, such as 9/11, SARS and the global financial crisis, many of which have provided us with opportunities to deepen our customer relationships, whilst providing good investment opportunities.

Based on our experience, we expect to emerge even stronger from the current period of volatility. Manufacturer production issues dominated headlines in 2019 with the grounding of the Boeing MAX program, affecting both airlines and lessors with MAX aircraft on order.

We took delivery of only one of the 28 737 MAX aircraft scheduled for delivery to us in 2019. This was further exacerbated by Airbus A320NEO family delays that result in the postponement of 5 of our A320NEO aircraft from 2019 to 2020, and we expect continued new aircraft delivery delays through the current year.

At present, we're only scheduled to take delivery of 4 Boeing MAX aircraft in the fourth quarter of 2020 and anticipate delays in the other MAX aircraft scheduled for delivery this year into 2021 and beyond.

As part of the company's ESG enhancements, the board implemented a long-term incentive plan for management in 2017, where 50% of long-term performance bonuses are used to purchase BOC Aviation shares in the secondary market. A total of 2.4 million shares have been purchased by a trustee in March and April of both 2018 and 2019 after the announcement of our full year results and will vest after the third year following that grant.

A third tranche will be purchased along similar lines this year, further strengthening management's alignment with shareholders. At the beginning of January this year, we welcomed Madam Zhang Xiaolu as our Vice Chairman and Deputy Managing Director, following the retirement of Mr. Wang Jian.

We've also welcomed Mr. Deng Lei as Chief Commercial Officer for Asia Pacific and the Middle East to the senior management team following the retirement of Mr. Gao Jinyue. We'd like to thank both Mr. Wang and Mr. Gao for their contributions to the company. We also announced the forthcoming transition of our other Chief Commercial Officer, Mr. Steven Townend into the Chief Financial Officer role from October 2020 to replace Thim Fatt, who will retire in the fourth quarter of this year. This is in line with our succession plan, and we're pleased to have such a diverse and global board and management team.

I'll now hand this call over to David to speak to our operations and business developments and then Thim Fatt will take over for a more detailed review of our P&L and balance sheet. David?

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David Ryan Walton, BOC Aviation Limited - COO [4]

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Thank you, Robert. And let me add my thanks to all of you for joining us this evening. In 2019, we delivered 54 new aircraft to airline customers from our order book, including 12 where the customer exercised purchase options at delivery, giving us 42 new aircraft added to our owned portfolio. Our total fleet stood at 523 aircraft at the end of 2019, comprising 317 owned and 40 managed aircraft and an order book of 166 aircraft. Our owned aircraft portfolio remains one of the youngest in the industry at 3 years.

Some of the highlights of 2019 included signing a commitment to lease 10 Airbus A320NEO aircraft to our existing customer Air China; closing a purchase and lease transaction with our largest customer, Qatar Airways, for 3 Airbus A350-900s; signing a financing arrangement with our existing customer, Azul Brazilian Airlines for 18 A320NEO family aircraft scheduled for delivery in 2021 through 2023; and the portfolio sale of 17 aircraft to the SLVRR-2019 ABS platform, which contributed to our bottom line in the second half of 2019. We continue to actively invest in the latest generation aircraft. As of 11th of March, our order book of 205 aircraft is 100% latest technology including 787, A330NEO, 737 MAX and A320NEO families of aircraft.

Our long-term lease contracts, which have a weighted average remaining lease term of 8.4 years, provides us with significant revenue visibility. As of today, our committed future rentals under these contracts totaled more than $18 billion. Due to our active liability management and hedging policy, our net lease yield, which captures both the effects of interest rate fluctuations and the competitive lease rental environment remained stable at 8.4% in 2019.

We had another year with robust portfolio utilization of 99.6% and a collection rate of more than 96%. Over the past 12 years, we've averaged utilization of 99.8% and collections of 99.5%, near-perfect on both measures across industry cycles. To achieve this, we focus on good customer selection, and we monitor our customers carefully with a focus, in particular, on their cash flow.

In 2020, we are receiving requests from some of our customers for assistance as passenger demand and, therefore, airline revenue is affected by COVID-19. We're a long-term partner to our airline customers, and we will evaluate any such request carefully in light of their cash flow forecasts and in light of the support provided by other stakeholders.

We'll work with affected customers to find solutions, which we believe will likely involve partial deferrals of rent for 3 months or less with interest payable on overdue amounts or will involve more purchase and leaseback transactions with those customers. In this context, I'd like to remind everyone that we are the owner of our aircraft. We're a senior creditor of our airline customers and our operating these contracts are well structured. We're paid rent monthly or quarterly in advance. We collect security deposits, and for many of our customers, we collect security to provide protection against future major maintenance events. At the same time, we're looking for opportunities to provide liquidity for our customers and to put good new business on our balance sheet. Since the beginning of 2020, we've added another 42 aircraft to our order book, comprising 20 A320NEO delivery positions, 10 of which we've already placed with an airline customer, and we've also executed our largest ever purchase and lease transaction for 22 Boeing 787, which is scheduled for delivery to American Airlines in 2020 and 2021. These transactions illustrate the strength of our global customer reach. It also highlights the way our team contributes to build good long-term business on the strength of our capital structure and our available liquidity.

Having over $5 billion in available liquidity as of today's date and A- credit ratings positions us well to work with our global customer base and execute new investment opportunities. And with that, I'll hand it over to Thim Fatt.

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Thim Fatt Phang, BOC Aviation Limited - Deputy MD & CFO [5]

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Thank you, David. Our post-tax earnings per share was $1.01 per share, up 13% over 2018 earnings per share. Net assets per share, meanwhile, rose 9% to $6.60 in 2019. Net profit before tax also rose by 13% to $775 million, driving a pretax ROE of 17.7%. The principal driver of the growth in earnings was a 15% increase in total revenues and other income. Our core lease rental contribution was $695 million, which net of operating cost represented 72% of net profit before tax. Our lease rental income rose 11% compared to 2018 as we increased the size of our fleet, while retaining a stable lease rate factor. At the same time, depreciation increased 12% compared to 2018, rising at the same pace as investment in our fleet. We sold 28 aircraft from the owned fleet during 2019 compared to 34 aircrafts sold in 2018 as we capitalized on robust investor demand for aircraft with leases attached.

Gains on aircraft sales were $134 million and accounted for 17% of pretax earnings. Interest fee-related and other income amounted to $137 million, almost 50% more than 2018 levels as we've generated more fee income from predelivery payment financing. These activities comprised 11% of our net profit before tax after deduction of associated interest expense. Finance charges increased by $75 million, driven primarily by an increase in our borrowings as we invested in more aircraft.

Our average cost of funds rose to 3.6% in 2019 from 3.3% in 2018. Staff costs declined $12 million and represented approximately 4% of our total revenue and other income in 2019, below 2018, when staff cost represented 5.3% of our total revenue and other income. During 2019, we've recognized impairment costs related to financial asset of $25 million as compared with no charge to previous year. This is related to trade receivable that were past due and in excess of security deposit held under leases to which the payment is related. Of the $43 million total receivable an amount of $33 million has since been collected or secured by additional collateral.

Other operating costs in 2019 were $59 million, 11% higher than 2018 but lower than the growth in our revenues. Our average tax rate was stable at 9.4%. At the end of the year, our total asset has increased 8% or around $2 billion to $20 billion from the end of 2018. We had capital expenditure of $3.2 billion in 2019, primarily related to our aircraft deliveries and pre-delivery payments.

We now expect total CapEx of $11 billion between 2020 and 2024, of which $5 billion is expected in 2020. Our indebtedness increased rising 8% to $13.5 billion at the end of 2019 with our gross debt to equity ending the year at 2.9:1. Capitalizing on our own industry-leading ratings, we identify investor demand to raise $3.9 billion in total debt during 2019. This borrowing activity included our successful bond offering that raised $2.1 billion under our GMTN Program with the balance raised from our banking group of over 70 banks.

Now back to Robert for his final comments.

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Robert James Martin, BOC Aviation Limited - MD, CEO & Executive Director [6]

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Thanks, Thim Fatt. 2020 marks the start of our 27th year as a company. And I would like to thank all of our team for achieving a 15th year of consecutive record profits. As a management team, we focus on the long-term with an emphasis on long-term sustainable earnings. We've continuously proved ourselves in the face of adversity during this period, producing profits in every year since our inception. While there are headwinds presented by COVID-19, we expect to capitalize on the superior structure of our balance sheet with low debt to equity, strong investment-grade credit ratings and our access to liquidity with over $5 billion of cash and undrawn backstop credit lines at today's date. Our business plan remains growth focused. Our sights are set higher than in 2019, and we started in a manner that's consistent with our targets, adding a further $2 billion in contracted future revenues so far in 2020.

This concludes our review of the industry, our company's financials and our outlook, and I'll pass the call back to Tim.

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Timothy Ross, BOC Aviation Limited - Head of IR [7]

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Thanks, Robert. This wraps up management's formal commentary. (Operator Instructions) I'll hand the call now back to the operator for the Q&A session.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question, we have Ivan from BOCI.

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Yifan Zhou, BOCI Research Limited - Research Analyst [2]

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Congratulations on the very strong results last year. My first question is about, as Robert mentioned, we have placed all the aircraft for this year. So is there any chance that our airline customers to defer some of the deliveries? And also, if not considering the 737 MAX, what is our guidance for the aircraft delivery for 2020?

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Robert James Martin, BOC Aviation Limited - MD, CEO & Executive Director [3]

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Okay. Thanks, Ivan. This is Robert. Okay. So the first thing is, we've received no request for deferrals of deliveries at this point. However, I want to be transparent with everyone. There will be some short-term delays probably in March and in the early part of the second quarter due to practical issues of people being allowed to physically go and receive deliveries. And in our case, that's principally related to Airbus with Toulouse and Hamburg deliveries. I think we have 4 deliveries, if I remember correctly of 320 family in the next 4 months. We're just watching those very carefully because a number of those are -- the end of the Air China order, and also, we have one other plane that is due to go to China, so you may see some short-term delays there. Now in terms of guidance for 2020, I think, Thim Fatt, gave you that, we're expecting CapEx of $5 billion and 4 MAX deliveries.

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Yifan Zhou, BOCI Research Limited - Research Analyst [4]

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Okay. Can I ask a follow-up question? For the lease back deals, I understand it's very competitive market. But for this year, do we see a -- like more chance is because airline is in trouble, so do -- what kind of experience, what is -- what can we do for this year, 2020?

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Robert James Martin, BOC Aviation Limited - MD, CEO & Executive Director [5]

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Okay. So if you look back in history, Ivan, what has happened is, when we have periods of industry turbulence, we tend to relatively do better because we carry a lot of liquidity, and we're able to move quickly, which is exactly what we've been doing over the last 6 weeks since the start of Chinese New Year, supporting customers either that potentially have deliveries coming, which was the case with American Airlines or customers who may want to add to their liquidity by doing sale leasebacks on unencumbered aircraft.

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Operator [6]

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Our next question, we have Ben from Goldman Sachs.

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Ben Hartwright, Goldman Sachs Group Inc., Research Division - Executive Director [7]

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Can I just ask a little bit more about the impact of COVID-19, potentially this first half, in particular? And particularly around the risk of either having credit costs or even asset impairments coming through, and how you look at that, and how we should think about it both in the first half and in second half, if COVID-19 does continue for longer?

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Robert James Martin, BOC Aviation Limited - MD, CEO & Executive Director [8]

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Thanks, Ben. So first of all, the thing to remember is all of our aircraft are on long-term leases, even those planes that are due to deliver us -- to us during this next 4 months to sort of the middle of the year. And so we're not concerned in any way about impairment. In terms of where we're working with customers, as David mentioned during his presentation, our general approach is if they really need some help, we're working with 1 partial deferrals over a 3 months period. Our cash flow is very good during January and February. And so realistically, that's going to be sort of over the next 3 months. But then it will be repaid over the summer period. So it'd just be a short-term cash flow issue. And as I mentioned -- as we mentioned at the start of the call here, we've got $5 billion of liquidity.

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Ben Hartwright, Goldman Sachs Group Inc., Research Division - Executive Director [9]

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Okay. And I -- are you seeing any -- I mean, are you seeing distress in your -- any of your customers, and is there a risk of any planes that you might have to take back and re-lease? And if that would happen? How is the market at the moment? How -- what would be the potential impact on earnings in that case?

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Robert James Martin, BOC Aviation Limited - MD, CEO & Executive Director [10]

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Okay. So at the moment, we're obviously watching all of our customers very carefully because when COVID has hit, it hit pretty quickly. So it's quite interesting. What we've seen is around the world, and I spent a lot of time visiting CEOs over the last 6 weeks, is basically -- those airlines have been through downturns before, are pretty well prepared in terms of they know what to do in terms of raising additional liquidity. Where they've got unencumbered assets that they can convert into cash, which we're happy to help them do, and where they are already taking sort of cost-cutting measures.

Where that becomes more challenging is whether you've either got smaller carriers or carriers who may have their fleet to 100% on operating lease, where they don't have unencumbered assets to basically use. So our Head of Risk Management, David Farrell is watching that very, very carefully. We have less than a handful of customers, we have on that list at the moment. And we've identified potential homes, in case we need to move those aircraft and they're single aisle aircraft, so they easily move. There's still pockets of demand around the world.

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Operator [11]

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We have Kelvin from Daiwa.

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Wai Kin Lau, Daiwa Securities Co. Ltd., Research Division - Head of Automobiles, Transportation and Industrial, Hong Kong & China [12]

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Just 2 questions. One is the -- I saw the collection rate has actually further declined to 96.9% to -- from 97% in the interim results. So what management expects for this? Is it -- because I think I assume that this doesn't -- we've got any impact from the COVID-19. So would management expect a further little bit decline more? Or do you think it will be more stable? That's my first question.

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Robert James Martin, BOC Aviation Limited - MD, CEO & Executive Director [13]

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Okay. Thanks, Kelvin. So if you look back to last year. You're correct, COVID didn't effect last year at all. Last year's impact on collections was twofold. One was, of course, some of those MAX lessees. Bear in mind, we had 6 MAX aircraft that were delivered and are sitting part with our airline customers. So to be frank with you, there was some slowness of payments there. And the second thing is a large North Asian airline group who got slow on payments last year. Now in both cases, as mentioned during the presentation, we made recoveries during the first quarter.

Now if you -- looking forward, yes, as I mentioned in response, I think to Ivan's question, we will see some short-term impact from deferrals during basically the first half of this year. But those will be recovered over the summer period, and then they'll be back to normal by fourth quarter.

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Wai Kin Lau, Daiwa Securities Co. Ltd., Research Division - Head of Automobiles, Transportation and Industrial, Hong Kong & China [14]

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Okay. So my second question is also about COVID-19. Is that -- so I just want to clarify that for the deferrals it's only a cash flow issue, but will be -- you will still book the receivables? And you do expect the receivables to be collected like back within the year, so it should not be like a P&L impact, right?

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Robert James Martin, BOC Aviation Limited - MD, CEO & Executive Director [15]

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Correct. And if you remember, we have a pretty stringent provisioning policy here, which we enforced at the end of last year. If we have amount owing that are above our security deposits then we will immediately provision for it in our P&L. There'll be no change to our policy in that. And so investors will be able to see exactly how we're tracking when we come to our half year results.

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Operator [16]

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Our next question, we have Paul from DBS.

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Paul Yong, DBS Vickers Research - Research Analyst [17]

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Congratulation on the good sales results and congratulations on the new American Airlines. With the kind of liquidity that we have over $5 billion. In terms of potentially looking for deals, are we sort of looking -- targeting certain geographies. So obviously, adding America got bolstered with the deal with American Airlines? Are we looking at certain geographies or what sort of deals are we sort of looking for? Are we looking new customers or to increase transactions with existing ones? Yes, that's my first question.

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Robert James Martin, BOC Aviation Limited - MD, CEO & Executive Director [18]

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Okay. Thanks, Paul. So as with previous situations like this, we tend to use a period like this, to upgrade the average credit quality in the portfolio, and so we're primarily focused, first of all, on those stronger carriers in the market where we can do volume deals. And obviously, American is a good example of that. And I think you'll see us doing more of that as this quarter proceeds.

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Paul Yong, DBS Vickers Research - Research Analyst [19]

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And the $5 billion CapEx guidance provided by Thim Fatt earlier on, that excludes any new deals on top of that we could potentially be doing in the next couple of months, right?

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Robert James Martin, BOC Aviation Limited - MD, CEO & Executive Director [20]

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Yes, absolutely. That is purely what we have announced to date. So the last deal we announced was American Airlines. And if my memory is correct, 12 of those deliver this year and 10 deliver next year.

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Paul Yong, DBS Vickers Research - Research Analyst [21]

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And my final question is really with regards to COVID-19 again. What kind of duration of -- in terms of how long it will last, do you think it would -- would it take long. We see airlines getting really stressed. And also, I think the assumption is that it will be over by summer but if it stretches, maybe beyond an x number of months, how long do you think before things start really stressful?

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Robert James Martin, BOC Aviation Limited - MD, CEO & Executive Director [22]

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Well, let me turn around the other way, how do we approach this? Because I really can't comment on what airline managements are doing because that is their business. But what I can tell you is what we are thinking. So our base case is that starting from March, we're allowing for a 3-months period. So this will then go through March, April, May. And then our base case is recoveries, we go into the summer season. Now bear in mind, here in Asia, in particular, that May traditionally is a low month for the airline industry. May and November, the 2 low months. So we wouldn't expect to see significant pickup in May anyway. We think that will happen in June. But we also believe that as people come out of this situation, and we're already seeing good signs in certain provinces in China, where already, there's a number of provinces where there have been no new cases for over 10 days now. So we're beginning to see a little bit of light at the end of the tunnel, the same with Macau. And so that's our base case, but we obviously, as a good management, have a contingency plan for what happens if this goes on longer, if it were to extend through for another 3 months after that.

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Operator [23]

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Next, we have Sabrina from JK Capital.

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Aravindan Jegannathan, JK Capital Management Ltd. - Senior Analyst [24]

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I'm Aravind here. My question is similar to what has been already asked. But again, I would still, again, ask for a bit more clarity. I'm quite concerned about the 20% of the fleet which you are exposed to for those airliners, who have relatively smaller fleet, like below 20 airlines. If they decide to give you back a plane and you need to repossess, what would happen to your aircraft utilization rate and in terms of earnings? Is there any risk on that regard?

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Robert James Martin, BOC Aviation Limited - MD, CEO & Executive Director [25]

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Okay. So probably the best way to address this. Last year, we moved a number of aircraft around that we have to repossess from Jet Airways, from Avianca Brasil, from Germania. And maybe if David just talks through our experience, I think that's probably the best way to handle this. David?

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David Ryan Walton, BOC Aviation Limited - COO [26]

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Sure. So as Robert said, we had to deal with some customer difficulties last year. The first one was Avianca Brasil. And actually, we repossessed those aircraft at the end of the prior year, and we had those exported from Brazil, and then back out on lease, having been repainted and fixed up a bit, and they were back on lease again in under 45 days, those 2 aircrafts. We had another customer go bankrupt. We had 1 owned aircraft there and 1 managed, that was Germania in Europe. And actually, we had 0 downtime for those aircraft. And then the final example, we, I think, along with many others in the industry, we had aircraft on lease to Jet Airways in India. We had 5 owned aircraft and 2 managed aircraft. And we had those aircraft back out on lease, on average, across the 7 aircraft in 21 days. So we were able to very quickly -- to get those aircraft redeployed. And the reason for that, one of the main reasons is we've got a very experienced team from our technical and legal side, and importantly, we have a global marketing team. And so when -- and I recognize that in this situation, as Robert said, there are areas of the world that have different stress at the time being. But if you have a global team, you're able to find those pockets where there is still demand for aircraft. And so that's what we've got the team working on now as contingency plans. And so as Robert said, we had a good experience last year. I gave you some data on that, and we're preparing in case we need to redeploy aircraft for this year.

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Aravindan Jegannathan, JK Capital Management Ltd. - Senior Analyst [27]

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Okay. So I mean, your ability to deploy, then business is as usual is well known. It's just that in COVID-19 with probably demand faltering and that IATA estimates the global airline traffic growth is going to be the lowest ever in a decade or so, I'm just worried about whether it's that easier -- that easy a task. I mean, I don't know. And also, just wanted to know the contingency plan you had in mind, if you could brief a little bit more on that or is it kept on wraps?

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Robert James Martin, BOC Aviation Limited - MD, CEO & Executive Director [28]

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So you're asking contingency planning in which particular scenario?

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Aravindan Jegannathan, JK Capital Management Ltd. - Senior Analyst [29]

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The 3-month, if the COVID-19 lasts longer, you are prepared for a better contingency plan. So that -- if you could brief on that a little bit?

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Robert James Martin, BOC Aviation Limited - MD, CEO & Executive Director [30]

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Yes, by all means, by all means. So what we will do in the next 3 months, we will continue to raise capital from the debt capital markets and also we have a banking group of 70 banks. So basically, our view is we will not run down our liquidity. We will keep a high level of liquidity during this period. Bear in mind as well, we have a low debt to equity. And so we can also basically level up slightly if we need to. And finally, bear in mind, my comments that we're heavily focused on adding new transactions from stronger credit airlines, which will also put the company in better shape as we move into the second half of the year.

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Operator [31]

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Next in queue, we have Shashank from Liontrust.

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Shashank Damji Savla, Liontrust Asset Management PLC - Fund Manager [32]

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My question is on the CapEx, which you mentioned at $5 billion. With the delays in the MAX and some NEO deliveries as well, is that a stronger element of purchase and leaseback deals in that? And also on the MAX, we recently got news about wiring issues, which has delayed the aircraft even further. Can you give a sense of where you think MAX is? And when is it likely that it will actually come back in the sky?

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Robert James Martin, BOC Aviation Limited - MD, CEO & Executive Director [33]

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Okay. Shashank, thanks for the questions. So let me deal with the second one first. Basically on MAX, I was in the U.S. last week meeting with some of our major customers like Southwest, American to get their views on when they think MAX comes back. Because I think this is very important that they're going to be the first operators who will fly this. And the feeling I came away with is this is really a third quarter issue this year. Now bear in mind, the crucial part in all of this is the regulator, the FAA. And so the FAA will be the determinant of when these aircraft are able to both deliver and fly again. So going back to your first question and in terms of CapEx. So we've got a reasonable number of Airbus aircraft delivering this year, and those are coming straight off the production line under our own order book. We had 5 remember delayed from last year that are included within that. And in addition to that, then we've obviously now begun to layer on top of it some purchase leasebacks starting with the American 787 transaction, and there will be more, this won't be the last ones we do.

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Shashank Damji Savla, Liontrust Asset Management PLC - Fund Manager [34]

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Great. And just on the aircraft, like if worst case scenario, some airlines go bankrupt, and you have to recover some of the aircraft. In terms of these sale transactions which are happening right now, is there any reduction in the price of the aircraft, which you're seeing in the market right now?

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Robert James Martin, BOC Aviation Limited - MD, CEO & Executive Director [35]

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Okay. So we've got a number of sales in the pipeline of selling aircraft with lease attached at the moment. None of the lessees attached to that, I think, are at risk of bankruptcy. So I'm really confident those will get done in first half. I think realistically though, you can expect that our sales for this year are likely to be back-ended probably more in the second half than the first half just because, obviously, sort of there's more uncertainty in the first half.

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Operator [36]

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Next in queue, we have Ajith from UOB Kay Hian.

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K. Ajith, UOB Kay Hian Research Pte Ltd - Director of Asia Transport Research [37]

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Congratulations on a good set of results. I might have missed a part on the portion of the MAX deliveries for 2020. Can you provide the number again?

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Robert James Martin, BOC Aviation Limited - MD, CEO & Executive Director [38]

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Yes, no problem. So 4 MAX deliveries in fourth quarter.

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K. Ajith, UOB Kay Hian Research Pte Ltd - Director of Asia Transport Research [39]

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Okay. As for sale and leaseback, would you be looking at, again, narrow bodied aircraft or wide bodied aircraft in 2020?

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Robert James Martin, BOC Aviation Limited - MD, CEO & Executive Director [40]

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The answer is both, sort of, basically, as you know, our portfolio, we tend to have a mix of roughly by balance sheet sort of 60% single aisle, 40% wide-body, and so we'll be looking at both.

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K. Ajith, UOB Kay Hian Research Pte Ltd - Director of Asia Transport Research [41]

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Okay. In terms of what -- the request from customers looking for PLBs and so far did you get -- where you see the demand, is it more on narrow-bodied aircraft?

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Robert James Martin, BOC Aviation Limited - MD, CEO & Executive Director [42]

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No, it's both, frankly. So I think sort of our approach to this is to talk to carriers and find out what they have unencumbered at the moment. As you know, our strong preference is to write long-term leases where we can. So generally, we're looking for aircraft that are less than 5 years old. Because, as you know, we've got a very average young age of our fleet, and we want to maintain that to the extent possible.

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Operator [43]

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Our next question, we have Gloria from Neuberger.

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Gloria Lam;Neuberger Berman, [44]

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In terms of the security deposit that the team just mentioned at the beginning, how many months of security deposit the -- does BOC aviation collect?

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Robert James Martin, BOC Aviation Limited - MD, CEO & Executive Director [45]

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Okay, the answer is, it depends upon the airline credit, we've collected anywhere from 1 month up to a high of 14 months. And so what happens is when our risk team does the evaluation, this is one of the key factors they take into account. So it depends on the airline credit rating, is the answer. In addition, for weaker airlines, we also collect what I'll call cash maintenance reserves, and those cash maintenance reserves will build up over the period from the delivery of the aircraft to the big heavy maintenance visits, so that we got cash collateral for the heavy maintenance events. Now sometimes, instead of taking cash, we'll take an investment-grade rated letter of credit instead to make sure we're secure for those same engine airframe shop visit.

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Gloria Lam;Neuberger Berman, [46]

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Understood. And just now the team also mentioned that the company is looking to maybe have a more relaxed collection term over the next 3 months to help the airline industry in case the COVID-19 situation prolongs. So when -- and at that point of time, I guess, after 3 months, the company may need to consider provisioning. Can we talk more about the provisioning policy, as when we provision the part that is not covered by the existing security deposit or it's just the whole loan that the company will take a percentage of the remaining lease balance to provision?

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Robert James Martin, BOC Aviation Limited - MD, CEO & Executive Director [47]

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Now as an operating lessor, our policy is very, very clear, it is anything that is owed to us above and beyond the security deposit that we hold. Okay. And that's how we've always done our provisioning right the way back to when we set up the company.

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Gloria Lam;Neuberger Berman, [48]

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But in reality, if, let's say, the airline customer becomes quite stressed after 3 months, the base case is that there is high likelihood the BOC Aviation will take back the aircraft. Is that the right way to interpret it?

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Robert James Martin, BOC Aviation Limited - MD, CEO & Executive Director [49]

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No, it depends on how much security we're holding. If we're holding 6 months of security, then we're well secured. So that's what I said, the risk team look at this on a case-by-case basis, depending on each individual credit. And obviously, the weaker the credit, the more security we generally take.

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Operator [50]

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Next in queue, we have Robert from (inaudible)

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Unidentified Analyst, [51]

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I want to ask the current fleet had a premier of USD 1.3 billion over its book value, represent 8% premier. Why there is 8% premier over the book value. What are the key underlying assumptions and the key factors? And also, if the 2020, the financial market turbulence continued and the economic situation deteriorated further, will that possibly trigger the write-down of the decreased value of the appraised value of fleet? And what if that happened, what's the impact on the -- for future P&L?

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Robert James Martin, BOC Aviation Limited - MD, CEO & Executive Director [52]

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Okay. Thanks, Robert. So the first thing is the $1.3 billion comes from the difference between the average of 5 appraisers values, which we will get every 6 months. So these are the numbers as of the end of December last year versus our net book value. Now unlike other industries, in our industry, we take the original historic cost of the aircraft, and we depreciate 3.4% per annum from that original historical cost. We never write aircraft upwards. And so as time goes on, obviously, your net book value will come downwards. So when we do our impairment test, which drives any impairment, that's driven by 2 things. First of all, we do the naked value of the aircraft versus the appraised values. And then secondly, we look at the value and use, which is the NPV and cash flows, which are under the lease through to the lease expiry. Okay. And so every 6 months, we test this. And so you look at impairment on an individual aircraft basis, not on a fleet basis. So occasionally, from time to time, we will have 1 or 2 aircraft that we will impair. We haven't had that at the end of last year. All of our values are above. The net -- all of the appraised values are above our net book value, and so we're in good shape. But if there's a market dip, occasionally, we will make an impairment, and we've just straight -- take that straight through the P&L, if that were to happen. Okay?

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Unidentified Analyst, [53]

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And just -- this industry will be sometime during the extreme time like 2009 or 2001, the value where we'll give independent evaluation, which has -- had a discount of NPV rather than premier?

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Robert James Martin, BOC Aviation Limited - MD, CEO & Executive Director [54]

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Yes, on the individual aircraft, we may see that from time to time. But bear in mind, we have latest generation aircraft in our fleet, which are the most fuel-efficient in the market. Our average fleet age is 3 years old, you tend to see aircraft values becoming more volatile as the aircraft get older. The other thing to remember is we do have an average lease term remaining of 8.4 years on all of our leases. And so we have solid cash flow attached to our aircraft that are in the fleet today and those are due to deliver.

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Operator [55]

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Our next question, we have Kelvin from Daiwa.

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Wai Kin Lau, Daiwa Securities Co. Ltd., Research Division - Head of Automobiles, Transportation and Industrial, Hong Kong & China [56]

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Just one follow-up. Is that the interest cost, what you expect? Because I saw the interest cost further shoot up to 3.6% on the cost of debt. You mentioned mainly is due to the more fixed rate. And now your fixed rate already increased to probably close to 80%. So should we assume it should be stable at this level, or do we see further increase?

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Robert James Martin, BOC Aviation Limited - MD, CEO & Executive Director [57]

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So maybe I'll get Mr. Phang. This is his area of expertise, take this one. Phang?

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Thim Fatt Phang, BOC Aviation Limited - Deputy MD & CFO [58]

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If you look at the current market for interest rate, interest rate has dropped off tremendously. So as we enter into new financing, those new financing for our $5 billion of CapEx will be at this lower rates, and we would also have refinancing of $1.2 billion this year. So which will be done at the lower rate. So we would expect -- if current interest rates hold at this level to have a lower average cost of fund this year.

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Wai Kin Lau, Daiwa Securities Co. Ltd., Research Division - Head of Automobiles, Transportation and Industrial, Hong Kong & China [59]

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Okay. So -- but I assume most of them already fixed, I assume. So the new contract impact would not be very significant. But as it is not increasing it should be on the declining trend. Am I correct?

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Robert James Martin, BOC Aviation Limited - MD, CEO & Executive Director [60]

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Yes. The way to think of it is, think of our portfolio on December 31, 2019. So there, we have a series of transactions, which are mainly fixed rate leases on the lease side, and most of the debt is hedged. So really where the difference is going to come in is as we financed that additional $5 billion of CapEx this year. And as Thim Fatt and the treasury team refinanced the $1.2 billion of debt that's falling due during this year.

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Wai Kin Lau, Daiwa Securities Co. Ltd., Research Division - Head of Automobiles, Transportation and Industrial, Hong Kong & China [61]

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Okay. My third question will be the net lease yield. So do you expect it to be -- actually it declined a little bit this year? So what do you or management expect for this year?

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Robert James Martin, BOC Aviation Limited - MD, CEO & Executive Director [62]

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It depends on the ratio of new purchase and leaseback business to placement business. We tend -- because we have a choice whether we do purchase and leasebacks. We tend to get better returns in a market like this on purchase and leasebacks versus regular placements. So we've had a good start to the year on that side. We will do more during this year. And so I think it's probably best. We give you guidance on that at the half year, depending on how much additional CapEx that we achieved in the first half.

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Operator [63]

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Our last question, we have Ben from Goldman Sachs.

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Ben Hartwright, Goldman Sachs Group Inc., Research Division - Executive Director [64]

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Actually, my question is quite similar to Kelvin on net lease yield. And I think you've probably answered most of that. I mean, one of the questions, sort of to follow that up is, how will a number of things impact the net lease yield, one being the MAX returns? I mean, I guess, this year, we have relatively few of those in Q4, maybe thinking about next year as well. The MAX coming back, does that put downward pressure on net lease yields? And secondly, given the market situation, the stresses and uncertainty. Are you finding that funding cost may be higher relative to what they were a few months back? And how will that also effect the net lease yield this year and next year?

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Robert James Martin, BOC Aviation Limited - MD, CEO & Executive Director [65]

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Okay. Thanks, Ben. So first of all, MAX, I'm afraid to say this year totally insignificant. Because even if we get deliveries, they'll only be in fourth quarter. So at best, we'll have a couple of bumps from the books. So they wouldn't -- the MAXs won't effect on net lease yield this year. In terms then of funding cost, I was actually sitting with our Treasurer this afternoon, challenging him exactly on this issue because I also wanted to know. And the base rates have come down significantly, as you've seen. If you look at 5-year treasuries and 10-year treasuries, which are the most common types of capital markets funding that we issue. The rates of -- the sort of base rates came down significantly. And we don't think the margins have significantly widened out for an investment-grade credit like us. And so net-net, it will be at lower levels than we've seen previously, which is good for the net lease yield.

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Ben Hartwright, Goldman Sachs Group Inc., Research Division - Executive Director [66]

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Okay, great. And then, I mean, it's a big CapEx this year with the $5 billion, you're still finding markets open and funding available?

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Robert James Martin, BOC Aviation Limited - MD, CEO & Executive Director [67]

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Yes, definitely. We've got 70 banks in our banking group. Our top 10 banks have been with us for 25 years, because we've done quite a lot of stuff in the capital markets over the last 5 years. A lot of our banks are underlent to us and so I'd like the opportunities to increase that. And in addition, we still think there's depth in the capital markets to support more issues this year. We're A- rated, and so that obviously helped us in a situation like this.

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Ben Hartwright, Goldman Sachs Group Inc., Research Division - Executive Director [68]

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Okay, great. And one -- sorry, last question, if I may, just on funding market as well. I mean, how is the ABS market. I mean, I know you mentioned that in terms of sales, yes, there's more that may go into the second half. Is that also something that is affecting ABS market and your ability to sell into that?

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Robert James Martin, BOC Aviation Limited - MD, CEO & Executive Director [69]

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Yes. I think, really, if you split into 2 parts, I think you can get As and Bs away. It's just a matter of price, as there's a bit of widening of price compared to last year. But remember, again, base rates have come down, treasuries have come down since last year. I think the challenge at the moment in the ABS market is really the E-Notes, we're not interested in ABS as a source of funding. We can fund ourselves much cheaper using corporate debt not in the capital markets or the bank markets where we use ABS as an exit strategy for portfolios of aircraft. And so I think realistically, we're probably talking about third quarter before that market becomes open again.

Okay. Well, I should just say to everyone on the call, thank you. We had a record attendance today. And so we appreciate all of your time. We know you're all busy. And so with that, I'll hand back to Tim.

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Timothy Ross, BOC Aviation Limited - Head of IR [70]

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Yes, thank you, everyone, for joining today and thank you for your time and focus. We'll look forward to speaking to you, with you all again in about 5 months' time, if not before. Thank you, operator, and good night.

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Operator [71]

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Thank you. Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.