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Japan's Orix to buy $2.2 billion stake in HNA's aircraft lessor Avolon

By Junko Fujita and Anshuman Daga

TOKYO/SINGAPORE (Reuters) - Japanese financial services group Orix Corp (8591.T) has struck a $2.2 billion (1.7 billion pounds) deal to buy a 30 percent stake in aircraft lessor Avolon Holdings as cash-strapped Chinese conglomerate HNA Group Co Ltd trims holdings in its core assets.

The stake purchase in the world's No. 3 lessor will help Orix to bulk up in the $280 billion (216.9 billion pounds) global aircraft leasing market, where demand is growing, supported by a rise in low-cost carriers and passenger traffic.

The agreed deal will allow Orix Aviation Systems Ltd, a fully-owned unit of Orix, to gain part control of a lessor that has 562 aircraft, nearly three times its size.

As Orix has no aircraft on order, it can now tap into Avolon's 300-plus aircraft on order with Boeing (BA.N) and Airbus (AIR.PA).

"Big players having access to placement positions over the next number of years and having scale of orders is indeed very important for their success," James Meyler, deputy CEO of Orix Aviation, told Reuters in an interview on Wednesday.

The transaction is expected to be completed in the fourth quarter of this year and Orix will get two seats on Avolon's board.

Avolon is currently fully owned by Bohai Capital Holding Co. Ltd <000415.SZ>, which is in turn controlled by HNA.

Orix Aviation is the world's No. 12 lessor.

Combining the strengths of Orix's asset management platform and Avolon's trading business will help Avolon to grow further, said David Power, CEO of Orix Aviation.

HNA bought Avolon for $2.5 billion in 2015 through Bohai. Avolon then struck a deal to buy the aircraft leasing arm of CIT Group (CIT.N) for $10.4 billion in 2016, creating the world's third-biggest lessor.

U.S.-listed AerCap (AER.N) and General Electric's (GE.N) GE Capital Aviation Services are the world's top two lessors.

Over the past year, Avolon has come under scrutiny over its links to HNA and credit ratings analysts have been pressing for tougher safeguards against it being forced to bail out the cash-strapped Chinese conglomerate.

"Our new shareholder structure and the associated enhancements to our governance framework will also accelerate our momentum towards an investment grade rating – a key objective for our business," Domhnal Slattery, Avolon's CEO, said in a statement.

The aviation-to-financial services HNA group has been shedding assets such as real estate to slash the massive debt it accumulated from its acquisition spree in recent years. It has also started selling aviation-related assets - once considered as core business.

"Orix's investment will significantly improve investors' confidence in Avolon's financial position and future financing capability for its large number of aircraft on order, easing their concerns given the high financial leverage of HNA Group," said Corrine Png, CEO of transport research firm Crucial Perspective.

Orix is a diversified financial services company with businesses ranging from leasing, life insurance and real estate to corporate lending. It has pursued diversification both in Japan and overseas.

Orix was in talks with HNA and Bohai for more than six months and the agreed 30 percent purchase was ideal for now, executives said.

"Following negotiations with Bohai, clearly that's what was available to purchase as well," said Meyler, adding Orix had no plans currently to raise its stake in Avolon.

(This version of the story corrects first name of deputy CEO to James from Jeremy in paragraph four)

(Reporting by Junko Fujita and Anshuman Daga; Editing by Himani Sarkar and Mark Potter)