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Lenders brace for hard landing

By Apple Li and Evelynn Lin

* Loans: Entire Asian aviation sector under review as travel bans spread

By Apple Li and Evelynn Lin

HONG KONG, March 27 (LPC) - Lenders are reviewing their exposure to Asia's aviation sector amid an unprecedented freeze of global air travel aimed at curbing the spread of the coronavirus pandemic.

Asia’s biggest airlines are drawing down on their credit lines and calling in government assistance to deal with the fallout. Singapore Airlines on Thursday became the latest to shore up its liquidity, courtesy of a S$15bn (US$10.5bn) equity raising underwritten by state investor Temasek Holdings and a S$4bn bridging loan from DBS Bank. (See News.)

Aircraft leasing companies and plane manufacturers are also on the radar as the virus upends business models and wipes out earnings projections for the aviation industry this year. State-owned China Southern Airlines has requested a deferment of lease payments to Irish aircraft leasing and aviation finance firm AerCap Holdings, itself a regular borrower in the loan market.

“Aircraft lessors must decide whether or not they will accept lower-than-contracted lease payments or allow lessees to default,” said one loan banker, whose institution is a regular lender to the sector.

AerCap said it would evaluate the viability of its airline clients when dealing with such requests.

Guangzhou-based China Southern recorded a 73% year-on-year drop in passenger capacity and a 50% decline in cargo capacity in February. The carrier operates a fleet of 861 aircraft, with 257 on finance lease and 318 on operating lease.

Last Tuesday, Australia’s Qantas Airways obtained a A$1.05bn (US$628m) 10-year loan, secured against aircraft. Hong Kong’s Cathay Pacific Airways has drawn down a large portion of its US$350m secured revolving credit facility in three stages since January – two years after signing the loan in December 2017.


CASH IS KING

Some lenders have been looking to sell aviation-related loans in secondary. However, there are few takers.

“We have received calls from other banks asking if we are interested in buying these loans at very little discounts, but it is hard for commercial banks to take on more risk given the current situation,” said a Hong Kong-based banker at a Chinese bank, adding that other aviation financing deals earlier in the bank’s pipeline had now been shelved.

Aircraft leasing companies and airlines in Asia Pacific (ex-Japan) have been a constant source of opportunities for lenders, raising US$14.84bn in syndicated loans since the beginning of 2017, according to Refinitiv LPC data. Aircraft leasing companies have accounted for US$10.20bn of that flow.

State support will become more important the longer travel restrictions remain in place. In a global report on March 20, Moody’s warned "there is potential for some airlines to collapse within a short period without additional support from shareholders and/or central governments”.


STATE SUPPORT

Many bankers believe that governments will not allow their national carriers and biggest corporates to fail. On Wednesday, the US Senate unanimously passed a bill to give US carriers US$58bn in aid, including payroll support.

Authorities in China are considering measures such as direct cash infusions and mergers, according to local media reports. Debt-ridden HNA Group, which owns Hainan Airlines and Hong Kong Airlines, said on February 29 that it had asked the Hainan provincial government to help it resolve liquidity risk caused by the epidemic.

Air New Zealand signed an agreement with its government on March 20 for an up to NZ$900m (US$514m) standby loan facility to support the airline's business.

The Australian government on March 18 announced a A$715m (US$435m) support package which includes waiving all industry fees and levies, and reimbursing local airlines the A$159m collected from them since February 1. That, however, did not save Virgin Australia from a two-notch downgrade to B– on Thursday from Fitch, which warned it would need to access additional funding if travel restrictions remain in place for longer.

On Friday, Thai Finance Minister Uttama Savanayana said the government will inject funds into Thai Airways, with details yet to be agreed, according to local media reports.

“Many of these companies will survive a temporary drop in demand, but we do expect to see some consolidation in the industry where smaller regional carriers or lessors with fewer client portfolios head into distressed territory,” said another Hong Kong-based loans banker. (Reporting By Apple Li and Evelynn Lin; editing by Prakash Chakravarti and Steve Garton)