Japan’s Orix rejects taking over aircraft leasing JV with HNA

HONG KONG — Japanese financial group Orix has quashed speculation that it could increase its stake in Avolon Holdings, the aircraft leasing business where it is a minority owner alongside HNA Group, the cash-strapped Chinese conglomerate.

Ireland-based Avolon is considered to be one of the assets that HNA, which has now been placed under state control, could sell as it tries to steady its finances.

However Orix, which owns 30% of Avolon, ruled out interest in raising its ownership. The non-bank financial conglomerate told the Nikkei Asian Review in an emailed reply on Thursday that it “is not considering additional acquisition,” when asked about the possibility of purchasing Avolon shares from HNA.

The Japanese company bought its stake in 2018 for $2.2 billion, while HNA’s Shenzhen-listed unit Bohai Leasing retained the remaining 70%.

Orix — which has a record of growing through dealmaking at times of crisis — has been viewed as a possible white knight for HNA, especially after the novel coronavirus further battered HNA’s financial standing and curbed investor appetite for its assets centered on airlines, airports and tourism.

Avolon and other aviation sector companies are also facing significant challenges from the coronavirus pandemic, which has led many airlines to ground their fleets and seek to defer lease payments on aircraft.

Orix also stressed its rights regarding Avolon and its joint venture with HNA. “Even though we only own a 30% share in Avolon, we have veto power over various aspects,” said Hitomaro Yano, executive officer and head of treasury, at the annual earnings teleconference on Thursday. “If anything unfavorable emerges, we will speak up in a straight-forward manner and prevent things from heading to an undesirable direction. That structure is in place,” he added.

He refrained from comments on HNA’s financial situation, but said, “the state is coming into support and dealing with the case. We will keep on watching how things develop.”

Orix has expanded its business empire from a leasing company to real estate, airport operations to professional baseball team ownership through aggressive acquisitions, including during previous crisis situations.

Yano, however, said the company was not considering making any move on this front at this moment.

The framework agreement between the two Avolon shareholders limits dividends to 50% of net income, sets certain corporate governance parameters and provides Orix with veto rights. The agreement is vital to support Avolon’s credit ratings with the top three global rating agencies.

Fitch Ratings analyst Katie Chen wrote in March after HNA was placed under state control that Avolon benefits from this “insulation framework [as] weakening credit profile for HNA Group or Bohai Leasing that impairs Avolon’s ability to access capital, damages its franchise, or restricts its business activities could put pressure on Avolon’s ratings.” Orix has an A-minus rating from Fitch.

Avolon is not immune from the pandemic but remained profitable in the first quarter. “While Avolon entered 2020 in its strongest position as a company, the impact of COVID-19 has been severe for the aviation industry,” Domhnal Slattery, Avolon CEO, said in a statement on May 6.

The Irish company said it had received requests for payment deferral from over 80% of its customers, accounting for more than 90% of the annualized contracted rental cashflow of its owned and managed fleet.

At least for the first quarter, lease revenue was $644 million, up 5% year-on-year, while operating cashflow fell 2% to $444 million. “Looking ahead, the COVID-19 global pandemic will materially reshape the commercial aviation industry for the foreseeable future,” he said.

Slattery said he remained “confident in the ability of our team to navigate the current environment, and the resiliency of the aviation industry to recover,” but said uncertainty would stay for “some time before air traffic returns to more normalised levels.”

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