BA Boeing Co

By Ben Dummett and Julie Steinberg 

LONDON -- The coronavirus pandemic has upended the airline industry, halting travel and grounding planes. Now, the sector's pain is spreading to a little-known corner of the market where investors have enjoyed heady returns for years.

So-called specialty aircraft-leasing funds have generated income for investors hungry for yield. These funds buy jets from the likes of Boeing Co. and Airbus SE and lease them to global air carriers such as Thai Airways International PCL and Emirates Airline.

In recent weeks, many of those investors have fled or incurred big paper losses as some London Stock Exchange-listed funds suspended dividend payments and held discussions with lenders to renegotiate payment schedules.

Two of the five LSE-listed aircraft funds have suspended dividend payments and share prices are down between 42% and 74% since mid-February.

Until the coronavirus outbreak, as well as some other secondary market concerns over the resale value of certain jets, the funds had a "solid investment case," said Markuz Jaffe, a Cantor Fitzgerald LP analyst. Now, lenders to the airlines may have to bail out the business model in the near term, "causing the market to rerate the funds."

The LSE-listed funds have a collective market valuation of about GBP500 million ($616 million), about half their size from the end of last year. Comparable asset-backed securities that use aircraft as collateral, a more common leasing investment structure, are privately held, which makes it difficult to measure their financial health. The publicly traded aircraft funds are a good proxy that offer more disclosure on performance than privately held funds because they are listed.

Such funds use a combination of debt and money raised from institutional and individual investors to help finance aircraft purchases. The planes are then leased out to airline operators, typically for 10 years or more.

The lease payments generate an income stream for fund investors and cover debt-financing costs. At the end of the leasing period, aircraft are sold, the fund is disbanded and sales proceeds are distributed to investors.

The funds generated dividend yields between 8-9% at their outset and have fallen to around 7% in recent years due to share prices rising, though they are still outstripping returns of risky high-yield bonds. That has attracted a string of big-name asset managers including Fidelity International, Standard Life Aberdeen PLC and Invesco Ltd.

Investors presumed the dividends were relatively safe payouts because carriers leasing the planes were, in many cases, backed by national governments. The coronavirus outbreak is challenging such assumptions as a sharp drop-off in travel forces airlines to lean on their lessors as one way to conserve cash in a scramble to survive.

Dublin-based Avolon Holdings Ltd., one of the world's largest plane lessors, last week said 80% of its customers are seeking payment relief.

One of the LSE-listed funds, DP Aircraft I Ltd., leases two Boeing 787-8 planes to Norwegian Air Shuttle ASA and another two of the same jet types to Thai Airways. Since going public in 2013, the fund had never missed or reduced a dividend payment, according to its filings. It generated an average annual dividend yield of between 7% and 10% over the last five years.

That streak ended last week when DP suspended its dividend payout indefinitely, following the Norwegian group's failure to make its required lease payments on two jets after grounding much of its fleet. The move triggered a one-day 20% selloff in the stock, which had already been under heavy pressure since Feb. 25 as the virus spread.

The dividend suspension is meant to preserve the company's "long-term financial stability," DP said in a statement. The company is seeking common ground with Norwegian Air over lease payments and German lender Norddeutsche Landesbank Girozentrale over the debt used to help buy the two aircraft.

"We are confident we will find a solution," said Christian Mailly, managing director of DS Aviation GmbH & Co., the fund's manager.

Global airlines, either through trade groups such as Airlines for America in the U.S. or individual airlines such as Germany's Deutsche Lufthansa AG and Emirates in the Middle East, are seeking government support to manage through the crisis. That prospect could play a key role in ensuring the survival of aircraft funds and lessors more generally.

That is a bet Ian Rees, deputy head of multiasset funds at London-based Premier Miton, is making. His group, with around GBP11.5 billion in assets under management, owns shares in funds that haven't suspended dividends and he has no plans to sell the stocks.

The funds lease planes to Emirates, which is government-backed and has a strong balance sheet, Mr. Rees said, giving him comfort that it will find ways to persevere through the downturn.

Amedeo Air Four Plus Ltd., another aircraft fund, acknowledged the role of national governments this week, noting "informal expressions of support" from the Thai and Dubai governments to back their airlines. That didn't prevent Amedeo, which leases 12 jets to Emirates and Thai Airways, from suspending its dividend, as the talks continue.

Representatives for Amedeo, Norweigian and Emirates couldn't be reached for comment. A spokesperson for Thai Airways said airlines globally are suffering heavily.

Write to Ben Dummett at ben.dummett@wsj.com and Julie Steinberg at julie.steinberg@wsj.com

(END) Dow Jones Newswires

April 08, 2020 07:59 ET (11:59 GMT)

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