$1.1 billion IPO for BOC Aviation, Boeing takes stake

Singapore-based BOC Aviation Ltd recently announced it had secured cornerstone investors for its initial public offering on the Hong Kong Stock Exchange, and on 1 June shares began trading. With an estimated US $1.1 billion raised, BOC became the second largest IPO in Asia this year, and the largest aircraft lessor IPO in more than five years.

More than just the sum of the IPO, BOC Aviation’s cornerstone investors have drawn a lot of attention.  A total of 11 big-name investors took a 52 percent stake in the base offering valued at over half a billion dollars. Investors include the normal mix of sovereign-wealth funds such as China-based CIC, and Singapore-based Temasek Holdings Pte’s Fullerton Fund Management Co. along with other state-backed funds, private equity investors and insurance companies. Perhaps most interesting however, was the $30 million investment from US aircraft manufacturer Boeing.

In response to Boeing’s capital injection, Airbus COO John Leahy told Air Transport World he was surprised Boeing made the investment, adding “if I was one of the other lessors, I would have more than a word or two with them.”

Although not exclusive to the Hong Kong Stock Exchange, cornerstone investors are much more common there than on other exchanges.  The practice gives large investors the opportunity to acquire the stake they want at a fixed price, and in exchange for the convenience, they agree to hold the shares in lock-up for six month following the IPO. At the same time, cornerstone investors are leveraged to attract smaller investors, and to help ensure the IPO does not flop.

Even if BOC Aviation uses the new capital to go on a spending spree, it will still trail behind the largest lessors in terms of the number of aircraft in its portfolio. Netherlands-based Aercap, and Ireland-based GECAS both have over 1,000 aircraft in service. BOC on the other hand currently manages 270 planes, and has another 240 on order. The lessor’s CEO, Robert Martin told Bloomberg News BOC Aviation would leverage investments in a 4:1 debt-to-equity ratio to make investments of over $3 billion dollars over  the next ten quarters.

BOC’s focus, dating back to its earlier incarnation as SALE, has always been on narrowbody passenger aircraft, but it does some widebodies, including seven freighters, in its portfolio – five A330-200Fs (three at Qatar Airways, two at Hong Kong Airlines) and two 747-400Fs (one each at Asiana and Atlas Air).

Whether freighters will play a bigger role in BOC’s future remains to be seen, but there are three factors that might tilt it toward freighter aircraft:

• The explosive growth of e-commerce, particularly in Asia, is driving demand for freighter aircraft, particularly narrowbodies. BOC could choose to have some of its older 737NG and A320 Family aircraft converted to freighter configuration.
• Former Cathay Pacific CEO Tony Tyler will be joining the lessor’s board. Mr. Tyler’s experience running one of the biggest cargo carriers in the world will certainly play a role in any decision BOC makes concerning involvement in freighter leasing.
• Boeing, which now has a stake in BOC, dominates the worldwide freighter market.

BOC Aviation has also put to rest concerns that a major shake-up in the dominance of the dollar in the aircraft leasing market is looming. Despite an increased call for planes financed in RMB, Martin told the South China Morning Post, “We are a pure US dollar-based company and we don’t intend to change that. Aircraft are bought and sold in US dollars.” He added that other currencies add “additional risks and complexity to your business model that you don’t need.”