Another interesting week for the niche aircraft leasing funds sector – this is a tale of two halves one could almost say. The good news came earlier in the week with the announcement from Amedeo, a London listed fund which is my favorite way of playing this truly adventurous sector.

It has agreed to sell

two A380-800 aircraft bearing manufacturer’s serial numbers 233 and 237 to Etihad Airways PJSC. Closing of the sales, which are subject to the fulfilment of certain conditions precedent, is expected to occur on or around 24 February 2020.  After repayment of the current financing arrangements on the aircraft, the determination of swap breakage and facility prepayment costs together with transaction costs, fees and expenses, the Company currently expects the aggregate net cash proceeds to the Company to be in the region of GBP 130 million…. An announcement containing further details of the sales will be made once the transactions close on or around 24 February 2020.”

For those of us watching this space carefully, this has to be seen as good news as it gives us a real data point, we can begin to use for an analysis of the wider subset of funds.

Here’s what we can establish, with the help of analysts from Liberum and Jefferies.

  • According to Liberum, the net cash proceeds of £130m from the sale of these two assets appear to be broadly in line with the consideration paid by the company in 2017. Amedeo Air Four raised c.£130m in January 2017 in order to fund the acquisition of these two Airbus A380s.
  • Matt Hose at Jefferies has also been scribbling down some estimates and that the two aircraft probably originally cost $262.5 million, ignoring prepayment fees and other costs.
  • On that basis the planes have depreciated by “about 13% from the transaction price in a little under three years. If we were to roll this depreciation forward for the full twelve-year lease terms, it implies residual values of c.$150m, albeit this looks too high”

Overall I think Liberum is on the ball when they say that the sale represents “ a good opportunity for the company to return some capital to shareholders”. That’s also what Matt Hose at Jefferies suggests will happen if only because as he reminds us, the sale will hit dividend cover because of the loss of lease income.

According to Matt assuming

“the cancellation of the 125m shares originally issued for the purchase of the two aircraft (minus costs) would result in a capital return of just over 100p per share. This is because the £130m net proceeds broadly matches the £128m of equity raised in 2017 to acquire the aircraft, bearing in mind how the debt amortises quicker than the aircraft depreciate. In effect, the return of capital would unwind the purchase of the aircraft but having picked up lease payments in the interim”.

But there’s an unfortunate sting in the tail to this positive tale!

Later this week Matt Hose also drew attention to a report in Simply Flying which suggests that an Air France A380 (F-HPJB) “was returned to lessor Dr Peters in January” to be broken up for parts in Ireland. This is the third A380 that has met this fate after having been returned to a leasor. Apparently, the plane was being marketed for resale but didn’t fetch the right price, although its also fair to say that the A380 was an older variant with a “dated interior and Engine Alliance engines”.

The rub here is that at the moment Emirates seems to be the only real buyer of these planes (from the likes of Amedeo) and sooner or later there will be a surfeit of old A380s being scrapped for parts.  This means that resale prices might fall sharply as Emirates will be the only major buyer in town. That could push resale prices even lower. That said, I think we are seeing some useful data points emerge and I absolutely think it worth keeping this sector on our collective radars.