an introduction to investment in commercial aircraft · •a “duopoly” between airbus and...

An Introduction to Investment in

Commercial Aircraft

December 2019

™Copyright © 2019 EnTrust Global

www.entrustglobal.com

• Actively seeking attractive alternatives to traditional fixed income and equity allocations

• Pursuing strategies that perform well in downturns and have proven resiliency in the past

• Favoring income-oriented investments that provide stable, attractive current yields

• Preference for strategies that require specialist knowledge and relationships creating alpha

• Also prefer strategies that offer diversification and that are uncorrelated to other allocations

Current Investor Market Trends

An investment in any strategy described herein is speculative and involves a high degree of risk. Statements regarding current conditions, trends or expectations in connection with the financial markets or the global economy are based on subjective viewpoints and may be incorrect. For

illustrative purposes only and subject to change.

1



Aviation is an Attractive Opportunity for Investment Allocation5

An Alternative to Traditional Fixed Income & Other Real Assets

2

Investor Allocation Strategy

• Offers investors the ability to diversify away from traditional fixed income in an uncertain market environment and allocate toward a strategy that can provide stable, attractive returns that are uncorrelated to financial markets

WHY AVIATION?• Strong risk-adjusted returns compared with other alternatives

• Liquidity profile between traditional fixed income and real estate /

infrastructure

• History of value-retention and solid downside protection • Inflation protection with hard assets that retain value• Low correlation to equity markets or airline sector

WHERE DOES THE OPPORTUNITY FIT?• Private Debt/Private Markets, Opportunistic Credit, Alternative

Assets, Real Assets, Fixed Income

Higher Yields with Strong Assets and Limited Downside Risk

CharacteristicAviation

Investments

U.S. High

Yield Bonds

Bank

Loans

U.S.

Investment Grade

Bonds

Target Net

Yield 10%1 5.75%2 6.3%3 3.7%4

Maturity ~5-7 years 5-10 years 5-7 years 3-10 years

Underlying Collateral

Security in

Commercial

Aircraft

Unsecured Senior Secured Unsecured

Attractive Allocation Strategy for Growth, Stable Returns and Resiliency

• Direct lending and leasing provides a number of attractive return

characteristics not found in traditional fixed income investments

• Combination of fixed and floating rate products

• Steady, predictable cash flows

• Downside protection from valuable assets

• The aviation industry shares many benefits with conventional real assets

such as infrastructure and real estate

• Inflation protection that is not available in conventional fixed-income

investments

• Similar to real estate and infrastructure, aviation assets are long-lived,

with typical useful lives of 25-30 years, but are also portable

Equities Fixed Income Alternative Investments

Forecast Average Total Returns (per year) over the next 5 years (in%)

7.80%

6%

4.45% 4.40%3.95%

2.40%

0.80%

8%

7.10%

6.20%5.80%

4.15%

3.35%

2.05% 1.90%

10%

0%

2%

4%

6%

8%

10%

12%

1 Net of management fees. Based on the mid-point of the target range for net returns post fees and expenses. Targeted returns or investment objectives my not be achieved and investment losses may occur. An investment in any strategy described herein is speculative and involves a high degree of risk. 2 Bloomberg Barclays Global High Yield (LHMN0039) March 2018. 3 Source: J.P. Morgan Asset Management, S&P, Bloomberg, Dow Jones, St. Louis Fed; data as of August, 2017 4 Source: Bloomberg Barclays Investment Grade (3-10Y), Jan 2019 5 Credit Suisse Investment Outlook 2018



• Many categories of traditional fixed income investments - including leveraged loans, middle market

lending, mezzanine funds and other direct lending strategies - pose more downside risk to investors

compared with specialist hard-asset strategies

(1987-2010)

Lien Position Recovery Rates

Loans 80.3%

Bonds

Sr. Secured 63.5%

Sr. Unsecured 49.2%

Sr. Subordinated 29.4%

Subordinated 29.3%

Jr. Subordinated 18.4%

Investors Should Benefit from Reallocating to Stable Income-Oriented Strategies

Loss and Recovery Rates for

Enhanced Equipment Trust

Certificates (“EETCs”)1

Seniority

Approx

Cumulative

Loss Rate

Cumulative

Recovery

Rate

First Lien 0.1% 99.9%

Second

Lien1.4% 98.6%

Third Lien /

Mezz3.0% 97.0%

1Source: Kroll, “EETC Historical Recoveries and Current Outlook”, September 28, 2015. 2 Data from January 1, 1995 to May 31, 2018. 3 Source: FlightAscend Consultancy. PAST PERFORMANCE IS NOT AN INDICATION OF FUTURE RESULTS.

An investment in any strategy described herein is speculative and involves a high degree of risk. For illustrative purposes only and subject to change.

Low Correlation of Aviation Assets to Equity

and Fixed Income, Airline Industry and

Other Real Asset Investments

Index

Correlation to

the ALRI2

(1995-2018)

Sharpe

Ratio

Ascend Leasing

Returns Index3 1.00 3.19

DJ Brookfield

Global Infra. TR.13 2.54

Barclays US Corp

High Yield TR.06 1.64

S&P 500 Airlines Index .10 1.55

S&P Global REIT

(Total Return).02 1.34

S&P/LSTA Leveraged

Loan TR Index.11 1.10

MSCI World Index .08 0.91

3



Aviation is a Resilient Sector With a Growing Need for Capital

Attractive Industry Fundamentals and Limited Historical Downside Risk

4

1 IATA, 2 Airbus Global Market Forecast (GMF) 2017, 3 Boeing Current Market Outlook 2017, 4 World Bank, 5 Brookings: The Unprecedented Expansion of the Global Middle Class, Feb. 2017. PAST PERFORMANCE IS NOT AN INDICATION OF

FUTURE RESULTS. An investment in any strategy described herein is speculative and involves a high degree of risk. Statements regarding current conditions, trends or expectations in connection with the financial markets or the global economy

are based on subjective viewpoints and may be incorrect. For illustrative purposes only and subject to change.

Industry Features: Solid Growth

• Air travel is a vital industry to the global economy, supporting nearly 63 million

jobs and over $2.5 trillion of annual economic activity1

• The commercial aviation industry is served by more than 33,000 aircraft

operated by more than 700 scheduled airlines carrying more than 4 billion

passengers per year1

• Air Traffic has persistent resilience, having grown 68% in the last ten years and

over 110% since 9/112

• Over the past 20 years, the world fleet has doubled while the operating

lease fleet has quadrupled3

World Air Traffic Growth2

Pric

e (

$B

illio

n)

Glo

ba

l R

PK

s (t

rillio

n)

(Re

ve

nu

e p

ass

en

ge

r K

ilo

me

ter)

1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015

0

1

2

3

4

5

6

7

Oil

CrisisGulf

CrisisAsian

Crisis 9/11 SARS

Financial

CrisisOil

Crisis

60+% Growth

100+% Growth

Resiliency through shock events

World Traffic and Real GDP Growth (Indexed to 1990 levels)1,4

Anticipated Industry Performance

• Over the next 20 years, it is estimated that 35,000 aircraft worth $5 trillion will be

delivered globally2

• Approximately 160 million people enter the global middle class each year,

driving air travel and aircraft demand5

• Airbus and Boeing forecast 20-year traffic growth at 4.4% and 4.7%

respectively, well above the forecast of real GDP growth at 2.8%2,3

• Revenue Passenger Kilometers (RPKs) grew 7.5% in 20171

• Annual volume of nearly $50 billion in secondary market trading that is

currently underserved by capital providers

100

150

200

250

300

350

400

1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016

RPK GDP

Air traffic growth

expanding at faster

rate than global GDP

across market cycles


www.entrustglobal.com5

0%

4%

8%

12%

16%

20%

0

400

800

1,200

1,600

2,000

197

0

197

2

197

4

197

6

197

8

198

0

198

2

198

4

198

6

198

8

199

0

199

2

199

4

199

6

199

8

200

0

200

2

200

4

200

6

200

8

201

0

201

2

201

4

201

6

Commercial Aircraft Deliveries1

Deliveries Deliveries % of fleet

1Source: CAPA – Centre for Aviation, “Aircraft manufacturers embrace the consumer society's values of built-in obsolescence”, June 20, 2017

PAST PERFORMANCE IS NOT AN INDICATION OF FUTURE RESULTS. For illustrative purposes only and subject to change.

Less than 150 seats

150 + Seat Aircraft

Market Overview & Opportunity Set

Limited Supply & Strong Demand: 150+ Seat Market is a Duopoly

Production is tightly controlled, highly regulated and subject to very high barriers to entry

• Boeing and Airbus have an effective duopoly in the market; together they account for ~80% of aircraft supply by number of units, and

~90% by asset value

• Aircraft are manufactured based on contracted orders, which are typically placed several years ahead of their delivery date

• Despite the massive growth in the global fleet, deliveries have consistently been between ~4-8% of the outstanding fleet

• The sub-150 seat aircraft are more limited in their applications and are often concentrated in their country/region of production,

limiting their ability to materially impact the stable state of the global aircraft market



• We refer to commercial aviation as “flying real estate,” as it is mobile and can be efficiently redeployed if

something goes wrong in a particular airline or country

• This is one of the main reasons the profitability of leasing aircraft has been entirely uncorrelated to airline

profits over time: as an airline faces difficulty or goes away, the assets that are critical to airline fleets

globally get absorbed and maintain profitability

• Focus on mainstream, in-production aircraft that are used by hundreds of aircraft globally

• While the value of real estate is typically in the location of the asset, the value of commercial aircraft is in the asset and depth of the operator base worldwide

• We view these aircraft as having lower volatility and reduced likelihood of technological obsolescence because over 25% of the commercial fleet is out of production

• This includes:

― 472 Airbus A300 & A340 aircraft

― 1,100 Boeing Classics

― 644 McDonnell Douglas aircraft

Location, Location, Location vs. Asset, Asset, Asset

In Production

23,899

74%

Out of

Production

8,466

26%

Aircraft Leasing & Airline Profit Margins1

-5%

0%

5%

10%

15%

20%

25%

1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016

Airlines Aircraft Lessors

Lessor profitability has

been strong through

market cycles and

well above airline

profit levels

1 Source: Boeing, IATA, ICAO, IBA, Company filings, Factset. PAST PERFORMANCE IS NOT AN INDICATION OF FUTURE RESULTS. An investment in any strategy described herein is speculative and involves a high degree of risk.

Statements regarding current conditions, trends or expectations in connection with the financial markets or the global economy are based on subjective viewpoints and may be incorrect. For illustrative purposes only and subject to change.

6



Even through massive global disruptions, aircraft values have shown remarkably little volatility. This is in large part due to:

• Resilient global air traffic demand fueling the need for

additional commercial aircraft

• Air traffic that roughly doubles every 15 years

• A “Duopoly” between Airbus and Boeing that limits supply

side capacity

• Stable commercial aircraft backlog that represents 4-8 years

of production, based on asset type

• The continual need to replace older aircraft as they “age

out” of the system and are uneconomical to operate

Chart source: Flight Ascend Consultancy, October 2018 JP Morgan Investor presentation

For illustrative purposes only and subject to change. Statements regarding current conditions, trends or expectations in connection with the financial markets or the global economy are based on subjective viewpoints and may be incorrect.

.

Target narrowbody aircraft saw estimated declines of ~13-15%

immediately following 9/11 and the global financial crisis

(“GFC”). These decreases recovered quickly and post-GFC

values have been stable for over a decade.

Target widebody aircraft saw similar estimated declines of ~7-

14% following the GFC. Values also recovered quickly, with

stability observed since 2009.

A320 & 737 | Narrowbody

A330 & 777 | Widebody

Investment Process Overview

Stable Values Proven Over Time




Commercial Market Demand Outlook: Deliveries 2018-2037

7%

8,800

3,040

8,490

1,190

2,990

1,290

16,930

42,730Deliveries

$6.3TMarket Value

4.7%Traffic Growth

Source: Boeing 2018 Current Aircraft Financing Market OutlookPAST PERFORMANCE IS NOT AN INDICATION OF FUTURE RESULTS. For illustrative purposes only and subject to change.




Fleet Expansion Capital Requirements: Aviation Opportunity

$0

$20

$40

$60

$80

$100

$120

$140

$160

$180

$200

2018 2019F 2020F 2021F 2022F 2023F

Fle

et

Gro

wth

($

B)

Insurance Cash Capital Markets Bank Debt Export Credit

Expanding capital demands will need to be met with

specialized lending structures

• Over the next 5 years there will be an average of

over $157B in new aircraft deliveries made per year

• This requires a significant amount of new capital to

enter the market in the near future

• Lessors are increasingly looking away from traditional

bank debt to other sources of financing – in fact,

traditional bank debt financing has fallen from 44% of

market share in 2017 to an expected 34% in 2019

• Increased fragmentation from the rise of boutique

lessors, coupled with constrained traditional banks,

presents significant opportunity for aviation investors

seeking opportunities across the capital stack

An estimated $6T of capital is needed to support over

40,000 new aircraft entering the market over the next 15

years

Source: Boeing Capital Corporation - Current Aircraft Finance Market Outlook 2019

PAST PERFORMANCE IS NOT AN INDICATION OF FUTURE RESULTS. For illustrative purposes only and subject to change. An investment in any strategy described herein is speculative and involves a high degree of risk.



1Source: Boeing Capital Corp. 2Source: Flightglobal. 3Source: Aercap.

PAST PERFORMANCE IS NOT AN INDICATION OF FUTURE RESULTS. For illustrative purposes only and subject to change. An investment in any strategy described herein is speculative and involves a high degree of risk.

Why do Airlines Lease?

• Since 1980, as the global fleet has expanded by ~4x,

the share which is leased has grown by ~25x, from <2%

to over 40% of the total market. The proliferation of

commercial aircraft leasing has been driven by a

variety of factors, including:

- Financial flexibility: Leasing minimizes the initial capital outlay that is necessary by the airline,

which allows carriers to conserve cash in what is a

capital-intensive business

- Fleet planning: Airlines may transition to new/different aircraft type more easily, and can

better adjust capacity to match changes in

demand

- Reduce residual value risk: Airlines are not well suited to maximize the value of these assets, and it

is a distraction from their everyday business

- Access to delivery positions: Order slots for the newest aircraft programs are currently sold out for

several years. If an airline has not ordered a

sufficient quantity (or any) aircraft, it cannot

otherwise access the equipment25%

41%

41%

44%

51%

55%

58%

86%

0% 20% 40% 60% 80% 100%

Cathay Pacific

China Southern

British Airways

American

Air France

KLM

Spirit

Virgin Atlantic

Leased Share of Major Airlines' Fleets2,3

1%

leased

19704,039 aircraft

2%

leased

19807,586 aircraft

12%

leased

199010,873 aircraft

50%

leased

2020Forecast

38%

leased

201522,566 aircraft

22%

leased

200015,656 aircraft

Growth of Operating Leasing1,2


The Appeal and Growth of Operating Leasing

American Airlines

Spirit Airlines



Aircraft Leasing and Financing Strategy – Illustrative Portfolio

Diverse Portfolio Characteristics1

• Illustrative Portfolio intends to provide exposure to various aircraft types and vintages, airline operators, and different geographies

and jurisdictions to ensure a balanced and uncorrelated portfolio

Portfolio Characteristics

• Portfolio of 20-50 fixed and floating rate loans and leases

• Investment terms will range from 2-10 years with 5-7 year

hold period

70%

30%

Investment Allocation

Op Lease Loan

70%

25%

5%

Asset Exposure

Narrowbody Widebody Regional Jet

40%

20%

20%

10%

10%

Regional Exposure

Asia Pacific Europe

North America Latin America

Middle East

Yield Characteristics

• Cash profile of underlying lease/loan contracts typically pay current

cash yields of 6-8% to investors

• In addition, aircraft can be sold with or without lease attached to

recover investment with upside

• Targeted Net IRR Range for Lease Equity Investments between 10-14%

• Targeted Net IRR Range for Debt Investments between 7-10%

• Target Weighted Net IRR to Investors: 10%+

1 For illustrative purposes only and subject to change. Actual portfolios and allocations may vary. Targeted returns or objectives may not be achieved and investment losses may occur. Distributions are subject to performance and are notguaranteed. PAST PERFORMANCE IS NOT AN INDICATION OF FUTURE RESULTS. Statements regarding current conditions, trends or expectations in connection with the financial markets or the global economy are based on subjectiveviewpoints and may be incorrect.



Blue Sky Portfolio Management Team

Adam Cooperstock, CFA – Senior Vice President, Investment Research (January 2018 – present)

Prior experience:

• 12 years of experience in Commercial Aircraft Analysis, Trading and Portfolio Management

• CIT Group Inc., Seabury Group

Matthew Eddy – Vice President, Investment Research (May 2019 – present)

Prior experience:

• 7 years in Investment Research, Pricing, and Airline Credit Analysis

• CIT Group Inc., JetBlue Airways Corp.

John Morabito – Managing Director, Portfolio Manager (January 2018 – present)

Prior experience:

• 18 years global experience in Financial Markets, specializing in Av iation & Transportation Finance

• Pioneered joint venture with Tokyo Century Corporation in 2014, managing $2bn in av iation investments

• Prev iously at CIT Group Inc. building up the Aviation Finance portfolio to $11bn

Ben Pughe-Morgan – Senior Vice President, Investment Research (June 2019 – present)

Prior experience:

• 18 years of experience in Airline / Lessor Originations and Deal Structuring

• DVB Bank SE / Deucalion Aviation Funds

Matthew Meissner – Vice President, Investment Research (September 2019 – present)

Prior experience:

• 10 years in Investment Research, Cloud-based Analytics, and Aviation Finance Modeling

• Blue Moon Analytics, CIT Group Inc.

1Data as of June 30, 2019; may be based on estimates and includes assets under advisement and $1.8 billion of mandates awarded but not yet funded. 2As of October 31, 2019.

EnTrust Global

at a Glance

• $19.1bn total assets1

• 11 offices worldwide• 156 employees, including 45 Investment

Professionals2

• Chairman & CEO – Gregg Hymowitz • Blue Sky Aviation Strategy expected to launch in Q4

2019

Blue Sky – Aircraft Leasing and Financing Strategy

Blue Sky Portfolio Management Team

Important Considerations



Important Information

This document may contain confidential and private proprietary information and/or legally privileged information. Any further distribution, copying or other use of any contents of the information

contained herein is prohibited.

There is no guarantee that any investment objective or targeted returns will be achieved. No due diligence process conducted by EnTrust Global, no matter how thorough, can be an absolute

guarantee against losses. An investment in this Strategy is speculative and involves a high degree of risk.

The views expressed and information provided are as of the date given and are subject to change, update, revision, verification and amendment, materially or otherwise, without notice, as market or

other conditions change. Since these conditions can change frequently, there can be no assurance that the trends described herein will continue or that any forecasts are accurate. Neither EnTrust

Global, its affiliates, nor any of EnTrust Global or its affiliates' respective advisers, members, directors, officers, partners, agents, representatives or employees or any other person (collectively “EnTrust

Global Entities”) is under any obligation to update or keep current the information contained in this document.

Charts, tables and graphs contained in this document are not intended to be used to assist the reader in determining which securities to buy or sell or when to buy or sell securities.

Certain information contained in this document may constitute “forward-looking statements,” which can be identified by the use of forward-looking terminology such as “may,” “will,” “should,”

“expect,” anticipate,” “project,” “estimate,” “intend” “continue,” or “believe” or the negatives thereof or other variations thereon or comparable terminology. Due to various risks and uncertainties,

actual events or results or the actual performance of any Strategy may differ materially from those reflected or contemplated in such forward- looking statements.

The information in this presentation and any materials referenced herein has not been provided in a fiduciary capacity, and it is not intended to be, and should not be considered as, impartial

investment advice.

This communication is for informational purposes only and its accuracy cannot be guaranteed. EnTrust Global Securities LLC is a broker-dealer and member of FINRA and SIPC that through its registered

representatives may introduce for compensation, prospective investors to investment vehicles or accounts managed by its investment advisory affiliates. EnTrust Global Securities LLC does not maintain

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Copyright© EnTrust Global 2019. All rights reserved. This material is proprietary and may not to be reproduced, transferred or distributed in any form without prior written permission from EnTrust Global. Itis delivered on an “as is” basis without warranty or liability. All individual charts, graphs and other elements contained within the information are also copyrighted works, which may be owned by a partyother than EnTrust Global By accepting the information, you agree to abide by all applicable copyright and other laws, as well as any additional copyright notices or restrictions contained in theinformation.

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an introduction to investment in commercial aircraft · •a “duopoly” between airbus and...

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