An inside look at Milestone Aviation and the first helicopter export credit bond
Milestone Aviation discusses the closing of the first Ex-Im helicopter bond and the year of work that went into it.
Milestone launched the largest helicopter export credit financing ever in 2013. It was a transaction of many firsts: Milestone’s first export credit guaranteed deal; the US Export-Import Bank’s first bond secured by helicopters; and, Deutsche Bank’s first Ex-Im guaranteed bond issuance.
But the deal took patience and determination. After three years of meeting with US Export-Import Bank (often at Corporate Jet Investor conferences), the Dublin-based helicopter lessor mandated Deutsche Bank in the last quarter of 2012 to raise an Ex-Im guaranteed bond for nine Sikorsky S-92s.
The $187.4 million helicopter deal, which launched on May 22, raised cheap, long-term funding for aircraft acquisitions. “In this era, to secure 12-year financing at such a low cost provides confidence to our investors and provides good stability to Milestone as we continue to grow our overall strategy,” says Daniel Rosenthal, president, Milestone Aviation Group.
It is rate to find 12-year funding in the helicopter market and the capital markets option allowed Milestone to achieve attractive terms. (Before the bond, the lessor was using a commercial bridge facility from Deutsche Bank to fund deliveries, which began in November 2012.)
“We want to blend low cost financing with long term maturity financing,” says Daniel Rosenthal, president, Milestone Aviation Group. “Ex-Im provides us with both.”
Milestone is the first company to issue an Ex-Im bond that is secured by helicopters. The fact that helicopters are less familiar to bond investors than commercial aircraft made this transaction slightly more complicated said a banker working on the deal. But it did not impact the end result. The deal was two-times over subscribed and priced at mid-swaps +51bps with a coupon of 1.87 per cent. This is easily Milestone’s lowest cost of debt.
The Ex-Im capital markets option was created as an alternative type of capital when bank debt dried up in 2009 during the financial crisis. A guaranteed bond allowed purchasers of US manufactured aircraft to reach a deeper investor base in the US capital markets who would buy US government risk. Since Emirates’s inaugural issuance in October 2009 there have been over 70 Ex-Im bonds issued for a diverse group of commercial airlines.
A year in the making
“This is not a transaction that happens overnight. It was the product of working with Ex-Im Bank for three years,” says Rosenthal. Milestone management started working with Ex-Im Bank just after establishing the company in August 2010.
“We had been in discussions for a long time,” says Kathleen Flanagan, senior loan officer, Ex-Im Bank. “Usually we would require three years of audited financial statements, but we made an exception in this case because of the industry experience of the principals involved.”
Flanagan is keen to emphasize that this was an exception. This deal was the product of a dedicated effort to establish a relationship between the bank and lessor.
“What is different about Milestone is the size of the order and its experience in the bond market,” says Flanagan. “A bond deal was an attractive option as opposed to individual ‘plain vanilla’ loans because of the volume of aircraft and the relatively short interval over which they are being delivered. The fact that Milestone had issued a bond previously was also a factor.”
After receiving approval from Ex-Im Bank to proceed with the bond, Deutsche Bank – the mandated arranger – was left to execute the deal. While these bonds typically have a regular pool of investors, Milestone’s deal expanded the investor base, attracting two new accounts as well as a large order from an investor who had not purchased Ex-Im bonds for a long time.
Convincing investors about helicopters
One complication was that investors do not know helicopters as well as fixed-wing aircraft, because it is a smaller market. Also, there was a perception that helicopters are more prone to accidents, so while the bond is guaranteed, investors need to get comfortable with the technology to understand the investment risks. Bondholders were not concerned about principal risk because Ex-Im guarantees the bond, but they did have concerns about the ‘make whole’ clause in the event of an accident. The fact that it was a new asset class that investors were learning about meant that the company and bankers had to spend time and effort to educate the investor base according to the banker working on the transactions.
Diversity of lessees was key to create a strong product. The nine-aircraft deal includes five customers based in Brazil, Norway and the United Kingdom.
Timing mattered too. Milestone was scheduled to go to market in May, but given the option to delay a couple of weeks if necessary. “If Milestone had gone to market a week later, the pricing would have been about 20bps higher,” says the banker.
Milestone should be thrilled with its 1.86 per cent coupon, particularly given the dearth of long-term capital available for helicopters. And while it is unlikely that this structure will be replicated for a vast number of clients due to the small nature of the market and that there are only a few companies with large equipment orders, Rosenthal says that Milestone will definitely consider a repeat transaction.
“This is a textbook example of how the Ex-Im process should work,” says Rosenthal. “It wasn’t easy and it wasn’t quick, but it was thoughtful and thorough.”