Avolon, a subsidiary of HNA, agreed this week to buy the aircraft-leasing arm of US lender CIT Group, beating a large group of other bidders in the highly-competitive deal.
Executives at the Chinese company could be forgiven for patting themselves on the back for the deal. The price they paid was roughly in line with what analysts expected, and a capital return plan from CIT means shareholders are highly likely to approve the deal.
But the deal is only the latest in HNA’s debt-fuelled acquisition boom — and some market observers are now worrying about HNA’s debt levels following the binge, said a banker close to the company.
Part of the problem is the sheer size of HNA’s acquisitions. Avolon, the acquiring company, is itself a recent acquisition and cost a subsidiary of HNA $7.6 billion including debt. HNA’s subsidiaries have closed other eye-catching deals, including the $6 billion takeover of US electronics company Ingram Micor.
Morgan Stanley and UBS, the advisors to Avolon, are providing an $8.5 billion loan to help fund the purchase, according to a statement by Avolon. The rest will be funded by cash on-balance sheet and new equity provided by Bohai, another HNA subsidiary.
HNA would certainly not be the first Chinese company to have raised worries with its debt-fuelled acquisitions. Fosun International is something of a poster-child for aggressive offshore M&A, and turned to equity investors last year to alleviate debt fears.
But HNA has certainly had an impressive growth of its own. In the last two decades, the company — founded by Chinese billionaire Chen Feng’s — has grown from a local aviation transportation operator to a giant in the sector. It has spread its tentacles to tourism, logistics, ecotech, capital and holding company aspects.
The nitty gritty
Avolon will pay 100% cash for CIT Commercial Air, including its operations and forward order commitments. The unit's assets amounted to $11.1 billion and it had liabilities of $1.7 billion before the takeover.
After the acquisition, Avolon’s business will be doubled. It will own and manage a fleet comprising 910 aircraft with average age at 4.6 years and value over $43 billion.
The purchase price represents a 6.7% premium to net assets value amounting to $9.4 billion, according to the company statement. If the deal is successful, Avolon will become the third largest aircraft leasing company in the world.
The implied multiple from the sale is roughly 1.2 times book value, inline with what the market was expecting since July this year, according to Barclays’ analysts.
CIT also intends to return up to $3.3 billion of common equity to shareholders. It has received a “non-objection” from the Federal Reserve Bank of New York to its amended capital plan. The capital return is higher than some analysts predicted.
The capital return will likely to be in a form of a share buyback. But in terms of how much, when and what price, CIT is still uncertain.
The sell-down marks a new phase for CIT. After filing for bankruptcy in 2009 and struggling for several years, CIT has finally made a move to cut its loss-leading arm and focus more on its core business as a pure-play commercial lender. Investors generally view this deal as positive.
Chinese officials have demonstrated their determination to become a market leader in aircraft-leasing, listing BOC Aviation for $1.1billion June this year followed by China Development Bank Financial Leasing for $800 million a month later. There are plenty more deals in the pipelines, including ICBC Leasing, Bank of Communications Financial Leasing and China Merchants Bank Leasing.
The transaction is still subject to regulatory and shareholders approvals from HNA Group and Bohai. But the deal is expected to complete by the end of the first quarter next year.
A termination fee of $600 million payable to CIT is applicable on this deal.
JP Morgan is the financial advisor to CIT Group. Wachtell, Lipton, Rosen & Katz served as legal counsel.
UBS and Morgan Stanley are the financial advisors to Avolon. The legal adviser is Weil, Gotshal & Manges.