Aircastle Limited (NYSE:AYR)
JPMorgan Aviation, Transportation and Defense Conference
March 5, 2013 10:25 ET
Ron Wainshal - President and Chief Executive Officer
Mike Inglese - Chief Financial Officer
Okay. Well, Jamie had mentioned that we were going to have a compare and contrast. Well, we certainly do, because Aircastle has a unique strategy. We are very pleased to have with us Ron Wainshal as the President of Aircastle; Mike Inglese, the CFO. Ron has a distinguished career with General Electric. Well, he is there from basically almost day 1 at Aircastle and the company has evolved over the years. We have been pleased to work with them. And it is a unique story in the leasing space. So, let me turn it over to Ron to kick things off and for Mike.
Ron Wainshal - President and Chief Executive Officer
Good morning, being a Jamie at JPMorgan’s tough year in demand. Can you guys hear me okay? Okay. It’s a big business. You heard I guess a couple of different business models. There is $400 billion of airplanes flying around including $100 billion every year just get cranked up by Boeing and Airbus. And there is lots of ways to play. We are different than some of the others in terms of our constitution, in terms of our background. And that’s fine we find that there is good value in our approach to investing in the space and we are an investor is a value investor. And when you do that, you had to sort of assess, it’s not a passive play it’s one that requires servicing after you buy the aircraft. And so our approach to the world has been we look around and we assess from time-to-time what’s available in terms of the profile of assets. And we invest in the places where we see there is the best risk in return.
So, our company was formed from a clean sheet of paper eight years ago by Fortress, the private equity firm. And as Mark said, we have grown over the years. We went public in 2006. We are the first group to do that. And then the financial crisis happened. And what we have done is we have involved our capital structure. Mike will take you through that and how we have done over the last few years, but I think as we have evolved, what makes us different is that number one, the investment style, and number two the fact that our capital structure and our investment style are so integrated. And you need to be able to adapt to the financial market conditions to make sense of it all. So, we have really put a premium on expanding our bond market activities. And through that, we have developed flexibility and we ended the last year, started this year with over $600 million of cash. Thanks to the bond rates later in 2012.
And we have been shipping in a way that we are not folks that just spend money we invested, and we are very disciplined. And I’ll talk a little bit more about how we are looking at the aircraft investment opportunities and the type of worker that we have put into our investments. So, a little bit of the backdrop, I think most of you already know this is a market that’s grown pretty steadily over the years. In fact over the last 30 years, there has been only about three years, where the market actually declined in terms of revenue passenger kilometers. This is an Airbus chart. So, of course, it’s going to show that the expansion we have seen in the past is going to continue indefinitely. We do think it’s a growth market. It’s tied to the expansion of the emerging market economies.
And you can see that Asia-Pacific now is the biggest in terms of market share by region. That’s a fairly new phenomenon. And if you project out, that’s going to continue and expand particularly. Europe, another particularly fast growing market, no surprise, there are some other regions that are emerging and are becoming very big and important. Middle East, in particular, not so much because of origin and destination traffic, that’s part of it, but because of the Gulf as a hub and spoke for the world, and that’s a big deal in the passenger market. It’s a very big deal in the freight market as well, which is one of our areas of focus. In addition to this, we are seeing that the lessors market share has grown quite a lot. I think that changes the dynamics of the market quite a lot, and I’ll cover that shortly.
Now, what do we think is interesting in terms of buying assets? Well, a few criteria are important. We like to have assets that have a broad operator base, because as a leasing company, we expect we are going to have to re-lease them. Number two, general rule of thumb for any business is everybody is doing the same thing. It’s really hard to make money. And I think in my 20 somewhat years in this business, I have never seen more of a clustering of business strategies around new narrow bodies. And that doesn’t mean they are bad airplanes, this means it’s really hard to make money on them.
We don’t have a bank parent with zero cost debt. And so it’s really hard to see that. We also as an investor have a philosophy that the front to middle part of the production life will last longer. The last off the line effect is pronounced. It’s the similar notion as with an automobile. Only you don’t expect an automobile to last 15, 20, 25 years. So, we have evolved our shift, our mix of investments as the markets evolved. We have always been a middle market player, because there isn’t competition from the GEs, ILFC, and other big boys that they have very low cost of capital. The buy prices are extremely attractive and that’s still the case today.
In fact, it’s probably never been more so the case, because the financial markets crisis basically meant that lending from banks on used aircraft pretty much went away. And that’s what provided the liquidity to the market and it’s what provided smaller leasing companies with their capital. That’s a structural change. I don’t think that’s going to reverse itself in any meaningful way for quite a while. So, it means that there is good value in our view in the middle of the market. And I actually think that for the current technology aircraft buying a 10-year-old aircraft is a much lower risk proposition than buying a shinny new one, because the payback period to a part of that value isn’t that long.
Now, last year was an interesting year in a sense that secondary market transaction volumes were their second lowest level ever, the lowest year 2009 when the world was going to end. Well, so it was a smaller year for deal flow. What we did buy was very good, but their book value problems not just from lessors and depreciation, but because a European airline that has an airplane has books in euros is going to have a harder time being able to sell it out without taking a loss if the dollar is weak and that’s true elsewhere around the world.
We found though that there is good values elsewhere wide bodies, I am very concerned of being vocal about this for a while now, but the production rates on new narrow bodies. I think that’s a bigger threat than the new technology coming down the road. And I think that’s the reason why you see particular weakness at least so far on the Airbus A320 family side. I think that 738s are vulnerable to that as they ramp up in a later fashion. Now, all that depends under the rate of growth in terms of demand, so, it’s not necessarily a terrible story, it’s just something that we have to keep in mind.
On the wide body side, you don’t have the same overproduction issues. In fact, you have the opposite problem. There is no 787 flying today. There is really no A350 flying for a while also. And I am much more attracted to this part of the market for that reason. We have good quality customers. We have long-term leases. You don’t have the production supply issue if you will. Freighters, tough market, it’s sick right now, but I think the reports of the market strength are greatly exaggerated. IATA reported a little bit more promising picture. I think it’s still too early to call a recovery, I wish I could, but I can’t, and I’m worried about production issues here too. However, air freight is going to continue. It’s just a question of when the rebound happens.
Right now, let’s play a smaller portion of our investment mix simply because you are not willing to take placement risk, but it’s been a good performer for us and we have actually had pretty good results over the years. And then the last category is E-Jets, I have been – as a company, we have been looking at this category for a long-time. The 50 and 70-seaters have been in North American only market and for us, that’s too narrow over an operator base, and the results having been good. The E-Jets have customers in more than 40 countries. So, that makes it a suitable operating lease aircraft. And last year, we bought four aircraft at the end of the year. So, its part of the mix, it’s not going to be the dominant part of our portfolio, but we see there is good value there.
And by the way, I should mention what are we targeting as far as returns? We are targeting 15% ROE or better. And we get there two ways. One is when we buys say a new wide-body. We will have mortgage debt on that and the calculation of an ROE is more straightforward. When we buy an aircraft that’s been funded through unsecured bond issuances, the connection is not direct, there is no mortgage, there is no connection, so what we do in that case is we apply an overall capital structure. So, we’ll capitalize two parts debt one part equity roughly speaking. And if you use simple algebra, if your return on assets is 11% or 12% which is what we have seen and your cost of debt is 6%, you can get to a high-teens-low 20s with the capital structure we have them makes sense.
Now I have mentioned we’ve kind of had an evolution in terms of what we buy, it’s not that our philosophies changes, but the markets change. So, we have always played a lot in the middle of the market and you can see that in 2012 the proportion of the middle of the market strip shrunk and that’s because of the secondary market being lower we’re not going to force the issue. We have done a lot in the zero to five year category and partly that’s a reflection of our A330 order stream, which is now complete, but we did a lot of business beyond that in narrow wide-bodies.
Now, this is a bit of an unusual mix, if I had to look forward this year, I probably expect that you will see a little bit more in the middle age category, but wide bodies will still be part of what we do. Hard to say about freighters, but we look at that the return thresholds are a little bit higher. But its – I have put this slide out because a lot of the investor community probably thinks of us overly so perhaps as a middle age player, its not something that I show away from it just that there is a factual change in what we have done.
And Michael will tell you what’s happened in our portfolio along the way. There is a couple of other things that have changed in our portfolio and that also reflects the market. Basically Europe has shrunk and Asia has expanded just like the rest of the world has. And Asia now is instead of about a quarter of our book to about a third and I think it will continue to grow. For that reason we have been building up our Singapore office and I don’t think this is a particularly unique story, it’s – it comes about because as aircraft come off lease. Number one, we – our job as asset managers is to find the highest and best use anywhere in the world of portable assets. And so we have had aircraft coming out of Europe and going elsewhere including Asia.
And the part of it is new business and we found as Asian airlines ramp up and that’s a light body heavy market that there is good opportunities to invest as well. So, this is the last slide that I will make before I will turn it over to Mike, but it is one I am most proud of. It shows our servicing performance, okay. So, its one thing to be an investor this is a full context work and managing the assets is the other part of it. And the blue bars basically show you the percentage of days on lease, its utilization. And if you think of us as a landlord getting 98% to 99% over the last five years is a pretty darn good thing. And our business has generally has done pretty well I think we’re at the top end of the business with a fleet that’s 10 or 11 or 12 years old on average. So, it does two things it proves number one that there is a life after the first lease. And number two it shows that we are pretty good at what we do. The other part that butters is that is a little – the red line, which is the rental yield. There is no gain here with maintenance revenue being counted, and this is pure rent over net book value of the assets and it’s been around 14%. So, you can as a landlord get to a very high utilization rate if you give it away. But if you keep that at a pretty steady rate and you keep your planes flying you are doing a good job.
It doesn’t mean that airlines don’t go bust. We had a lot of transitions last year, the year before that Arab Spring happens European, Eurozone the way it happens, that’s our business. And you will see that we have managed to keep the planes flying and at a good rental level and outstanding. So, with that, I’ll turn it over to Mike.
Mike Inglese - Chief Financial Officer
Thanks Ron. We released our results just a couple of weeks ago. So, just a few highlights from 2012. As we began investing in the business again post-financial crisis in the late 2010, we have grown the portfolio and consistently growing our lease rental revenue and EBITDA along the way. We had a strong EBITDA performance up 7% year-over-year. We maintain about 99% fleet utilization or 14% yield. We disposed of about eight aircraft last year mostly part outs of older aircraft in our fleet and require required a modest gain of about 5.7. This is in contrast with the prior year where we’re very active sellers and sold over $0.5 billion worth of assets and generated gains of about $40 million in 2011. We’ve raised about $1.6 billion in the capital markets last year in the construct of reshaping our structure as well as accessing growth capital. We increased our dividend late in the year by 10%, it was our third increase in the last two year and we are active in the buying back our stock as well during 2012 having bought back about 3.6 million shares, at about $11.65 a share.
You can see on this chart, the growth as I mentioned starting in late 2010, the growth in the operating cash flow of the business, reflecting straight from our cash flow from operations and our statement here reflecting lease rental growth and the increasing spread in the business over our interest expense, asset returns as well. Again you see the growth from 2010 through 2012 in our flight equipment assets in the commencer of growth in the right hand chart in our lease rental revenue as well as our adjusted EBITDA. We ended 2012 with the portfolio of run rate of about $650 million of lease rental overall and almost $300 million of that was from unencumbered assets in support of our unsecured debt issuances in the capital markets.
Our capital structures among those conservative in the industry we have rounded about net debt to book equity of about 2.1 to 1. We have no significant contracted forward purchase commitments and we have no real significant debt maturities until 2017. Our unsecured debt to total debt ratio increased to 49% at the end of last year up from 15%. At the end of 2011, we had unencumbered asset pool of $23.1 billion of the aircraft representing almost half the aircraft in our fleet. In the construct of our portfolio evolution over the last three years as Ron mentioned in 2010 we started accessing the unsecured market and creating a shift in our capital structure with a more balanced approach to secured and unsecured debt.
You can see here in the first yellow line, the growth and in unencumbered flight equipment to a little bit over $2 billion at year end. The growth in unencumbered asset pool from 18 to 72 aircraft passenger and freight mix is above slightly with the passenger growth outstripping freight growth. Over that time period in across this time, the weighted average age of the portfolio has decreased modestly, while the weighted average remaining lease term of our portfolio has also – has actually increase modestly.
And then finally as I mentioned in 2012, we raised $1.6 billion, $1.3 billion in the unsecured capital markets about $600 million of which was used to repay a bank facility in the spring of last year. The secured debt ratio is down to about half from the 85% mark at the prior year, we’ve grown the unencumbered asset base and as we have continued to access the high-yield market both from sort of investor education, the strength in the high-yield market. We’ve consistently seen the yield and the pricing that we may able to attain in that market come down considerably over the last three years. So, we ended the year with over $600 million of unrestricted operating cash, strong cash flow out of the portfolio. And so we think we are very well positioned to continue to invest in accretive assets and grow the operating cash flow and earnings of this business going forward.
With that, we’re happy to leave it open for Q&A.
In terms of getting more capital for this year and next few years, do you see yourself getting more secured financing rather than unsecured?
You want to take that Mike?
Yeah. In the context of where we expect to invest this year, I think we will actually see perhaps unsecured debt added to the portfolio. If we find it attractive wide-bodies or other assets that lend themselves to that debt, but as I mentioned late last year, we raised about $0.5 billion in the unsecured market. So, we have a very large dry powder here to deploy in capital. So, I think we will still see a mix of unsecured in the context of this year’s activities, but it’s really going be driven by where we see the best investment value in the context of adding assets to the fleet.
It’s a longer term matter beyond this year. I think it’s fully hard if you have a business it’s just one way or other way. And having a mix of unsecured and secured probably makes sense. What we are mindful of is what some of our competitors have run into in the financial crisis where you had big maturities walls do. And so as we have done our unsecured deals, the nice thing about it it’s a balloon but one day you have got to pay it back. And we have put – it’s not a hard cap, but for us, we have limited it to $0.5 billion a year. So, in effect that puts a limit on how you could grow, that’s the only way you did business. But I think there is good value to be had by having diversified flight access because markets shift in out and but I think the one thing that does make is different is that and it’s here to stay is some sort of pronounced role for the capital markets, the unsecured debt.
Ron, we’ve spent a lot of time, I think at meetings recently talking about this, but I want to bring it up again because I think it’s very important. Your stocks trading at a discount to book value, the good news is the (Dow) has had an all-time high. We might get some asset inflation. The bad news though is that people are looking at the ILFC sale at 33% discount to book value. They are looking at your stock trading below book value. You’ve had some asset impairments. You have some assets on watch list, but it doesn’t seem to amount to the level of pessimism that’s still embedded in the stock with that discount. So, I am wondering can you talk a little bit about how comfortable you are with your asset values maybe touch on your depreciation policies and so forth and with this more of a mid life portfolio than your peers how again just to the confidence that you have in the way you’re carrying your assets under balance sheet?
Yeah, there is a lot of questions all at once. Let me per se, okay, number one, I think we are undervalued. And to that end, we’ve bought quite a number of our shares back over the years. Over the last year and a half or so, we have bought back about 10% of the company. We still have $30 million of share buyback capacity available that’s authorized. It’s a balancing act between where do we see out in the market in terms of its attractiveness and share price. So, there is a discipline to that, number one. Number two in terms of the carrying value, look we do every public company has to do a fleet analysis once a year, we did ours. The standard in the U.S. anyway for U.S. GAAP guys is that assets are impaired if the projected cash flows don’t cover the carrying value. When you get to the very end of an aircraft’s life, if you have a discontinuity in the lease or if you feel that it’s not worth reinvesting in an airplane that put their next lease on, you may have an impairment, it just happens and the other thing that kind of gets lost in the mix is that when you have leases, you have things called maintenance reserves. You have things called end of lease payments for maintenance that’s burned off. That’s kind of loss in the impairment analysis every now and then too.
I am comfortable with the analysis that we did in the third quarter, it doesn’t mean that we’ll not have an impairment again we will. In fact in the fourth quarter we did, we had an A320 that was 14 years old and we had a lessee that was quite strong, paid us $6.5 million of return comp at the end. Once that return comp is received, there is no more cash flow from that per se. And we have looked around what’s the best thing to do, the 320 market may have turned the corner, but it was more sensible for us to take advantage of the active trading market in B2500 and our engines. And we basically sold those engines are transferred them to other aircraft and sold the airframe and broke even when you net it all out.
Our business isn’t about do you want to avoid or hide your impairments? If you buy new airplanes, because it’s a sum of future cash flow, it’s not a present value gain you can wait for a decade or two before you have your reckoning moment. For us, it’s a question of capital efficiency. We didn’t have to sell the aircraft. We could have put it back on lease and not take an impairment but it’s a return on capital game too. And so far us in this particular case, we’ve found the impairment and the maintenance revenue offset each other and we are going to do better getting that cash and putting it to work elsewhere.
And to put some context around it and when we reported our fleet impairment charge in the third quarter of last year. When you look at the impairment charge compared to the prior carrying value of the assets that got impaired, it was basically about a 38% mark down from products sold if my worst valued assets got marked down and this was 12 planes out of 160. At that kind of discount having my entire company trade at the same level or same multiple makes absolutely no sense to me.
So, I just want to pick your brain a little bit more about the freight market. So, we know that it’s been a little bit depressed lately. But I kind of wanted to get a sense for what you thought is this more of a cyclical downturn or do you think when the market finally rebalanced, but when it’s hit a new normal?
I think the whole market shift in both passenger and freight, freight more profoundly. Freight markets always been more economically sensitive than the passenger market, that’s not a new thing. But amplitude the difference is bigger now in the last four years than ever before. And I have heard a lot of different explanations. To me, I think the profound changes that are going on in the European economy are a big driver there and the Eurozone has never been in the crisis that is in not recent memory anyway and I think that’s a big contributor of what’s going on there. What’s also happening in the freight market is that you have – as you do with the passenger market, but even more so a shift in market allocation, more and more cargo is being sent through the Middle East, it’s a big hub and spoke network now. I think the pattern of usage in the cargo markets also changed. We were just doing an analysis of what route lengths are and the average route length for our cargo aircraft right now for wide-body kind of 747 size, 777 size airplane is about 2500 nautical miles. It’s not that long and so when somebody talks to you about their cruising capability for 8000 nautical miles or whatever. It’s not the typical mission profile. The market is going through some fundamental changes, the way stuff that goes by air is produced around the world are shifting. It’s a market that’s evolving. It doesn’t mean that the market goes away I just think it’s undergoing some structural shifts.
In the long-term, I think it will still be an important part of the market. You just need to understand it’s going to have little bit more volatility to it, I was saying that volatility is the fact that these aircrafts are much more fungible redeploying a cargo aircraft is pretty easy, don’t have to worry about the in fly entertainment system or the seats or the galleries or all those customer specific things. It’s pretty fast to redeploy them. In general, we have longer term leases. In general, we’ve had better credits. So, there is some offset and then generally last longer. So, those are all generalities, but we found that there is still good things to do there and it’s still sick, I think some of the decorations of recovery are premature, but I do think that there will be a rebound.
Hi, Ron. Just a follow on from that point, you mentioned high quality wide bodies. Am I right in assuming that’s twin engine wide bodies as opposed to four engine wide bodies?
Good, okay, because you didn’t hear what I said this morning.
Four engine wide bodies, probably.
I probably agree with you.
Yeah and I was just going to follow-up again on the, I think it was the – yeah on the E-jets, I mean, does it bother you that there is a re-engine and prior coming out does that impact your exposure on the current 190 fleet.
I would prefer that there was never any new technology, ever introduced again. So, it ever every lessor, but we knew this was coming down the pike and we invested accordingly. So, it’s not a shocker. I think the lease terms we had on our deals were like 12 years and you know if you look at the production life of aircraft that it’s – it tends to be around 15 years or so, it will be actually a little longer for the current narrow bodies. So, it’s inevitable that something better and new will happen and it doesn’t really affect our economics. As I said I think the E-Jets have established themselves as the plane in the 100 seat market, but they can’t stand still, there is stress all the time and for them to move around is appropriate.
By the way one thing I forget to mention in terms of the cargo market, we have one aircraft to place this year other than in all days we tend we are going to part out. And so when you look at our portfolio, it is – it does have quite a lot of aircraft, but the average lease term for our freighter portfolio is quite long. It’s about couple of years longer than our passenger portfolio. So, it’s about six year, seven years to go. But we only have one airplane in place right now and this year, at least that we are planning on.
I have a question on depreciation. What is the depreciation curve like for your aircraft what I noticed that your average life is around 10 years? What is it like from five years to 10 years, and why isn’t that you prefer to move towards 10 years?
So, the question if you couldn’t hear it was about depreciation and how do we think about the depreciation for a 10-year-old versus a five-year-old airplane, is that fair enough? Well, let me put it this way, I made the comment about how the middle of the market offered value. We’re buying 10 year old airplanes for less than half of the price of a new one. I think there is not a linear curve in terms of market pricing, it’s more convex. And the opportunity buy stuff was a short pay back to a part out value arises because of that. I think it’s a lower risk return trade off in the narrow-body space, it’s simple as that.
Now as far as our accounting policy, accounting policy is straight line to some sort of residual and we use the market convention as a starting point which is 25 years to 15% of whatever the new aircraft was. But what we do as a result of our annual strategy as we visit the market. So, a couple of years ago we concluded the 319s we’re not going to last 25 years because it’s the market shift there is too many low cost carriers and smaller gauge aircraft don’t work as well so we shortened it by a maintenance interval. We also put a cap couple of years ago on our classic residuals. So, we evaluate this all the time.
Also on an airplane specific basis if we get into what we think of it’s the last lease and it doesn’t have to be a 25 year cap lead, we just sold an aircraft in last year that was 27 years old at Southwest flew to all the way to the end. There is no hard limit. But in general, we look at does it makes sense to spend the money to transition airplane to put it through the shop into another lease or not and 25 years is not necessarily a rule thumb, the 14-year-old airplane that we part out and fit the bill. So, it’s a case by case by case.
And the other thing I would mention is just kind of buttresses the argument that I made before about the last off the line is this, if you buy the – in the accounting rules or generalities, right, on average you are going to be wrong, right. It just said when you – the accounting rules don’t let you take the profit unless you actually you sell, okay. So, you’re going to have some if its evenly distributed half of the guesses will be the wrong on the wrong side. But the things that we have done in the last year or two I think illustrate the first off the line versus the last off the line thing. If I use that 15% generalization I will say I will look at an earlier A320 for $30 million residual value than which is mostly engines by the way we’ll say it will be $4.5 million, can I get that today I’m pretty confident we can get that today.
If I look at the last off the line A320 for $50 million will that residual value in 25 years from 2015 or ‘16 be worth $7.5 million, I don’t think so. The demand for the engines is basically a function of the installed base. And today it’s pretty healthy in 25 years it’s not. And so when you look at depreciation realize that the accounting rules are generalizations. We deal with the specifics. In the beginning you have to have a simple constructs you don’t have a different rule for each airplane that would confuse the heck out of investors. We have to have rules and along the way we adjust and to get back to your other question I’m comfortable what we do.
There was some disappointment after your fourth quarter call because I think because you took back five planes and the lease revenue is going to be a little less than expected there are 17 planes that you have to take care of this year. Can you – do you think that was an overreaction first of all. And secondly what are the prospects for taking releasing or selling those planes?
Let me answer that question with this first of all. You’ll seen that in 2009 we had a little dip. Our fourth biggest customer went burst. This happens in our business and the first thing you want to do is to get control of your asset. And I don’t really care if it happens that I end up with AOGs at the end of quarter or the particular time. Step number one is get control of your assets in your record. And then get it back on leasing in an appropriate way. It is trade offs I can go and take the first guy who is want to take the airplane and I may I regret that. Look we every year during the winter you have a slowdown in cash flows for airlines in the Northern Hemisphere, this year no exception. We’ve decided that the right thing to do is to grab our planes rather than wait for situations to deteriorate. Each of these airplanes had some good prospects, and I am pretty confident that this track record will continue. So, I think there is a ridiculous overreaction if that was what caused it. The other part that was decided by some of the reports was freight market concerns, fair enough, but our exposure to the freight market is one airplane right now in 2014. So, I think that’s overdone as well. I don’t know that anybody can match our track record servicing to be honest. And I am pretty confident that we will demonstrate that we are good at servicing airplanes as time goes on.
I have one, Ron and Mike from the web or from a cyberspace, let’s put it that way probably a holder of this paper, but the question is the cost of the refinancing and the 2006 ABS according to who is asking the question. It seems to make sense if you factor in the hedge unwinding so forth and turning off the cash trap and might have a positive impact on your ROE, can you talk about the two ABS deals and the 2006 deals specifically and about when the refinance opportunity makes sense?
Yeah. I think we have been pretty consistent over time in saying we are likely to revisit the ‘06 deal in that context when we think the trade makes sense and we do have a large embedded hedge liability there that would have to get paid off in the context of refinancing that. That hedge expires in just about three years. And so over the course of the next three years, it will sort of amortize itself away relatively quickly. So, I think the ‘06 deal is the more likely of the two candidates over the – near to intermediate term, just because it’s roughly a 5.75 cash pay facility today. And by way of reference at year end, the debt balance is about $300 million. The hedge liability was like $50 million. So, it’s pretty large in the context of the principle outstanding. But in time, we will figure out the best path what we can do with that and we will deal with it.
And for the context of the ‘07 deal, it’s about three times the size we have reset the interest rate on that deal to 1.5 roughly including the spread on a fixed pay basis for the next five years. So, we expect that deal to amortize relatively quickly. And at sometime probably before full payout, we will look at that and say there is too much equity tied up, too much amortization tied up and we’ll probably do the same math and get to a place where we think it makes sense. So, in due course, I would expect that we will do something with both of them and we will see how that plays out over the course of this year.
By the way, Mark, one of the things that accounted for the $1.3 billion in unsecured issuance last year was the refinancing of another portfolio deal that we had that was a bank deal with a hard maturity in ‘15. And in that case, it also had a break funding cost, but it was a maturity extension trade and the NPV made sense. So, we look at this thing. It’s an analytics on an emotional thing. We look at it and we visit it all the time.
And the things that the rating agencies do that make me scratch my head and loose sleep at night. No, I really don’t loose sleep about it, but I just scratch my head about it. On the last bond deal, Moody’s changed the outlook to negative sighting. They didn’t know what you were going to do with the proceeds from the bond deal, which I thought was a rather unique excuse. So, they might be listening. And I am sure investors in the room are curious. Can you talk a little bit about the pipeline and are you going to continue to buy aircraft or maybe not aircraft that might make Moody’s nervous?
Well, we have continued to buy airplanes. That’s our business. This is a structural matter, where you can approach the bond market in two days, because there are big blobs of capital happen all at once, one is you can get the investment commitments first and then raise the money or you could do the opposite. And we choose to do the opposite knowing that there is cost of carrier that goes with it, but there is a reputation that matters too. I think we are a better buyer without a financing contingency, especially in some parts of the market. And I think we have been rewarded for that over time. So, it’s just out model, but we have softened that a little bit. We have expanded our revolver to help us in the future. So far we announced our results last week or the week before or two weeks, time flies, we announced at that time that we have committed to invest over $200 million in aircraft and the pipeline is really building very nicely. And it’s a disciplined process. So, I am pretty confident we will put the vast majority of that $600 million to work in airplanes.
Yeah, I am sure we are all on the edge of our seats, but is your pipeline consistent with what you currently own?
Yeah. But we are not ready to it either. I mean, I think the more accurate thing to say is consistent with what we bought in the last year or two. Okay, because the market has evolved a little bit, I think the mix between – this is a wild gas. So, it could change the mix between wide-bodies and other staff will probably be 50-50. And you will see more business in Asia than other regions in the world. But the great thing about our business model, particularly because of the capital structure is we have flexibility. We don’t have any commitments to the OEMs. We buy only what we want to buy. And if we don’t make sense of it we won’t. I think this is our last point. It is a difference in our business models. We bought aircraft from the OEMs. It’s a different proposition. You are making and this one that I am more sensitive to being a standalone company, our founding shareholder, they gave us all this money, it’s not a big insurance company, it’s not General Electric, they are a private equity firm they have exited.
We have a nice group of public shareholders, but nobody’s there that’s going to bail us out if there is a problem along the next decade or so of time. And we have seen if you look back five years as the world was a dramatically different place. So, when we look in the order stream or any kind of new investment commitments. We do that with probably a greater level of risk aversion than others do. And we also realized that when you buy a new airplane you probably don’t know who your customer will be meaning what the rents will be. You don’t know what the interest costs will be, when you bother that or where it’s going to come from. You have delivery payments. There is a lot of question marks. And so you have to be really darn sure that you are getting a good price. We don’t see the opportunities in the new order market today given how sold out the manufacturers are. And as I said, we take a little bit more of a cautious approach….
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