Executives
Julia Hallisey – IR
Ron Wainshal – CEO
Mike Inglese – CFO
Analysts
Jamie Baker – JPMorgan Chase & Co.
Gary Liebowitz – Wells Fargo Securities
Andrew Light – Citigroup
Scott Valentin – FBR Capital Markets
Josh Pinkerton – Goldman Sachs
Andrew Hong – CIGNA
Aircastle Limited (AYR) Q2 2010 Earnings Call Transcript August 10, 2010 10:00 AM ET
Operator
Good morning. My name is Ashley and I will be your conference operator today. At this time, I would like to welcome everyone to the Aircastle second quarter 2010 earnings conference call. All lines have be place on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. (Operator instructions) Thank you.
I would now like to turn today’s conference over to Julia Hallisey, Head of Investor Relations. Ma’am, you may begin your conference.
Julia Hallisey
Thank you, Ashley, and good morning, everyone. I would like to welcome all of you to the second quarter 2010 earnings call for Aircastle Limited. Joining us today are Ron Wainshal, our Chief Executive Officer, and Mike Inglese, our Chief Financial Officer.
Before I turn the call over to Ron, I would like to mention that this call is being recorded and the replay number is 800-642-1687 from within the US or 706-645-9291 from outside of the US, with the replay pass code of 89643753. This call will also be available via webcast on our Web site, www.aircastle.com in addition to the earnings release and an accompanying PowerPoint presentation.
I would also like to point out that statements today which are not historical facts may be deemed forward-looking statements. Actual results may differ materially from the estimates or expectations expressed in those statements and certain factors that could cause actual results to differ materially from Aircastle Limited’s expectations are detailed in our SEC reports. I direct you to Aircastle Limited’s earning release for the full forward-looking statement legend.
Now I would like to turn the call over to Ron.
Ron Wainshal
Thanks, Julia, and thank you all for joining us. Today, we will discuss Aircastle’s performance during the second quarter and current strategic priorities. I will also share some thoughts with you, as usual, on the broader trends in the industry and increasingly convincing signs of a sustained recovery in many of our markets we serve around the world. Mike Inglese will then speak about our financial results, and after Mike’s remarks we will open to questions.
This was an important quarter for Aircastle. We delivered solid results again as the company benefitted from an excellent execution and improving market conditions. Further, we saw strong signs of continued improvement inside of our key industry metrics, including passenger and freight traffic levels, load factors and parked aircraft trends.
Demand for leased aircraft is up, as evidenced by increasing rental rates and improving deal terms. Overall, we believe this is an excellent time to invest in new assets and we have the capital structure and platform to position us to pursue a wide range of investment opportunities offering attractive risk-adjusted returns.
Let’s review our second quarter results. Our portfolio continues to perform well. We reported fleet utilization of 98% in Q2 and a portfolio yield of nearly 14%. With that, we demonstrated again the good demand for our modern fleet across a global and diverse customer base.
Thanks for a high fleet utilization, rental revenue is $128 million, almost the same level as $129 million we recorded in Q2 2009 against essentially the same asset base. This is a very good result that demonstrates our ability to manage through a tough cyclical downturn.
Earnings and cash flows were strong with adjusted net income plus depreciation for Q2 coming in at nearly $80 million or $1 per diluted common share, same as during the first quarter.
Since June, we have secured more than $1.1 billion in financing commitments, further strengthening our capital structure and adding several important new funding sources. We now have bank commitments to finance nearly all of our Airbus A330 new order positions and we've also sourced flexible capital, which positions us to pursue exciting new investment opportunities which may prove beyond the reach of competitors with weaker capital structures and less established platforms.
At the end of June, our fleets stood at 129 aircraft. Measured by book value, 88% of our fleet were latest-generation aircraft. The weighted average remaining lease term for our portfolio is 4.6 years and we had 63 customers based in 36 countries reflecting a good spread of risk. We continue managing our portfolio proactively, keeping a close eye on market conditions across the globe and on the financial health of our customers.
Turning to our portfolio, we continued to make good progress in securing new leases for our aircraft. At this point, counting signed letters of intent, we’ve placed all of our aircraft coming off lease this year. Presently, we only have one off lease aircraft, the 757, which we expect to sell within the next few days. We also sold a second 757 in June to the same buyer.
Looking ahead to 2011, our lease placement requirements are also relatively small with only 9 aircraft left representing about 6% of our portfolio’s net book value and we are making very good progress on several of these aircrafts. In other words, our portfolio is in terrific shape and allows our team to focus on new business.
As I mentioned before, during the past few weeks, we’ve made great progress in securing financing for our Airbus A330 program. We obtained approximately $700 million in long-term financing commitments from three leading global banks to help fund our next nine deliveries on extremely attractive terms.
We expect to apply the first of these commitments during this quarter to the delivery of our first A330 freighter aircraft, which is subject to a long-term lease with an affiliate of High Nine Airlines. We were also able to sign a $108 million predelivery financing facility for our six A330 program with South African Airways, of which we’ve drawn down $57 million as of June 30.
Combined with what we have invested in the program to date, these financings mean our A330 program is essentially self-funding going forward, allowing us to deploy our strong operating cash flow to take advantage of current market opportunities.
Beyond our results, I would like to share a few thoughts on the macro catalyst of our company's fundamental performance. We believe we are in a midst of a sustained recovery as the industry returns its historical growth trajectory of roughly 2 times GDP growth.
And we are seeing increasingly encouraging data from IATA, the International Air Transport Association. Air traffic levels for both passenger and freight are now higher than the previous peak levels we saw in early 2008. Passenger travel increased almost 8% during first half of 2010 versus the same period of last year while air freight traffic increased more than 28%.
Putting aside April’s results, which were dampened by the effects of the Icelandic volcano, the traffic statistics have been improving month by month as the overall tone of the world economy gets better. In fact, passenger traffic rose nearly 12% during the month of June. The biggest increases are coming from the larger emerging economies, while Europe and North America continue to have the slowest recoveries.
Importantly, the growth in air travel is outpacing the increase in available capacity. The 8% increase in revenue passenger kilometers I mentioned before during the first half compares to only a 2% growth in available seat kilometers, resulting in fuller airplanes. In fact, the average load factor worldwide during the first half was a very high 77% and was more than 79% in June, a record level. Freight load factors are also at all-time peaks. All this translates into higher yields and profitability for our customers, and also into heightened aircraft demand.
Parked aircraft statistics bear this – bear out this trend. There are hardly any idle new generation aircraft out there. In fact, recent statistics show that only about 1% of the latest generation narrow-body and mid-body feet is parked. And most of the grounded aircraft appear to be committed to new lessees or temporary displace due to airline financial problems.
So we are pretty close to full deployment, and the rapid recovery in premium travel we’ve seen during the first part of this year has also led to sharp drops in the level of some of the mid-body aircraft like A330s.
Of particular note is the recovery in the long-haul freight market. This is very positive for modern large capacity freighters like the 747-400’s due to the flagship aircraft type for most of the leading cargo players and also accounts for roughly 25% of our portfolio by net book value.
The rapid recovery in air cargo demand combined with the removal from operation of a significant portion of the older technology models means there isn’t adequate capacity to meet rapidly increasing market needs. Rents and values are increasing sharply, though we suspect this will take 6 months to 12 months to show up in the appraiser's data.
Consistent with the statistics I just mentioned, demand for leased aircraft is continuing to improve as our leased rentals. Rental rates for modern narrow bodies are increasing steadily although there is still about 5% to 10% below peak levels achieved in late 2007 and early 2008.
In this regard, we've seen a disproportion increase in rentals for earlier vintage, the latest generation narrow bodies as supply tightens up. Even more striking is the rapid recent recovery for modern mid-body such as the A330. So the recovery for these aircraft is in an early stage, we estimate that the current market rentals for used A330's have increased 15% to 25% just this year as excess supplies evaporated quickly.
I would now like to discuss our strategic priorities. We are beginning to enjoy the benefits of recovery via increasing lease rentals and we expect to see asset values rise. We’ve proven our mettle by successfully managing through sharp downturn, turning in 98% utilization over the past two years while keeping rental yields steady.
I believe this successful track record combined with our conservative balance sheet gives us credibility and a competitive advantage in accessing different capital sources, no other self standing aircraft lessor can match.
We have $800 million to $900 million of attractive built-in growth provided by our A330 program, the bulk of which we’ll deliver through 2011. And as these aircraft come online, this program will layer in strong revenue stream which we expect to be financed with very low cost ECA-backed debt. In addition, we believe this is an excellent time to buy assets and grow the business.
As we will continue to highness the tremendous strength of our platform and we believe we can do this very profitably. We are going to look across a broad range of investment opportunities in our market and seek out the best risk adjusted returns taking into consideration the financing alternatives available for different types of investments.
At the same time, we are focusing on how to improve an already strong capital structure with a goal of achieving reliable and flexible access to capital over time. 10 days ago, we closed a $300 million unsecured bonds sold to US institutional investors and complemented that with a commitment from Citibank to provide a 3-year $50 million unsecured revolving credit facility.
This was the first unsecured bond completed by an independent aircraft leasing company in recent memory, and it represents an evolutionary milestone for Aircastle. Though I believe we paid a bit of the new issuer premium, it establishes access to a deep pool of that capital outside of the more limited secured markets to which most lessors are confined today. Also, it provides us with flexible, long-term capital that we can deploy quickly to secure investments with expected unlevered returns in the mid teens plus a lot of upside.
For example, in June, we purchased an eight-year-old 737-800 that was soon to come off lease fresh from an overhaul. Our purchase price was less than half the cost of a new aircraft or $5 million to $7 million less than the current market appraisal values. We think that's an excellent price to buy an asset with more than two-thirds of its expected useful life remain.
Our team acted quickly securing five different lease placement opportunities with solid customers in three weeks or so between signing the letter of intent and purchasing the aircraft. In the end, we signed a six-year lease with an unexpected initial cash yield of 14% to 15% per annum and got the aircraft in service the same day we closed the purchase.
And I believe we achieved similar economics on the A330 purchase in leaseback transaction agreed with Sri Lanka recently for three aircraft. We are also using the proceeds of the bond deal or at least part of the proceeds of the bond deal to repay our Term Financing No. 2, which has a final maturity date of September 2013. As of June 30, that facility had outstanding debt balance of approximately $103 million or being secured by aircraft having a net book value of approximately $250 million plus $27 million of restricted cash. By repaying this facility, we will free up the restricted cash and make the portfolios cash flow available for other uses.
We are constantly looking for investment opportunities to fit our rigorous criteria, with a sharp focus on modern, high-utility aircraft with larger operator bases, we are seeking high risk adjusted returns, that is good cash yields with significant upside potential that will be accretive to our shareholders. In doing so, we are going to leverage a strong origination and placement skills for our platform as well as our presence in the resurgent air cargo market and our access to diverse set of funding sources.
This is an excellent time for Aircastle. We’ve taken a few important steps forward over the past few months to better position us for the long term and we are going to take advantage of terrific opportunities we see before us right now.
I will now turn it over to Mike.
Mike Inglese
Thanks, Ron. During the second quarter, our aircraft portfolios continue to generate strong operating results. Lease rental revenue for the second quarter 2010 was $128.1 million, down modestly year-over-year, includes a decrease of $4 million comprised of $2.9 million from aircraft in transitions and extensions during the year and $1.1 million related to the two 757 aircraft that were AOG, subject to forward sale agreements.
These decreases were mostly offset by the impact of acquisitions net of dispositions of $3.1 million compared to the prior year.
Second quarter 2010 total revenues were $130.2 million, a decrease of $6.7 million year-over-year reflect the lower lease rental revenue of $1.3 million, lower end of lease maintenance revenue of $2.8 million due to fewer lease transitions during Q2 2010, and higher non-cash lease incentive amortization of $2.1 million driven by the number of lease transitions that have occurred over the past year.
Based on our current expectations that we will not have any lease transitions or terminations during the third quarter of 2010, we expect that we will not recognize any maintenance revenue during the third quarter of 2010 and we also expect that the amortization of net lease discounts in lease incentives will be generally consistent with Q2 2010 figure.
For the second quarter of 2010 the annualized portfolio yield, annualized lease rental revenue compared to the average aircraft assets held for lease, was about 13.6% consistent with the second quarter of 2009 and first quarter of 2010. The quarterly run rate at June 30 for lease rental revenue was approximately $130 million.
When factoring in the committed aircraft acquisitions during the third quarter of 2010, we anticipate that the Q3 2010 exit run rate for lease rental revenue will be around $137 million.
Adjusted net income plus depreciation and amortization for the quarter was $79.8 million or about $1.00 per diluted share, down modestly year-over-year due primarily to lower lease rental revenue and lower maintenance revenue totaling $4.1 million, offset by lower maintenance and other costs of $1.1 million and lower adjusted interest expense of $1.8 million.
Adjusted net income from the quarter was $20.5 million or $0.26 per diluted share, down $6.4 million year-over-year and reflects total lower revenues of $6.7 million, higher depreciation expense of $2.7 million, partially offset by lower maintenance and other costs of $1.1 million and lower adjusted interest net of $1.8 million.
Depreciation expense for the second quarter was $54.4 million and our quarter-end run rate depreciation on a quarterly basis was approximately $55 million. Giving effect to our expected aircraft acquisitions, Q3 exit run rate is expect to be around $57 million on a quarterly basis.
Reported interest net, which includes hedge related charges, was $40.2 million for the second quarter of 2010, and is net of approximately $800,000 of capitalized interest during the quarter. Cash interest expense, which excludes all non-cash interest charges and hedge items, was about $35.3 million for Q2, down $1.3 million from the second quarter of 2009.
Second quarter 2010 total SG&A was $11 million, down modestly from Q2 ‘09 and includes non-cash share based compensation expenses of $1.9 million and $1.7 million for Q2 2010 and Q2 2009 respectively. For the full-year 2010, we continue to expect cash SG&A to be in the $39 million to $40 million range.
During the second quarter, we reported a loss on a sale of an aircraft of approximately $1.3 million reflecting higher than anticipated maintenance costs in preparing the aircraft for delivery to the buyer. We have another similar aircraft delivering to a buyer within the next few days, we’re expecting that transaction to be essentially breakeven.
In other income, we saw approximately $1.7 million swing from Q2 2009 to Q2 2010. In Q2 2009, we had approximately $600,000 of income from a claim settlement and $900,000 of other income from the mark-to-market on an interest rate hedge for a total of $1.5 million in other income for Q2 2009. In Q2 2010, we simply had a mark-to-market on an interest rate hedge of about $176,000 non-cash charge.
Our second quarter tax provision was $1.5 million, $1.3 million of which is deferred for an effective tax rate of about 7.7% reflecting the revenue and income sourcing mix from the portfolio during the quarter. Consistent with our 2009 full-year effective rate, we expect that the 2010 effective rate will be in the range of 7% to 8% overall.
Turning to capital structure and financing activities. Since June, we’ve secured $1.1 billion of secured and unsecured financing commitments, both solidifying the financial profile for the Airbus program and providing flexible new investment capital for the business. As previously disclosed, we obtained about $700 million in delivery financing commitments for banks for our 2010 and 2011 A330 program deliveries. These commitments which are based on ECA support provided by COFACE or from SMBC, BOTM and Citibank, and range from $220 million to $250 million across those three institutions.
Additionally, SMBC has also provided $108 million predelivery loan facility to finance payments to Airbus on our six A330-200 aircraft delivering during 2011. At June 30, 2010, we had draw $57 million on that facility.
As Ron spoke about earlier, at the end of July, we closed a $300 million private placement of senior unsecured notes due in 2018, proceeds from the offering net of underwriting fees was approximately $291 million. We planned to use the net proceeds to repay all the amounts outstanding under Term Financing No. 2 of approximately $103 million as well as $25 million drawn under a $75 million facility we had with Citicorp North America. Other purposes including the purpose of aviation assets, will be used – the use of proceeds with remainder.
Finally, we secured a commitment from Citigroup Global Markets for a $50 million senior unsecured revolving credit facility, which has a three-year term and subject to completion of satisfactory documentation, we expect to get that done during the current quarter.
At the end of the second quarter we had total cash of $362.8 million comprised of $149.7 million of unrestricted cash and $213 million of restricted cash. We had $2.4 billion of securitization and term debt outstanding comprised of six separate facilities with the earliest maturity being in September 2013. Additionally, we have the new PDP facility in place with the balance of $57.1 million.
Our net debt outstanding was $2.3 billion which is about 61% of the net book value of our flight equipment, and the net debt to equity ratio excluding the mark-to-market on our interest rate derivative portfolio was approximately 1.5 to 1.0 at quarter-end.
Pro forma for the unsecured notes offering total debt was $2.6 billion with an unrestricted cash balance of $360 million. For the remainder of 2010, we expect to fund approximately $172 million total payments for the new A330 aircraft comprising both predelivery and delivery payments to Airbus. We estimate borrowings under our 330 PDP facility together with the financing commitments we have for deliveries will cover substantially all the funding requirements for this program for 2010 and through 2011.
With that, operator, we’d like to open up the call for question and answer.
Question-and-Answer Session
Operator
(Operator instructions) Our first question comes from the line of Jamie Baker with JPMorgan.
Jamie Baker – JPMorgan Chase & Co.
Good morning, everybody.
Ron Wainshal
Hi, Jamie.
Mike Inglese
Hi, Jamie.
Jamie Baker – JPMorgan Chase & Co.
Hi. Ron, you’ve got somewhat older fleet than some of your peers. The transactions that are coming up all seem fairly biased to more modern equipment, with all the money out there that’s starting to chase aircraft these days, I am just wondering where the sweet spot really is right now? I know you have the example of the 73 with about two-thirds of its useful life remaining. Anymore color?
Ron Wainshal
Yes. We look across the entire spectrum new and used. We're very focused on the technology of the aircraft. That’s really the primary driver of demand. You tend to have a showroom effect when you drive the aircraft off the delivery lot, it’s no longer new. I think the returns – unlevered returns in the new aircraft market are around 8% or 9% at best. Depending on how you lever that based on the traditional European bank debt profile that's a lever return to mid-teens.
We do see far better returns available and lots of demand on the aircraft types that I mentioned; the 737-800 and also in the mid-bodies. We see the recovery and demand that are being particularly acute and there is a bit of competitive advantage we have in terms of accessing capital. That’s really the play.
Jamie Baker – JPMorgan Chase & Co.
Okay. That helps. It sounds like you're pretty bulled up, pretty eager to push the throttles to the far wall for a lack of better term, in terms of acquisitions and growth from here. Is that something that the current management team can accomplish or do you need to bulk up a bit, which might mean incremental costs now and profits later.
Ron Wainshal
Well, there is couple things. One is whenever you layer on new investments it takes a while for that to actually show up in your financial statements because the assets today you buy them will generate no income, just the day after is when you get it. But the – we are absolutely excited about growth. There is lot of opportunity. One of the things we are going to try to do, though, is to still keep the capital structure we have in place, which I think is a competitive advantage for us. It’s conservatively levered. And I think this is the profile we will seek to maintain over time.
Having said that we're careful about making sure we keep everything in balance in terms of equity and making sure that we do things that’s accretive.
Mike Inglese
Jamie, from an operating platform perspective, I don't think we see any significant changes to what we have in place today in the context of the addition of our Airbus program over the next year and a half in deploying the capital that we think the business has available and we will continue to generate over the next year or two.
Ron Wainshal
Yes. In that regard I would say and I’ve said this publicly, I think we can double the size of the company without materially changing our overhead structure.
Jamie Baker – JPMorgan Chase & Co.
Excellent. That certainly answers my question. Thanks, guys.
Operator
Our next question comes from the line of Gary Liebowitz with Wells Fargo Securities.
Gary Liebowitz – Wells Fargo Securities
Thank you. Good morning, Ron, Mike and Julia.
Ron Wainshal
Good morning, Gary.
Gary Liebowitz – Wells Fargo Securities
Ron, can you tell us when the next loan-to-value covenant test comes up, and what your anticipated cash requirements would be for that?
Mike Inglese
We have two tests, Gary. The next one would have been in September, but since we are paying off Term Financing No. 2 that’s no longer relevant. So next spring we will have a loan to value test in our Term Financing No. 1 and it’s hard to predict where we think values will go over the next six to eight months at this point in time. But we think we are well positioned, given where we think they will be and where the business is right now.
Ron Wainshal
Yes, I think there is always a lag effect, Gary, on the – in terms of what the appraisers recognize relative to what we see in the world. But we see asset values going up and so I think that bodes well for that test. The other thing is that we effected an amendment during last quarter, which allows us to get credit for letters of credit in the loan to value test. That basically reduced the amount of anticipated further contributions basically cut it off to meet the test. So we are in compliance right now and I am pretty optimistic about next year.
Gary Liebowitz – Wells Fargo Securities
Okay, great. And now, Ron, you talked a fair amount about new asset – or new asset value and lease trends, but as I look at your portfolio and what types of leases expire coming up, it's mostly out of production models. Are you seeing any bounce back in those lease rates?
Ron Wainshal
Well, actually I don't think that’s accurate. What’s left over in terms of our portfolio this year is zero and we managed to get everything placed on the terms we expected. Next year is a very modest level of aircraft left in place, and the bulk of it by value is a 777, which we're very close on. I actually think that from a revenue perspective we are pretty well locked in for the next two years given the minimal amount of lease rollover we have. I do think the recovery for the classic generation aircraft is questionable. In fact, I am not sure it is going to happen at all.
I do think that – and we are seeing this that latest generation aircraft like 737s that were produced at the early part of the line will perform very well. In fact that's one of the areas we’ve seen the sharpest snap back and that's probably where we have more exposure than we do in classics. The classics, by the way, represent something like 5% of our portfolio by net book value.
Gary Liebowitz – Wells Fargo Securities
Okay, and Ron, can you give us an update on the search for a Chief Investment Officer? It seem like you've been actively finding deals without one. Do you need one?
Ron Wainshal
It’s ongoing and yes. Firstly I think there is a lot of interest and there is some very capable candidates to add a lot to the company.
Gary Liebowitz – Wells Fargo Securities
All right. And one last one. If I recall, you have ten A330s in the backlog and nine have been placed. Can you discuss the level of interest in that last A330, and do you have a right to convert it to a freighter?
Ron Wainshal
That’s all accurate. There is only one left. It’s in spring of 2012 and it seems like an overnight drying up of supply on the 330 side. I think the step up in rents on that is very, very encouraging and we have actually a lot of demand from a lot of very high-quality customers. It’s been a marked improvement over the last few months. So I am very bullish on that.
Gary Liebowitz – Wells Fargo Securities
Are you –
Ron Wainshal
We do have the right to make it into a freighter but I think realistically the passenger demand is so robust. It’s better to keep it that way.
Gary Liebowitz – Wells Fargo Securities
Okay. When do you expect to have that placed?
Ron Wainshal
This year. I don't know how soon. It’s matter of what's the best way to extract value.
Gary Liebowitz – Wells Fargo Securities
Thank you very much.
Ron Wainshal
Sure.
Operator
Our next question comes from the line of Andrew Light with Citi.
Andrew Light – Citigroup
Hi, good morning all.
Ron Wainshal
Hello, Andrew.
Andrew Light – Citigroup
On the lease rate factor, you're saying it's roughly 14%, 15% for a new generation used aircraft, and 8% to 9% for a new one. Would it also be 8% to 9% for a sale and lease back? Or would you expect to be better than that?
Ron Wainshal
Well, just to be clear, I was talking about yields. There is a little bit of a different concept but I don't think the lease rate factors are that far off from that Andrew. Sale-leasebacks are pretty comparable in terms of the new generation airplanes. They are a little bit more over the math in terms of the used aircraft, because buy prices tend to be a little bit more scattered, which is a good thing by the way. But lease rate factors on the new aircraft have been extremely competed over the last few months, as quite a number of entrants have sought to enter the market and capture market share and establish a platform.
But the other big factor in the new aircraft is the availability of ECA and EXIM debt. Airlines are opting for that more often than leasing because it’s cheap and that’s probably the biggest competitor for leasing companies at the moment.
Andrew Light – Citigroup
Right. Is it – do you think it's a temporary phenomenon that you're getting yields at 14% to 15%, and that's because other people are competing elsewhere, or maybe lease rates have started to rise ahead of aircraft values? Or is it something you've seen before, and this could continue for a while, or is this really just a – like a six month opportunity to buy planes?
Ron Wainshal
Everything is temporary. I think this is going to last a little while because the fundamental driver here is the limitations on the bank market financing. This is where we have an edge. The new players are pretty much constricted to the new aircraft side because that's where they can debt. The big players are always focused on the new aircraft side. So it leaves a playing field open for us. Eventually, we'll draw competition, but it's hard for our competitors to get that best financing given the bank market issues.
Andrew Light – Citigroup
Okay, great. Thanks very much.
Ron Wainshal
I think it's a one-year plus phenomenon but it depends on the health of the bank market.
Andrew Light – Citigroup
Right. Given the free financings you've proposed, financings you've done, and – I think you said you had unrestricted cash above $300 million or so, and what would you think your capacity at the moment is to purchase equipment in value and dollar terms, if you like?
Mike Inglese
That depends on how we go about it. One of the things we've talked about in the past, which we're exploring, is to the extent we do find new opportunities, and I want to be careful to say we have not ruled that out, if we find opportunities to avail ourselves of EXIM financing or ECA financing will do that. That will provide us with a lot more powder in terms of asset cost, if you will. If we buy things just purely on an unsecured – just with cash, then obviously it's going to be limited to the amount we have outstanding. But we are going to look at a mixture of things and it’s just a matter of what looks best.
Andrew Light – Citigroup
All right. Thank you very much for that.
Operator
Our next question comes from the line of Scott Valentin with FBR Capital Markets.
Scott Valentin – FBR Capital Markets
Good morning, and thanks for taking my question. Just to follow up a little bit on the recent commentary. In terms of bank financing on existing aircraft, are you seeing any easing up in terms at all?
Mike Inglese
It depends on what you compare – to what period you are comparing to. Versus a year ago, it's night and day. There's capacity versus zero. But I think since the beginning of the year it’s been pretty steady and pretty stable in terms of pricing and terms. The European aerospace banks, which are the bulk of the financing for the lessor world are kind of focused on narrow-body aircraft, latest generation zero to five years old. Getting outside that envelope is very hard to do. I don't see that changing any time soon.
Scott Valentin – FBR Capital Markets
And with LPDs right around 65% type levels for that five year and older aircraft, or –
Ron Wainshal
Give or take, yes.
Scott Valentin – FBR Capital Markets
Okay.
Ron Wainshal
With a fee pass date on.
Scott Valentin – FBR Capital Markets
Okay. And a question on – you mentioned your capital structure and your leverage being very conservative. What would be the highest in terms of debt-to-equity where you'd want to push the balance sheet?
Mike Inglese
I think we feel pretty comfortable in the neighborhood where we’ve been historically, which is in and around two times. And as we look forward we will balance that across the temporal effect for instance of the Airbus program coming on next year which with ECA financing will be a slightly higher leverage. But we think over the course of the next two years it will still be within that kind of band of within shouting distance of that two times.
Scott Valentin – FBR Capital Markets
Okay. Thanks very much.
Mike Inglese
Sure.
Operator
(Operator instructions) Our next question comes from the line of Justine Fisher with Goldman Sachs.
Josh Pinkerton – Goldman Sachs
This is actually Josh Pinkerton for Justine. You guys talked a little bit about an older 737 that you were able to purchase – what sounded like a pretty attractive price. Are you guys seeing any more opportunities to invest in older aircraft, or is this more of a one-off type deal?
Ron Wainshal
We are looking at those types of assets. I guess I want to emphasize again, they are the latest technology so they are in the five-year to ten-year type of a territory. There is an awful lot of that demand out there and very little supply. If you look at the top 10 leasing companies I think only Aircastle is playing in that market. When you look at the new entrants, just about everybody is focused on new aircraft which means that we are competing against a bunch of smaller, less well capitalized kind of capable companies and these are still very much in-demand aircraft, as illustrated by our example.
So the answer is, yes, and it’s not the only thing we are looking at but these are really attractive returns.
Josh Pinkerton – Goldman Sachs
Great. And then just one more broader question. With the recent unsecured issuance, you guys talked about the value that you see in having a diverse funding source – diverse funding base. There's obviously a price that you pay for that, where you you're paying probably a little bit higher rate for that unsecured financing, what you could get in the secured markets. Could you guys talk a little bit about how you think about the value of a diverse funding base versus getting the absolute lowest possible cost of capital, and how you're thinking about that balance going forward?
Ron Wainshal
Well, couple of things, one is if we are investing 15% and we are paying 10% that’s a pretty good deal. That’s just in very short terms. It’s flexible, fast, it’s unrestricted in terms of our application. But I think it also strategically opens up different opportunities for us. The US institutional market is a deep and robust source of capital. I don't think the European bank market qualifies that any more.
I think in time, we will establish ourselves better and I expect our funding cost will improve there. So this was a first-time deal, and as I said before, I think we paid a bit of a new issuer premium but I would expect that those costs would drop.
Josh Pinkerton – Goldman Sachs
Great. Thanks.
Operator
Our final question comes from the line of Gary Liebowitz with Wells Fargo Securities.
Gary Liebowitz – Wells Fargo Securities
Thanks. Mike, you’re selling another 757 in the third quarter. Do you expect the proceeds on the loss to be comparable to that – what you reported in the second quarter?
Mike Inglese
As I said in my prepared remarks, Gary, we expect the transaction to be essentially breakeven and I think the proceeds will be in the same neighborhood as what we had in the second quarter.
Gary Liebowitz – Wells Fargo Securities
Okay. Is there something about that aircraft now? There's a bias towards selling as opposed to re-leasing them as the leases expire?
Mike Inglese
No. These aircrafts we purchased in the 2007 time frame is part of a number of aircraft we purchased then and they were at that time already subject to a forward sale agreement. So these transactions are just carrying out an agreement that we inherited with the acquisition of those assets. And we have another one and the final one from that transaction which is expected to occur in the third quarter of 2011.
Gary Liebowitz – Wells Fargo Securities
Okay. Thank you.
Ron Wainshal
Hi, Gary, just on the note of asset sales, we have been over the last couple of years aside from these deals that were consummated quite a while ago, as Mike mentioned, fully pruning the classics from our portfolio. We'll continue to look at whether it is better to reinvest and re-lease an aircraft or to just to sell it as time goes on. But we are looking to downsize that part of – a small part of our portfolio. And at the same time, as market conditions improve, we are also going to look to see what kind of trading opportunities there are to take advantage of some of things we’ve been putting on recently.
Operator
We do have another question from the line of Andrew Hong with CIGNA.
Andrew Hong – CIGNA
You're thinking as to why you would pay down the term financing number two, where it's always – it seems to be at lower interest rate to the $300,000 note that you just issued?
Mike Inglese
Yes, we just – frankly we thought it would be – it was a very heavily amortizing loan and we thought we could better deploy the cash that was consumed in paying down that loan over the next three years with chasing the investment opportunities that we see in the market today. And it did also freed up those assets and created an unencumbered asset base which we think is something we will be mindful of in the context of assessing the unsecured bond market over time.
Andrew Hong – CIGNA
Yes, thank you.
Operator
There are no further questions in the queue at this time. I will now turn the call over to Julia Hallisey with any closing remarks.
Julia Hallisey
Thank you. This concludes the Aircastle second quarter earnings call. We look forward to speaking with you next quarter.
Operator
This does conclude today’s conference call. You may now disconnect.
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