Aercap, the world’s largest aircraft leasing company, has submitted an insurance claim for 3.5 billion worth of aircraft and engines that Russia refuses to return.
However, even if they do get the entire insurance claim (unlikely as the claim is going to be fought in court, Loyds of London suggests they should get 10 to 15% https://www.insurancejournal.com/news/international/2022/03/30/660380.htm ) this loss is about much more than the assets/planes themselves.
It reflects a change in how Aercap will be able to do business.
Aercap acts as a “middleman” between investors who offer capital to buy aircraft, aircraft manufacturers, and airlines. However, their unprecedented loss almost certainly means an end of the cheap debt and cheap insurance payments they rely on.
Aircraft leasing is relatively new over the past 40 years. The number of commercial aircrafts that are leased from a leasing company has grown from 1.7% to 51% of total aircrafts (https://www.statista.com/statistics/1095749/share-leased-aircraft-aviation-industry-worldwide/).
The growth of this industry is largely based on the Cape Town Treaty (https://en.wikipedia.org/wiki/Cape_Town_Treaty), a treaty where all signatory countries agree that that they will facilitate the repossession of assets like planes, trains, farm equipment etc to the original state.
By stealing foreign aircrafts, Russia has broken this treaty, showing that leasing aircrafts is much more risky than previously understood.
Aercap is highly indebted, owing about as much as it owns in assets (74.5 billion in debts, 74.6b in assets (before the Russian loss). They require access to cheap loans in order to facilitate their position as a middleman between bond investors and airlines. They say so themselves:
“We have incurred a substantial amount of debt to complete the GECAS Transaction, [most recent 30B bond/loan offering] which has significantly increased our indebtedness and debt service obligations, increasing risks relating to our substantial level of indebtedness” (2021 q4 earnings FORM 20-F, p 6).
“To service our debt and meet our other cash needs, we will require a significant amount of cash, which may not be available” (FORM 20-F, p 7).
“Despite our substantial indebtedness, we might incur significantly more debt” (FORM 20-F, p 7).
At the time of borrowing the 30b, before the Russian loss, the company had a MSCI ESG Rating of “A.” This was largely because investors bought into the Cape Town Treaty, seeing planes as assets that are really hard to lose. After Russia stealing the planes, the chances of AerCap ever being able to borrow money again at such a cheap price seems unlikely.
The same is true for their insurance costs, both the type of insurance AER will have to buy (in order to avoid a similar situation now where they have to fight the claims in court) along with the the increase in premiums to reflect the risk means that their overhead will increase significantly.
All this means a significant increase in overhead costs in an industry that relies on high amounts of debt. It may be untenable for them to continue to borrow enough money cheaply enough to maintain their company.
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