As America’s financial caldron threatens to boil over, Genesis Lease Ltd. CFO Alan Jenkins sees little chance that his company will get scalded.
In a stroke of good timing, it secured a $241-million debt facility in recent weeks — provided by three European aviation-specialist banks — covering 11 of the commercial aircraft-leasing company’s planes. Genesis also has a well-diversified $1-billion revolving credit facility, maturing in April 2010, to keep it out of the short-term market. Plus, its close working relationship with GECAS, the airline leasing and finance operation of mighty General Electric, offers some protection. And only 12 percent of the aircraft Genesis owns are now leased to airlines in the U.S., the market most vulnerable to economic disruption.
One further positive note: Genesis is based in Shannon, Ireland, although its American Depositary Shares trade on the Big Board. Indeed, Jenkins is a Dubliner who has never had a regular duty station in the U.S.
“I won’t be rethinking that strategy, right now at least,” he says, although he adds with a laugh that the comment is just a joke.
Despite his company’s apparent insulation from much of the crisis, Jenkins takes its challenges very seriously. “These are unprecedented times,” he says. “And if I were someone who needed to go back to the short-term financing markets right now, I’d be very concerned.”
As it is, however, “from our perspective we can be cautiously optimistic here.”
For now, his main concerns relate to the damage that the U.S. financial crisis could inflict on the U.S. and global economies on which air travel depends. “We see the global economy contracting relative to the growth expectations 6 or 12 months ago,” says Jenkins. “And the expectation is that fuel costs will be higher going forward.” He adds, “I wouldn’t underestimate the challenges outside the U.S.,” although the problems facing U.S. airlines are clearly worse. But that excludes any potential damage from a lengthy Congressional deadlock over a financial rescue plan, of course.
“There’s been overcapacity in the U.S. market for some time now. After 9/11 there probably was a business case for some of that capacity to go away in the U.S., but it didn’t happen for a variety of reasons,” he explains. And in a downturn, “there’s going to be a shakeup in the U.S.”
“The ‘holy cow’ moment for me was that Sunday-Monday [Sept. 14-15] when Lehman Brothers failed and Merrill Lynch was bought by Bank of America.” — Genesis Lease CFO Alan Jenkins.
Still, some are warning that global air-travel may be in for a much worse time. The International Air Transport Association this week called for lower taxes for carriers, and higher operational efficiencies by them, “a matter of survival” — and it predicted that at least 20 international airlines are at risk of bankruptcy. (Airlines that are competitively challenged, or are without strong levels of cash on the balance sheet, or that operate older less fuel efficient aircraft “will be under significant pressure through the Northern Hemisphere winter period,” Jenkins agrees.)
In both the global and U.S. environments, he argues, though, Genesis is well-positioned. Not only is its fleet of 54 planes assigned largely to non-U.S. carriers, but nearly all the planes are of the fuel-efficient variety being sought by airlines as they trim older models from their flight lines. “When airlines do come out of the far side of this [slump], their interest will be in fuel-efficient aircraft,” the CFO says.
Further, the connection with GECAS represents something of an insurance policy. “Clearly, we own aircraft [in] a capital intensive industry. And we’re only coming up on our second anniversary,” Jenkins notes. But his company was spun off as a public company by the GE operation, which retains an 11-percent stake in Genesis. And operationally, the much-larger GECAS “brings a lot of leverage to bear in slightly tougher times. We have someone like GECAS negotiating on our behalf, and if you have a default situation — like with [failed Hawaii-based airline] Aloha earlier this year — GECAS manages that on our behalf” and keeps the damage minimal. “That’s the wonderful thing about aircraft,” says Jenkins. “You can move them around the globe.”
Meanwhile, he says, “We have $1 billion of dry powder to finance our acquisitions” through its long-term credit facility, with 16 banks. Indeed, the $241-million, seven-year debt that it closed recently wasn’t a required refinancing. “We thought the debt markets were only going to go one way; they were going to deteriorate,” according to Jenkins, and so Genesis chose that time to do the deal, announcing it on Sept. 23. “Clearly, the week we closed was a pretty tumultuous week. We were quite satisfied by that transaction.”
It’s “a little early to say” what impact on Genesis or the aircraft leasing business will come from American International Group’s recent bail-out, he says. The diversified insurer’s government takeover has put the future of its giant aircraft-leasing unit, International Lease Finance Corp., in some question. ILFC, a healthy if highly leveraged company, is widely expected to be sold as a part of AIG’s reorganization. ILFC has said it is borrowing $6.5 billion in emergency funding — the maximum available under its three unsecured revolving credit facilities — to repay its commerical paper and other obligations, and allow it to get through the 2009 first quarter.
“AIG is clearly reassessing their business, looking to see if there are certain subsidiaries or assets that they want to divest,” notes the Genesis CFO. “It might be seamless.”
But right now there are more-basic concerns for the small work force — only 20 people, in fact — at Genesis. Those concerns involve structuring long-term leases for airline customers, and monitoring economic changes to give the company guidance on what terms to install. Lessees must pay security up-front, and Genesis can charge supplemental rental to mitigate any exposure to default. “That’s a challenge,” says Jenkins. “Inevitably, there may be the odd airline that may default, and you have to recover.” Adjusting terms, he adds, is “part and parcel of an aircraft lessor’s business.”
He’s also free enough of stress to be able to philosophize a bit about the growth of international financial reporting standards. Genesis uses U.S. generally accepted accounting principles now, but it has an edge on other companies looking ahead to the shift to IFRS. While it recruits largely from the U.S., the European-trained finance people who come to Shannon “will have been trained in IFRS,” he says. “Clearly, that would be an advantage.” And in general, “I would be broadly supportive of the way things are developing, as the accounting standards converge in the foreseeable future. We’re in a global business, and in terms of the harmonization of accounting rules, convergence is only a good thing.”
But, of course, running a finance department without significant external crisis hardly insulates a CFO shocks from like those of recent weeks.
“The ‘holy cow’ moment for me was that Sunday-Monday [Sept. 14-15] when Lehman Brothers failed and Merrill Lynch was bought by Bank of America,” he says. “Human nature is that you get used to these developments, and you’re almost not shocked any more on a daily basis.”
Still, he adds, “when we all reflect later in life on the previous two weeks, the consequences will be significant in terms of the nationalized entities.”
Like his U.S. CFO brethren, he’s watching to see if Congress will come through. “Given the current financial environment, the lack of credit, the uncertainty, the lack of investor confidence, I think the consequences of a systematic approach by the U.S. government not being successful would be significant right now,” says Jenkins.
And he takes some pride as an Irishman that his homeland took a corrective step just yesterday by guaranteeing the debt of six major financial institutions, warding off a greater loss of confidence there. “This represents a further extension of government support that we have seen around the world, in an attempt to limit the potentially significant consequences of a continued inability of the banks to access funds,” he says. “I was surprised at the extent of the support from the Irish government. The ramifications are potentially significant, but on balance I think it’s not an unreasonable move given where we are at right now.”