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Post by ablrateandy on Feb 16, 2015 22:35:31 GMT
Good evening all!
Thanks to those who have signed up for the new loan already. I thought I would give a quick overview of our latest loan. We've got it open for a decent length of time and interest is payable from when you submit your bid (obviously we have a very high degree of confidence on completing!)
Key Points
- the loan is secured against an ATR 42-500 aircraft which has a current value of £3.48mio (c. 71% LTV) - the "worst case" value for the aircraft at the end of 3 years is £2.264mio (note that the current "worst case" value of the aircraft today is £2.68mio but the market value is 800k higher) - the reason for the discrepancy is that the worst case value (Half Life Base Value) is based upon a theoretical equality of supply and demand... but in our market there is a much higher demand than supply so we would expect the value to be around 600k higher - it is best viewed as the difference between a "trade-in" value and a "re-sale price" for a car - despite that, and because we want to protect investors, the lessor will pay an additional £360k (edit - should be 432k (36 x 12,000) over the life of the loan into the SPV, leaving the worst-case value of the SPV at £2.624mio (edit should be 2.696) (we estimate it will actually end up somewhere just over £3mio) - the aircraft has 2 years of a lease remaining and we anticipate no difficulties re-leasing the aircraft at a fairly similar rate to the current one (£49,000 pcm). Demand for turboprops is exceptionally high and supply is very low - the interest cost is less than half of the lease rate on the aircraft so the lessee is very comfortable with the ongoing payments - the current lessee is SATENA, who are effectively owned by the Colombian government and we have never had a payment issue with them - these aircraft are used on infrastructure routes - ie. the government operates them because they need to have aircraft flying between X and Y - in the highly unlikely event of a payment problem, investors have recourse vs the lessor and then the SPV containing the aircraft - the lessee is contributing to a maintenance pool at a level considerably above anticipated maintenance costs, providing additional security in between service periods
Full details are up on the site, and you should rely on those!
Happy to field any questions on valuations, cashflows etc etc if you aren't comfortable on aircraft
Andy
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debeast
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Post by debeast on Feb 17, 2015 7:47:39 GMT
Yay great to see another one go live. We do need more though for diversification :-) /beastie
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Post by ablrateandy on Feb 17, 2015 9:03:13 GMT
Thankyou We have a rather decent pipeline of aircraft and a few other bits and pieces but we like to line up the ducks correctly so that we are happy that they get done! Lots of our stuff has leases attached too which not only secures the cashflows but also lifts the value of the aircraft way above the unencumbered value, something that the Ascend valuation can never take into account. We look forward to the Minibeasts' inheritance being invested!
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mike
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Post by mike on Feb 17, 2015 13:44:57 GMT
ablrateandy There is one aspect of this preventing me adding to my current position in Ablrate. Overall I like your proposition and the diversification it offers versus the numerous property backed loans on other platforms. My concern here is the residual value and the resultant LTV. Using the "worse case" numbers provided you end up with a loan of £2.475M versus an asset value of £2.624M giving an LTV of 94% versus the 71% quoted. Can you explain to me why I should look at this in any other way.
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Post by ablrateandy on Feb 17, 2015 14:07:52 GMT
That's a perfectly fair question and I will try to answer in a way that is clear . However, if I don't cover it to your satisfaction then feel free to drop me a mail or give me a call! Aircraft are slightly unusual compared with other assets in that there is an established independent authority called Ascend who provide future valuations. They provide two valuations on the date that you query, called the "Half Life Base Value" and the "Half Life Market Value". The HLBV is based on a standard depreciation rate that changes little from year to year. So, on the day of the valuation certificate (which is on the site), we can see both values - the HLBV being the value that their computer model expected the value to be and the HLMV being the value that the aircraft would currently fetch in the open market. However, because the HLMV is the actual value right this second, they do not predict the future market value of the aircraft because they don't want to predict data. Personally (and I have invested in the loan!) I would expect the value of the aircraft in three years to be above the HLBV. At the moment, the HLMV is about 30% higher than the HLBV so I would expect the value of the aircraft to be 15-20% above the HLBV. By showing the HLBV, we are just being absolutely honest with investors and saying "this is the expected worst case". A few things that I would note are : 1. With property, your LTV is based on a constant valuation and doesn't take into account market fluctuations. Our LTVs take into account worst-case fluctuations and still remain over-collateralised. 2. The lessor, Phoenix, would not enter into this transaction if they didn't anticipate having very strong equity in the aircraft at the end of the transaction 3. With loan payments at £49,000 and interest payments at under £23,000, we would not have a difficulty re-financing and re-leasing the aircraft (from a bank if necessary) - there is a lot of wiggle room there if at the end of three years no-one wanted to buy the aircraft from us! 4. Regional turboprops are ace . They are workhorse aircraft and always in demand. We can always find customers for them. 5. Whilst I am making a big statement by saying that I expect the market value to remain well above the base value, there are a few reasons behind this : (a) There is a very limited production line in the sector (I think 70 airframes per year?) (b) Regional air travel is very fast growing and our customers (mainly LatAm and SE Asia) are in very high growth areas so demand is very high (c) Historically, HLMV have out-performed the base values on turboprops. I will find a document to prove that when I am back in the office Hopefully you will see our honesty as it is - we don't want to mislead by giving you our "anticipated future value" of the aircraft - which to be honest we could very legitimately have done! We want to lay out all of the facts of what we, and an independent valuer, see as the worst case scenario and allow you to make an informed choice. Our opinion, and that of Phoenix, is that we are very comfortable on the capital repayment and that we see the HLBV as a worst-case scenario that we have covered.
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Post by ablrateandy on Feb 17, 2015 14:19:13 GMT
To make it a slightly more tongue-in-cheek comparison (excuse the flippancy !). Half Life Base Value is NOT the scrap value of the aircraft but it isn't far off... it is defined as : "Base Value is the appraiser’s opinion of the underlying economic value of an aircraft in an open, unrestricted, stable market environment with a reasonable balance of supply and demand, and assumes full consideration of its “highest and best use”. An aircraft’s Base Value is founded on the historical trend of values and in the projection of value trends and presumes an arm’s-length, cash transaction between willing, able and knowledgeable parties, acting prudently, with an absence of duress and with a reasonable period of time available for marketing. " In our case though, the market doesn't have a balance of supply and demand... hence the current market value being 30% higher than the base value. The Half Life Base Value is effectively the value of a pile of bricks and windows. The Half Life Market Value is the value of a house. We are buying a house for £3.45mio but the value of its bricks is £2.68mio. In three years, we expect the bricks to be worth £2.26mio. What will it be worth as a house? Well, worst case scenario you would hope £2.26mio but hopefully someone will want a house building out of them
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Post by ablrate on Feb 17, 2015 14:57:57 GMT
I would add: If we revalued the final residual on the basis of the current premium in the market the residual would be around $4.5 million (or around £2.93 million) the cash accumulating would be £432,000 so a value of £3,362,000. That would be coverage of 73% LTV. There are also accumulating maintenance reserves which, while essentially a zero sum (as they are periodically paid out for maintenance) do accumulate at periods further reducing the LTV until a maintenance event. This may seem irrelevant but in the event of default these are very important to cover void periods. Assuming an annual maintenance draw down we would have accumulated in month 11 £320,000 in maintenance reserves. However, when putting together a loan we want to project a conservative scenario which gives lenders the opportunity to assess risk better. The FCA have been vociferous on 'down playing risk' so we try to be cautious when accepting what transactions are on-boarded. Regards Ablrate ..and here is your MV/BV chart. The quality is not so great as its from a scan.. sorry.. The black dotted line is median Market Value tracked against the Base Value (the red triangles) and the blue is 'best and worst' values within that range.
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mike
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Post by mike on Feb 17, 2015 18:08:25 GMT
Thanks for that it gives me a good feel for the methodology involved. Projecting out the market value to give a potential LTV of 73% is very useful. It can of course vary with normal supply/demand shifts but the same is true of property. Without trying to over complicate the loan information packs going forward it might be useful to include that number as standard. Bottom line is I will re-look at this loan with a view to investing.
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baz657
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Post by baz657 on Feb 17, 2015 18:27:24 GMT
Normal world finances fly out the window (groan!) when aviation gets involved, as anybody who has been remotely connected would agree. Asset depreciation hardly exists but it is replaced, and then some, by maintenance costs. Each £100 unit you buy on one of these turbo props might actually entitle you to say you own a part of that aircraft, but you'll probably actually be owning a tyre valve or something else just as small and insignificant. Just one seat belt on a small four-seater Cessna can set you back $1000 so imagine the price of the parts for the bigger ones.
As long as they're well looked after with some TLC and shed loads of cash (as these on offer appear to be), IMO they will hardly ever go down in value by a massive margin, and might even go up.
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duck
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Post by duck on Feb 17, 2015 19:01:21 GMT
...... but we like to line up the ducks correctly ....... I stand in regimented manner .....
Appreciate the explanations given above, extra knowledge is always useful since my aircraft knowledge is based on wing box and undercarriage design/fatigue analysis on large aircraft.
More than happy with this proposal, bids in already.
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Post by ablrateandy on Feb 17, 2015 19:17:44 GMT
Thanks mike for looking again. I am very happy to show a full cashflow prediction etc offline if you mail me (not sure if I can post an email on this board but you can find me on our site and my e-mail is andy dot lastname at ablrate dot com . We model up valuations based on the Ascend HLBV, an interpolation of their market value and our own estimate. Good point on the loan information packs too. I'll discuss with The Boss tomorrow as we are just starting to standardise some things and that is on the hit list. Thanks baz657 for the vote of confidence too. Very good points all round in that post. These assets generally depreciate far less than expected because they are mid-life and well looked after in a strong demand sector. Our lessee in this case is effectively a government-owned airline and so there is an element of national prestige involved in keeping them outwardly ship-shape. In terms of their inward ship-shapliness (I'm patenting that word!), the lessee pays us a monthly maintenance deposit which goes towards servicing with the intention of maintaining the condition of the aircraft at a constant condition. Generally, this is over-estimated so that there is always a pool available for expected and unexpected maintenance. We just received back a condition report prior to handover in the office yesterday and the detail that is taken is quite remarkable - I fully expect to see how often the engines have been cycled but didn't expect to see that one of the rubber handgrips needed replacing and 200 other things that wouldn't get checked on a car MOT . We are careful not to oversell just how well we expect them to hold their value but we are always happy to show more information if requested on the state of an individual aircraft. And thanks duck . You probably know more than me
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pikestaff
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Post by pikestaff on Feb 18, 2015 0:13:29 GMT
samford71, that's a good question, and one that I had cause to debate in my past life. The fact that aircraft are priced in USD (like oil and many commodities) does not make them USD assets in my view. They are global assets and their value is set by global supply and demand - which is then expressed in USD. So the exposure is not really to USD but to global supply and demand. These particular aircraft are manufactured in the EU (EUR). although competitive aircraft are manufactured elsewhere, and much of the demand seems to be in LatAm and SE Asia. There might be some correlation to the USD - not least because the US remains the world's largest economy - but it certainly won't be perfect.
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Post by ablrate on Feb 18, 2015 11:42:33 GMT
I'm wondering what FX risk is being run on this transaction. The valuation of the collateral is in USD. Are aircraft priced in USD terms? Would a move higher in GBP/USD undermine the collateral value? The loan is being raised in GBP. Is the interest being paid by the borrower in GBP or USD? Thanks. The interest is paid in GBP at the lessor's risk and in this case we are working with a couple of institutions to put on a hedge if the lessor chooses to do so. Regards Ablrate
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Post by meledor on Feb 24, 2015 22:10:21 GMT
The key here is the quality of the asset. This might seem a pretty obvious statement as we are talking about asset backed lending, but not all assets are the same in terms of quality. Firstly, the asset in question, an ATR 42 -500 regional airliner, is an asset already generating a cash stream, so lending against this asset is different from lending against some artwork or a collector’s item. And it will be different from lending to fund a building project secured on the property. True there is an expected cash stream when the project is completed but there is an element of construction risk – building delays, cost overruns - attached to that cashflow. The second point to make is that asset quality is unrelated to LTVs. I’ve seen one or two posters recently being very precise about their LTV limits e.g. “I wouldn’t go above 70% LTV, the risk is too great”. Yet I’d rather lend out at an 80% LTV on a good quality asset than 60% LTV on a poor quality one. So how good a quality is the ATR42 and this one in particular? I’m still finding more out about the regional airliner market but here’s some food for thought: There has been strong growth in ATR sales (though stronger for the ATR 72 than the ATR 42) in recent years. In 2005 it produced just 15 aircraft; last year it delivered 83, (with firm orders for 160 received in the year). The growth is being fuelled by demand in Asia and Central and South America. The new deliveries are for new routes or replacement of other aircraft or jets and so is not impacting ATR second hand values of older aircraft like this one. “[ATR’s CEO] believes the aircraft are a “very good asset” due to their high demand, strong residual values and very few aircraft available on the second-hand market.” This particular ATR 42 has a reasonably low utilisation (only 25,000 airframe cycles – take-off/landings) which adds to its value. www.afm.aero/news/talking-point/item/2110-atr-smashes-records-in-extraordinary-yearwww.afm.aero/magazine/trading-legal-and-finance/item/909-lease-is-more-atr-s-growing-marketwww.afm.aero/news/item/1695-nordic-aviation-capital-sign-landmark-deal
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Post by ablrate on Feb 25, 2015 9:49:04 GMT
Thanks Meledor, a very good summary.
Regards Ablrate
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