Last week’s announcement by GECAS that they had made a $729 million writedown after goodwill impairment tests is perhaps no surprise given recent market events, yet the subject of rotorcraft valuation in some segments remains challenging given the lack of transparency. As part of a series of interviews covering the S-92 market we spoke to Ed Washecka of Intrinsic Aviation. Ed was previously Founder and CEO of Waypoint Leasing and prior to that was CEO of Era (now merged with Bristow, but at the time the helicopter subsidiary of SEACOR).
Ed - We’ve been to many of the same conferences in the last 12 months (in person and virtual!) and we have heard all of the following re the S-92:
“There were no transactions last quarter”
“There is a market but there’s only one buyer so it doesn’t count “
“The market is fundamentally unchanged and we aren’t adjusting values”
What’s going on? How does someone looking at the industry from the outside-in make sense of it all?
S-92’s have historically rarely traded amongst operators on the second hand market. If we go back to the boom years, OEMs sold to operators and that was it, with financing provided primarily from banks. With the launch of Milestone, Waypoint and others, we saw tremendous growth in sale and leasebacks as a source of capital for operators, followed by a new order boom as lessors built their own order books. What we have seen recently are aircraft changing hands during a restructuring, being sold while off-hire or even being sold while on lease. There are secondary transactions happening (apparently all to Milestone) and there are at least half a dozen for sale and being marketed at between $6-8 million. The Milestone purchases have been 7-14 year assets in the range of $4-6.5mm according to brokers.
I think operators and lessors are challenged to find debt. The oil and gas sector has been decimated and there is perhaps more to come as cost and capital pressures continue, so lenders are skittish for anything oil and gas. But while some lenders may still be able to say the word helicopter, as long as its not working in the oil patch, lenders will need a reliable and relevant set of valuation data to have comfort supporting this asset again. I think the appraisers have access to the most extensive data, but it can’t simply putting numbers into a spreadsheet that don’t directly tie to whats happening in the market…. or else maybe it will be brokers that start offering a “no BS appraisal”? Presumably, new lenders might want to buy that data, even if perhaps existing lenders and lessors prefer to pretend it’s all just a bad dream and values will come back.
Are those trades useful reference points? What would you say to those that insist they aren’t relevant?
Well, throughout the boom and bust times, the appraisers produced values. Appraisers produced values when there were no sales at all. Appraisers produced values when the only transactions were sale and leasebacks. If there was ever a “related party” transaction, it’s a sale and leaseback. Both parties can agree an artificially high or low selling price and still achieve a market transaction because it’s tied to a lease, meaning the term, return conditions and rent are part of the trade. Now, we have a lot of transactions from multiple sellers, some with leases and some without, but effectively only to one buyer. The buyer that controls 1/3 of the fleet and has the biggest incentive to maintain pricing, both to avoid being undermined on pricing from lower cost assets and to support book values recorded in a headier time. This would not seem a reason to argue that those sales don’t count. On the contrary, they are the only data points that count! I have no doubt other buyers would show up if the price were lower. Some buyers have offered to purchase some bank owned S-92’s. So maybe $2.5mm isn’t accepted by a seller who is listing for $6mm. Maybe the seller will accept $5mm. But this means the “value” is between 2.5 and 5. But if that’s the range, it certainly can’t be $12mm as some appraisers argue! I don’t see how the “value” can be higher than the seller’s asking price?
You built Era’s leasing business and ran Waypoint - can you share some examples of pricing and how those sale and leasebacks worked?
Yes, but let me talk in industry terms and I’ll use what I know of some of Milestone’s transactions. First, the selling prices were not necessarily true market because operators like CHC sold for very high values and paid high lease rate factors while operators like Bristow sold at book value (effectively at below market prices), but that ensured they had purchase options or lease extension options and had much lower lease rate factors and rents. Lessors, effectively, were making unsecured loans to CHC for the difference between appraised value and what one might have paid without the lease. The same 5 year old S-92 with CHC might have been valued at $22mm with a 1.1% LRF and midtime return conditions while Bristow would sell it for $17mm with an LRF of 80 basis points and a fully paid up PBH. Bristow’s ‘Power By the Hour’ aircraft made for higher appraisals. In the illustrative example, CHC’s rent was $242k and Bristow’s was $144k. This explains in part why Bristow saw a smaller cost reduction in bankruptcy from restructuring leases.
One way people often look at asset valuation is the earning power of the asset - how are lease rates holding up for these aircraft?
Given the dominance of the S-92 market by Milestone and Macquarie (with their own and Waypoint assets), lease rates were reasonably consistent for a while after CHC and Milestone agreed a new market pricing structure of $150k/month for older S-92s and circa $200k for newer machines. With additional bankruptcies, we saw some price erosion (10-15% less) but I have heard recently that pricing (in Brazil) is falling further below the “low water” mark set by PHI of $100-115k per month. Leased assets are worth more than off-lease assets to financial buyers, but then that is saying the asset itself has a value and the lease itself has a value. Maybe because the lease rent is above market, maybe because the cash flow makes it finance-able but this has always been the case. A brand new apartment building with no tenants is worth less than the one that is fully leased up, unless the rents are below market.
Historically, S-92s have fetched monthly lease rates of between $180-250k for newer units. In the recent downturn this is understood to have slipped to $150-200k and following the PHI and Bristow Chapter 11 proceedings the lower range has slipped further to circa $135k. There are reports of some banks accepting rents as below $100k for older assets.
How does this industry re-gain pricing power? Is scrapping the answer? The mobile offshore drilling rig business has scrapped a quarter of its fleet in this downturn (more than 250 rigs) and is now seeing utilization of 67%. The S-92 market has seen only two units parted-out and retired but then utilisation is comparatively high at 81% just now. How can the market find equilibrium? Is there enough data to inform the market?
As the owner, I think the asset is worth $6mm. I am willing to accept $6mm. Yet the appraiser says it’s worth 12mm. This makes absolutely no sense whatsoever. All other data points are effectively imaginary numbers. The OEM isn’t selling new units. The world is full of assets whose values have shrunk with demand - oil rigs are scrapped. Billions of dollars of capital has been vaporized in that sector. I am not sure what helicopter appraisers would think?
If you are an operator, you probably think the answer is just to keep trying to get your costs down. That may benefit a single operator, but certainly not the industry as it allows the vicious cycle of rate reductions to continue, destroying industry participants to benefit some massive oil companies. Scrapping will certainly help return the market to equilibrium but you can’t scrap more than a handful of these aircraft for parts unless a big operator decides to leave the power by the hour program. This might also save them money? I assume CHC finds it cheaper to operate without PBH or else it would not have done it all these years. But it’s not an easy switch for a fleet that has been in it with owned aircraft. Given the concentration of assets, the large lessors can simply hold excess capacity off the market. If they don’t try to win every job, they will have more AOG for sure, and it’s a lot of units idle from your analysis. So this may be too unappealing. Wasn’t the S-92 called a helibus? Maybe public transit in NYC is the answer!!
Sincere thanks to Ed for his time and insight.
Ed Washecka of Intrinsic Aviation
As a reminder, our latest S-92 fleet census was released this week. Providing unit-by-unit detail on current status and location for the offshore crew transfer fleet the report is ideal for stakeholders in the S-92 business and likewise for those that work with competing aircraft. We use state-of-the-art data analytics techniques combined with good old-fashioned primary research to establish who is operating the aircraft, where, and how that has changed. For more detail see here:
