January 24, 2018 / 5:46 PM / 7 months ago

Avolon CEO says impossible for China's HNA to strip it of cash

DUBLIN (Reuters) - Avolon’s Domhnal Slattery hit out on Wednesday at “idle speculation” over the impact of liquidity concerns at China’s HNA Group, insisting it would be impossible to milk the aircraft leasing firm for cash to prop up the Chinese conglomerate.

The Irish entrepreneur who sold Avolon to an HNA-controlled business in 2015, now finds himself forced to put distance between Avolon and its ultimate shareholder as speculation swirls around HNA’s aviation assets at a major Dublin gathering this week.

“Let’s get to the net point – the key investor concern is that HNA could strip cash from Avolon,” Chief Executive Domhnal Slattery told Reuters. Avolon is 100-percent owned by Shenzen-listed Bohai Capital, which is in turn 52 percent owned by HNA Group.

“The facts of the situation are that it is impossible for HNA to strip cash from Avolon because HNA would have to do that through Bohai,” he said on the sidelines of the Global Airfinance conference.

Asked whether Avolon could weather the storm surrounding HNA, Slattery said, “Avolon is not weathering anything. Avolon is fine. It is HNA that have their issues to deal with.”

Nor did he accept a suggestion that airlines or banks may hold off doing business with Avolon.

“No, not at all. Why would they?...Despite efforts to create the concept of a smoking gun, there just isn’t one.”

Slattery said there were no plans to relist or recapitalise Avolon.

“I think HNA’s current stance, as articulated at an Avolon board meeting last week, (is that) Avolon is a long-term strategic holding of the group...It is an excellent performing business, the credit metrics are very conservative.”

Slattery said a legal firewall prevents HNA from milking Avolon through Bohai Capital.

“If HNA wanted to strip cash from Avolon, they would have to go to the board of Bohai, who would say to them, under the Shenzen stock exchange rules and under the rules of the Chinese banking regulator, that’s simply not allowed,” Slattery said.

“So there are no shareholder loans between Bohai and HNA today. HNA cannot strip cash from Avolon, period.”

He acknowledged that there was no such firewall between Avolon and Bohai, but called a recent $365 million loan from Avolon to Bohai a one-off.

Some analysts have called on Avolon to rule out sending dividends to Bohai.

Slattery acknowledged articulating a dividend policy would be “helpful” but said he would not do so “on a whim”, noting it is due to issue earnings at end-February.

Any payout would have to get past an Avolon board with four independent directors, he added.

Slattery said Avolon had “absolutely not” come under pressure to borrow money for use elsewhere in the group.

Slattery, who first made his name by laying the seeds for Royal Bank of Scotland’s leasing arm only to see it sold after the bank’s 2008 bailout, rejected any comparison with other lessors that fell foul of difficulties at their parent firms.

International Lease Finance Corp became part of Avolon’s largest rival AerCap (AER.N) after losing access to the funding of its former parent AIG and mismatching its own funding needs.

Now, there are questions over the future of GE Aviation Capital (GECAS) as General Electric reorganises, though most financiers believe it will stay inside the U.S. giant.

“When you look at why subsidiary companies get into challenged situations, each of them is very specific. None of those fact sets apply to Avolon,” Slattery said.

Many of those companies or their top managers trace their roots back to the leasing empire of Tony Ryan and Guinness Peat Aviation, which collapsed in 1992.

“I have learned many lessons along the way about how to manage a business in a time of stress, whether it is the underlying business itself or your shareholder,” Slattery said.

Reporting by Tim Hepher; Editing by Elaine Hardcastle

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