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Aircraft lease advisory mandates: money for old rope?
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| 14 February 2003 |
The recent appointment of Babcock & Brown as the lease and aircraft debt advisor to United Airlines proves that there still exists more than ample fee income to be generated from the aircraft market, albeit for the wrong reasons. Jane's Transport Finance reports on what it takes to be one of the lucky - and rich - Chosen Few.
Facing an imminent cash flow and liquidity crisis, United Airlines (UAL) - the world's second largest airline - sought Chapter 11 protection at the end of last year.
By the end of this March, Babcock & Brown will hope to have earned at least $3 million in fee income by advising UAL on restructuring all of its aircraft-related secured debt and lease obligations.
In the first week of December 2002, Babcock & Brown entered into an agreement with UAL that selected it as the airline's preferred aircraft debt restructuring advisor. On 30 December 2002, the bankruptcy court in the Northern District of Illinois formally approved Babcock & Brown's appointment.
The lease arranger is advising the US airline on how to restructure all of its secured debt and lease obligations that come with the 400 aircraft in its domestic and international fleet portfolio. The role complements the existing financial advisory role of Rothschild Inc, which is mandated to deal with all of the financial activities relating to the airline's overall corporate restructuring.
According to bankruptcy court and official UAL documents, Babcock & Brown was paid an upfront signing advisory fee of $1 million when the agreement was first signed at the end of last year.
The lease arranger has been advising the airline on its bankruptcy-related aircraft refinancing issues since mid-November. It is also being paid an additional $500,000 per month in advance by wire transfer, beginning from 9 December 2002, through 9 March 2003, for its service until the end of March 2003: a potential total fee of $3 million.
On top of this potential $3 million in fees, Babcock & Brown stands to earn even more if its aircraft lease advisory services are used beyond 31 March. A bargain at a mere $250,000 per month in advance, on a month-to-month basis.
Add to this all of its out-of-pocket expenses - such as travel expenses, hotels and meals, third-party computer analysis and research services - being reimbursed by UAL, and you have the ultimate lease advisory retainer.
Some air financiers and investors may criticise the whole process, asking why so much is being spent on advisors patching up this airline giant with so little guaranteed as the final result. Others wonder why the advisors that UAL was using before filing for Chapter 11 protection couldn't foresee some of its current problems and take evasive action sooner, reducing UAL's advisory bills.
But funnily enough, the most vocal of all its critics among the air finance industry are likely to be those who weren't retained for a slice of this well-paid action.
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