3 things to know about helicopter finance in 2015
As part of his presentation at Helicopter Investor London 2015, John Sheldon, a member of Lease Corporation International’s helicopter advisory board, highlighted three points that everyone involved in helicopter finance should be aware of in 2015.
1. The current fall in the oil price will have little impact on offshore helicopter use
It may well be that much of this conference will focus on the impact of the fall in the price of oil. Certainly helicopter financiers will be seeking reassurance from industry experts about its impact on the offshore oil and gas industry’s use of work horse helicopters.
I do not hold myself out to be an expert but I have witnessed the effect on our industry of all the ups and downs of the oil price shown in the charts below. What they show is that even very sharp movements in the price in the last 30 years have not had any significant impact on oil production and more importantly on workhorse helicopter values.
Indeed we might all find it reassuring that there appears to be a natural trend line and ceiling and floor to the oil price. When it spikes it brings in a spate of extra exploration, expensive alternative sources of energy and small increases from marginal fields. These sources come and go and we are witnessing a concerted effort by some onshore producers to make these go away at least temporarily.
By way on contrast, offshore producers have always been obliged by the immense upfront investment in their fields to make an assumption about the long term trend line in the oil price. This has tended to make substantial exploration and all main production work pretty invulnerable to price movements. If the past 30 years is any guide, above 90 per cent of offshore workhorse helicopters are covered by this invulnerability. In a recent statement, Bristow estimated that production installations outnumbered exploratory rigs by a factor of 13:1.
A case in point is a recent headline which reported that Shell was cutting costs by $15 billion. On closer inspection this amount turned out to include many future projects which might well have been scrapped in any event even with oil at $100 a barrel. The actual expenditure cut for the coming year appears to be $500million out of a total of $35 billion – less than 1.5 per cent. Shell cut too much when oil hit $10 in 1998, leading its CEO to say this January: “I do not want to go into a slash and burn approach which we might later regret.”
2. The world economy is set to boom
There are the usual dire predictions from economists that one gets at this stage in any trade cycle but they ignore history. Boom follows bust just as surely as bust follows boom. Indeed there are a great many parallels with the world economy in 1996 – seven years into that particular recession.
Economists always have a reason why there will not be a boom (the “new normal” is to-day’s favoured attribution for this view) just as they said in 2004 to 2007 that there would not be a bust (the attribution being the “new paradigm”).
The prime reason given why the world economy will not now go in a favourable direction is that there is too much sovereign debt. Private debt has shrunk considerably in many countries but it would appear that sovereign debt is forever growing.
I challenge this fact. Quantitative easing has replaced about half the quantity of money supplied by banks up to 2007. New capital ratios mean that banks will never again reproduce through the multiplier effect their lost half of the total. This means that central banks deploying QE will never have to repay the sovereign debt that they have bought back from the market. I have good reason to believe that this view is held by the Bank of England. For example, the UK’s listed sovereign debt looks as if it is about £1 trillion; however QE may well have reduced this permanently by about £400 billion or 40 per cent.
Nothing is ever for nothing and the debt is effectively being repaid by savers getting next to no interest, borrowers paying higher margins, bank workers being paid less and bank shareholders losing their money. We are being taxed to repay the debt but have not noticed it!
This may not seem relevant to helicopter financing but it is because it means that we can look forward to a booming world economy, especially now that the Eurozone has finally been converted to QE. In addition the fall in the oil price will be no small factor in promoting world growth.
3. Financing Helicopters: three good reasons why recessions and oil shocks do not affect values of work horse helicopters
(i) Only a very small part of offshore oil and gas work horse helicopter operations are in the more vulnerable marginal exploration area which might be affected by oil and gas companies deciding to delay a number of peripheral projects. Moreover the proportion by value of workhorse helicopters in other fields is increasing. A favourable economic climate may further diminish the relative importance of offshore work by allowing SAR, EMS, Wind Farm and Police helicopter projects to accelerate.
(ii) Since 1996 there has been a strong correlation between rises and falls in the oil price and OEM production rates of workhorse helicopters. So to the extent that there is some fall off in offshore exploration work which is not compensated for by a rise in other uses, it is reasonable to expect a similar adjustment now.
(iii) It appears that new, more stringent safety requirements will reduce the number of passengers some types of work horse helicopters can have on board. In broad terms this may favour newer designs but the main immediate effect should be to increase the number of flying hours with more helicopters doing the same job.
Conclusion: the first test for new helicopter financiers
Before 2011, relatively few financiers of any kind got involved with helicopters. Starting then, the interest of investors, banks and leasing companies has proliferated based on the correct belief that work horse helicopters were in a stable business holding their values in a truly remarkable fashion sometimes over 40 years.
Thus for many financiers this will be the first time that this belief is being tested. They should know, however, that it has been tested many times before and not been found wanting. For what it is worth, I do not believe that this will be the first ever time that demand for and the value of work horse helicopters will break with past experience and fall significantly.
The last four years has shown a huge growth in helicopter finance coming from dedicated helicopter operating lessors of which LCI Helicopters is one. Banks and investors in the industry often now prefer to work with and through such lessors when financing helicopter assets, although there is still plenty of direct equity investment in operators. The overall picture is of financiers believing in the industry but wanting to spread and share their risk.
About the author
John Sheldon is an economist turned accountant turned general banker turned specialist in transportation finance. He has been involved in the finance of transportation assets for 40 years, in the course of which has lived and worked in London, the United States and Hong Kong.
He ran a joint venture leasing company with Bank of America in the 1970s financing vehicles and containers (amongst other assets). As a director of two successive banks in the late 1970s and early 1980s, he financed business jets and DC10-30s.
For 30 years from 1982 to 2012, Sheldon founded and ran his own transportation advisory firm, Sheldon and Partners, where he arranged over $10 billion worth of commercial jet transport, ship and helicopter finance for some of the world’s leading operators, including British Airways and CHC Helicopter Corporation.
Sheldon retired from full time work in April 2012, but now works part time as an advisor to LCI Helicopters and runs his own leasing and advisory company, SC Asset Finance Ltd.