What went wrong at Waypoint Leasing?


Waypoint files for Chapter 11

When Waypoint Leasing launched in 2014 it appeared to have all the ingredients that a business needs to succeed.

There was an experienced management team combining operators, brokers and experienced commercial aircraft lessors – people who understood the assets, had strong relationships with manufacturers and customers. It had three strong shareholders – MSD Capital (the family office of Michael Dell), Soros Fund Management, and Cartesian Capital Group. Experienced banks were also keen to lend it money.

All of them went into Waypoint knowing that the industry was cyclical. They expected tough markets.

Four years later, and Waypoint, has been forced to file for Chapter 11. So, what went wrong?

The simple answer is the market. As with the Global Financial Crisis, no one predicted how bad things could get.

In the summer of 2014, everyone was optimistic. GE Capital Aviation Services agreed to buy lessor Milestone Aviation in August 2014 (it completed in January 2015). Private-equity firm Clayton, Dubilier & Rice invested $500 million in CHC, the world’s largest helicopter operator, in August 2014.

At the same time, Bristow, CHC’s biggest rival, set itself the target of tripling the business from a $3.5 billion enterprise value to $10 billion. Babcock International, a UK outsourcing company, acquired Avincis, another operator, from KKR in March 2014.

And then, the oil price suddenly fell. In August 2014 a barrel of West Texas Intermediate was worth $106. By the following January it was struggling at $47.

When oil was over $100 a barrel, oil companies were busy searching for new projects and increasing production at existing ones. There were stories of scaffolding being left on rigs while majors bought new equipment for other projects. No one was worried about smaller costs (like helicopter services), they were fixated only mega-projects. Oil companies were also happy to pay a premium for helicopters and to sign long-term contracts.

The new lessors – Milestone, the first, was only launched in 2010 – and operators were happy to place big orders for helicopters.

But then everything suddenly turned sour.

Oil and gas downturn

Oil and gas companies reacted quickly and looked to cut every cost they could find. This included renegotiating and cancelling helicopter contracts.

Oil companies encouraged operators to utilise helicopters better. By cutting the number of helicopters servicing a contract from four to three or three to two, they were able to cut costs significantly. By 2016 some analysts estimated that a third of all off-shore helicopters were parked.

Lessors and lenders knew that energy companies had the ability to cancel contracts (often at as low as 30 days or 60 days-notice). But these options had never been used – the cancellation rights were regarded as theoretical. But in 2015 a few oil companies started exercising these rights. They also started to negotiate existing rates and contracts – threatening to cancel them. As all operators had spare capacity now, most operators complied. They, in their turn, called leasing companies asking for lease-rate discounts.

In the end, only a few contracts were formally cancelled. But operators, who had more helicopters than they needed, also started to return helicopters at the end of leases. Although this was obviously agreed when the lease was signed, it was actually something that had been relatively rare in the past.

If they did renew or take out new leases, they were looking for shorter terms. Waypoint’s average lease term fell to 2.2 years for 2017 from 3.1 years at the end of 2016.

Between 2013 and late 2015, between 94% and 100% of Waypoint’s helicopters were on lease. Today, 22% are parked and Waypoint’s revenues fell 12% in 2017.

GE says Milestone has 90% of its helicopters on lease – but this is partly because of CHC.

CHC bankruptcy

The biggest blow came from Waypoint’s biggest customer. When CHC filed for Chapter 11 in May 2016 it accounted for 53%, or $75 million, of the lessor’s revenues. Before CHC filed it leased 44 aircraft from Waypoint.

CHC’s filing was not a big surprise. Although it was the world’s largest operator, the company had been loss-making for years. Along with Milestone, Waypoint was one of CHC’s two largest lessors so looked as if it could negotiate a decent settlement. But, it was perhaps a little slow in making concessions.

Milestone also dealt it a serious blow in October 2016. In return for a $90 million loan – from its parent GE — Milestone was named as lead-lessor. “We believe that Milestone, as a part of General Electric, provides the strength and stability we need in a lessor partner, and we are confident that this agreement provides a strong foundation for CHC’s fleet of aircraft going forward,” said Carl Fessenden, CHC’s CEO, at the time.

As soon as this was announced, Waypoint knew that it would have a tougher time in any negotiation. In the end, CHC returned 15 helicopters. It also renegotiated lease payments on the remaining 29 helicopters – some of which may still be parked.

The other problem is that CHC returned the aircraft in very different states. As CHC has its own maintenance company, HeliOne, it did not agree to pay maintenance reserves or put helicopters on maintenance programmes (a similar stance taken by some of the world’s largest airlines). When CHC entered Chapter 11 it stopped maintenance work on many of the helicopters. This meant that Waypoint was also hit with $28.4 million in maintenance and transition costs for the helicopters it got back.

Since CHC emerged from bankruptcy, its lease payments for those 44 helicopters have fallen by $45 million a year.

CHC’s Chapter 11 filing has led to Waypoint’s own

EC225 grounding

If you asked lessors or operators to nominate the key offshore helicopter in 2010, many would have chosen the Airbus EC225 (now rebranded as the H225). The aircraft and its forerunner the Eurocopter Super Puma AS332 , accounted for 60% of all North Sea oil flights and was also a popular helicopter for Search and Rescue missions.

On April 29, 2016 an H225 operated by CHC Helicopter crashed in the sea near Bergen killing 11 passengers and 2 crew members. The European Safety Agency (EASA) issued a directive telling European to ground all H225s in June 2016. EASA lifted the directive, but the Norwegian and British civil aviation authorities grounded EC225s for another year.

Since then Statoil, the Norwegian oil company, and others have said that they will never operate the H225 again.

Waypoint had eight H225s. It says that the grounding cost it $156 million between late 2013 and early 2016. In a court filing Waypoint says that since the grounding: “there has been little to no demand for the H225 model aircraft on the part of oil and gas companies, their workforces, and consequently, helicopter operators.”

As part of a settlement with Airbus – which was also a lender – it returned two H225s to Airbus so now is left with six.

It could have been worse, in February 2014 Waypoint ordered 37 EC225s from Airbus. Waypoint had planned to have taken all of these by now.

When the order was placed, an H225 meeting offshore standards set by oil companies would cost about $28 million. Now appraisers believe these assets are worth less than $5 million. However, it is worth pointing out that the H225 has returned to operations in a number of countries.

What should Waypoint have done differently?

In retrospect, Waypoint grew too fast and was too reliant on CHC. When CHC filed it was arguably slow to negotiate and also unable to offer finance like Milestone.

But this is only in hindsight. At the time this focus on growth made sense. The leasing company was keen to stop Milestone becoming dominant and also needed a significant portfolio to float the company in 2015. Milestone had also been preparing for an IPO when it was acquired by GE.

This race for growth also meant that Waypoint was forced to take on $1.23 billion of debt. It says that this is backed by $1.62 billion in assets. Its inability to service the debt is why it has been forced to file for Chapter 11. Some have criticised how leveraged the company is, but Milestone had similar gearing before GE bought it.

When Waypoint signed deals with CHC it knew that the helicopter operator was losing money, but it felt it could manage this risk. Not only did CHC have new investors coming in, but the underlying customers (oil companies) were extremely strong credits.

One of the roles of aircraft leasing companies is to manage credit risks (many airlines are poor credits) and as the world’s largest operator, CHC offered big contracts. It was also keen to support all the new leasing companies.

Waypoint’s team fought hard during the downturn. The lessor successfully remarketed lots of helicopters but was forced to accept lower rates. In 2017 it agreed a sale to a Chinese financial institution, but this fell through.

At the end of the day, Waypoint is another victim of what Jonathan Baliff, the outgoing CEO of Bristow Helicopters, sees as a series of events.

“We are actually living through two downturns,” said Baliff in 2016. “One was a cyclical downturn which dealt with the oil price decline and imbalance of supply. “There’s a second downturn that we are now living in, which is more structural, more secular. This is, can offshore be a viable industry for the energy space?”

This same question is being asked about off-shore helicopter leasing.

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