* Hunt for yield is creating bubbles everywhere - DVB
* Credit margins will continue to decrease - DVB
* Asian plane order book could drop 20-25 pct - DVB
By Arno Schuetze and Andreas Kröner
FRANKFURT, March 31 Some of the yield-hungry
investors pouring money into the financing of aeroplanes are
likely to make losses, as they have pushed interest rates down
to levels that sometimes do not reflect the risks, a leading
lender to the sector forecast.
Able to borrow money themselves at rock bottom rates, banks
and investors are hunting for asset classes where they can make
a higher return. With record numbers of aircraft on order from
planemakers Airbus and Boeing, many have been
drawn into meeting the surge in demand from airlines for loans.
"There will be money lost in this sector", said Bertrand
Grabowski, board member responsible for aviation finance at
Germany's DVB Bank, the largest bank lending to the
industry excluding groups whose loans are backed by government
"Markets are desperately looking for opportunities to deploy
liquidity, causing bubbles everywhere - that is not specific to
the aviation sector", he added.
Just a few years ago, tougher capital regulations triggered
fears that airlines wouldn't find the funds for their expansion
plans, as European banks scaled back lending.
But Asian banks helped fill the void and now the sector has
drawn interest from longer-term investors such as private equity
and pension funds, which are hoping to boost low returns from
other assets such as government debt. The abundance of financing
has led to a slide in the profitability of loans.
"(Credit) margins will continue to head south. Industry-wide
they are down about 100 basis points over the last 12 months for
the best names," Grabowski said.
"For some banks who actively support their local airlines in
Asia or South America, pricing is becoming more a function of
liquidity than of risk. They are offering loans for up to 50-60
basis points less than globally active competitors."
An outside shock such as a rise in oil prices or a political
crises such as Russia's annexation of Crimea could disrupt the
aviation industry, affecting borrowers' ability to pay back
loans, as well as creditors' willingness to lend, he said,
adding DVB was ready to take advantage of such a situation.
"We are waiting for the next crisis. We love volatility and
will deploy liquidity when others won't. Our best years have
been crisis years like 2008, 2009 or 2011."
DVB is planning to hand out more than $2 billion in aircraft
financing in 2014 and does not expect its own profitability to
suffer as it shifts focus to second-tier airlines, especially in
Asia, which accounts for 25 percent of its loan book.
DVB is targeting smaller airlines such as Korean Air
, Cebu, Philippine Airlines,
AirAsia, Lion Air, Jazeera Airways and Tiger
"We finance assets, not issuers. And if an airline is unable
to repay its loans, we seize the asset and redeploy to another
operator", Grabowski said.
While the aviation industry is likely to continue to see its
strongest growth in Asia in the long term, investors should be
prepared for setbacks, Grabowski said.
He said short-term demand could turn out to be lower than
expected, which could force a rethink of orders placed for
narrow body aircraft - such as Airbus' A320 and Boeing's B737.
"I would not be surprised if 20-25 percent of the current
order book would evaporate or be redeployed in other regions, if
possible," Grabowski said.
(Editing by Mark Potter)