Mitsubishi and Li Ka-shing in $800m aircraft joint venture

Japan’s biggest trading company and Asia’s richest man have teamed up in an $800m aircraft leasing joint venture, betting that cheap debt and strong demand from low-cost carriers will sustain a multi-year boom.

Mitsubishi Corp will get the venture started by selling it 15 of the 79 planes owned by its aviation finance unit, MC Aviation Partners. MCAP, which is wholly-owned by Mitsubishi, will contribute 40 per cent of the venture’s equity, with the remainder coming from Cheung Kong Holdings, the main investment vehicle of Li Ka-shing, the Hong Kong-based billionaire.

The planes – new, narrow-body aircraft from Airbus and Boeing – have a combined appraisal value of about $800m, according to MCAP. Assuming that banks provide loans of between 60 per cent and 80 per cent of that value, the partners will contribute equity of $160m to $320m.

Within a few years, the aim was to build the venture’s assets to about $5bn, said Hiroshi Nakanishi, general manager of Mitsubishi’s aviation business department. He noted that demand from budget airlines was expected to push the share of leased planes within the global fleet to about half in five to ten years, from 40 per cent now.

“Depending on discussions with Cheung Kong, more planes could be transferred,” Mr Nakanishi said. “But we need to source new planes from the market.”

The move comes as Japan’s “big five” trading houses by market capitalization – Mitsubishi, Mitsui, Itochu, Sumitomo and Marubeni – seek dependable streams of income beyond their mainstay resources businesses, concentrating new investment in areas such as food, retail, transport and healthcare. The shift has been prompted by softer commodity prices and attempts by Japanese utilities to become producers and distributors of oil and gas, invading the traders’ turf.

The benefits of more rounded portfolios were underscored in September, when Sumitomo Corp warned that writedowns connected to a Texan shale-oil project would almost completely erase its earnings for the fiscal year to March.

Analysts say that the “Sumitomo shock” could prompt other trading companies to mark down commodity-related assets as they report half-year figures this week.

Mitsubishi had been looking for an Asia-based partner for a while to develop an arm’s-length business. Cheung Kong, with its long-term view and similar “low-teens” expectations for pre-tax returns, was a natural fit, said Keiichi Otani, chief executive officer of MCAP.

Mr Li is known for his preference for infrastructure in countries with stable regulatory and common law systems. In August, Cheung Kong said it was in talks to buy a $5bn fleet of 100 aircraft put up for sale by Awas, a European lessor owned by Terra Firma, the private equity group.

- Source:   http://www.ft.com