Business Activities
Babcock & Brown Aircraft Management (BBAM)
Babcock & Brown Aircraft Management (BBAM) is a global, full-service investor and manager of aircraft on behalf of third-party investors. BBAM is currently the world's 4th largest commercial aircraft lessor by number and value of aircraft, with a managed portfolio of 280 aircraft valued approximately US$8 billion. BBAM is solely focused on narrow and wide-body commercial jet aircraft manufactured by Boeing and Airbus. BBAM was established in 1991 and the founding executives continue to lead the business, making it one of the longest-tenured management team in the industry.
BBAM manages aircraft for Japanese private equity investors, Babcock & Brown Air Limited (listed on the NYSE), German retail investors and institutional and high net worth investors in Japan, Europe and Australia. Babcock & Brown typically invests in the institutional products it offers.
The BBAM fleet profile is well diversified by geography and lessee and is a high quality fleet with a weighted average age of 7.2 years versus North American market average of 14.1 years and a weighted average remaining lease term of 60.2 months.
Babcock & Brown views the long-term aircraft leasing industry dynamics at attractive for the following key reasons:
- A large and growing industry that has proven resilient to external shocks over the last 50 years. Commercial jet aircraft demand over the next twenty years is estimated at US$2.6 - 3.1 trillion driven by air travel growth that is forecast to continue at 5% p.a.
- Growth of large middle classes and rapid economic development in emerging markets is driving overall growth of the aircraft market.
- Operating lessor's ownership of the global aircraft fleet is increasing, having grown from 7.5% in 1986 to 32% in 2007.
In addition to long-term attractive trends of the industry, Babcock & Brown believes there are a number of short - medium industry trends which give rise to growth opportunities for the business.
- Distress investment opportunities: Negative sentiment around aviation assets created by an environment of high oil prices, slowing economies and airline failures presents a number of opportunities.
- Constrained supply: Backlogs for popular, fuel-efficient aircraft types are equal to almost 6 years production. Demand for fuel-efficient aircraft remains robust given heightened focus on operational efficiencies in an environment of high oil prices.
- Aircraft replacement cycle: The aircraft fleets in the US, Western Europe and Russia are, on average, reaching the end of their economic lives and replacement is expected to be accelerated in order that airlines capture the benefits of a more fuel efficient fleet.
The long-term strategic business objectives for BBAM are to:
- Continue to grow its Nomura Babcock & Brown (NBB) business (syndication to Japanese high net worth investors).
- Diversify its range of investment products.
- Expand its investor base.
- Establish aircraft as a recognised, alternative investment class amongst investors worldwide.
BBAM has 118 employees located in seven offices globally.
Babcock & Brown Rail Management (BBRM)
The scope of BBRM's primary activities include:
- Principal investment – origination and acquisition of railcars through manufacturer orders and portfolio purchases utilising Babcock & Brown’s balance sheet and Babcock & Brown Rail North America (BBRNA), BBRM’s syndicated warehouse funding vehicle.
- The Division earns rental income from rail cars on the Babcock & Brown balance sheet and generates management fees when a railcar is in a wholesale fund. BBRM acts as both fleet and investment manager to BBRNA and receives a management fee for the services it provides, which include lease remarketing, equipment management and maintenance, and lease administration.
- Arranger/Structuring Agent – BBRM generates arranger and structuring fees when railcars are moved from the balance sheet into a wholesale fund.
During the period, BBRM grew its total managed freight railcar fleet by 23%, bringing total cars under management to 20,597 (16,745 at 31 December 2006). The value of AUM grew 23% to US$1.4 billion (A$1.6 billion). As a result of the growth in AUM, investment management fees earned in 2007 increased 25% compared with the prior year.
BBRNA wholesale syndicate grew by 106% from 6,752 to 13,935. The value of AUM in BBRNA grew 95% over the period.
BBRM has a well diversified fleet, with an average age of 6.0 years versus the North American average fleet age of 19.3 years. BBRM’s fleet has been 97%-100% utilised over the last five years, and in 2007 the customer retention rate was 97%.
Eurorail
On 1 August 2007, Eurorail announced that it had established a new company, CBRail Leasing S.a.r.l. to facilitate the development of the Babcock & Brown and Bank of Scotland joint venture, CBRail. The ultimate owners of CBRail Leasing Sarl are Babcock & Brown 10%, HBOS 10%, Babcock & Brown Global Investments Limited 35% and Everest Babcock & Brown 45% with debt facilities provided by nine banks. CBRail Leasing S.a.r.l. will be the principal leasing company of CBRail and has a €390 million (A$653 million) long-term financing platform. At the end of December 2007 CBRail Leasing Sarl’s portfolio of AUM was $417million with a contract to acquire an additional $116 million in assets in early 2008.
In addition, a new JV between Babcock & Brown and HBOS (CBRail Sarl) was established in Luxembourg to engage in new business activities ranging from procurement of regional passenger trains for franchises to freight locomotives or freight wagons with or without lease commitments and sale and leaseback transactions. Equity is provided by both shareholders equally and debt facilities are provided by HBOS. This is viewed as a “warehouse” company with assets once on lease to be sold to CBRail Leasing Sarl or another long-term hold vehicle.
The CBRail Sarl assets and order book currently stands at $730 million.