ART deal for Saab aircraft lease portfolio

The Swedish auto, defence and aviation group, Saab, has provided more evidence that shareholders are beginning to appreciate the benefits of alternative risk transfer strategies. The group saw its share price rise from Skr65 to nearly Skr80 in the two weeks following its annoucement on November 24 that it had set up a 15-year $1.17 billion financial risk insurance programme for its regional aircraft lease portfolio.

The transaction is a carbon copy of the world’s first financial risk insurance programme, the 15-year, £2.4 billion programme established two years ago by the UK’s BAe Systems for its own regional aircraft lease fleet (Risk April 1999). 

Stefan Cederberg, an analyst at Enskilda Securities in Stockholm, says: “This risk insurance has covered the eventual losses beyond the provision Saab already has for its lease portfolio. There is more certainty about future earnings not being affected by potential future equity writedowns. It also makes the balance sheet easier to analyse.”

MMC Enterprise Risk, part of Marsh & McLennan Companies (MMC), brokered the Saab transaction, signing up as lead insurers with lead reinsurers Winterthur International Strategic Risk Solutions, Swiss Re New Markets, Mitsui Marine International and Ambac. An MMC entity had brokered the earlier BAe deal, placing it with a similar range of insurers. The transaction cost for Saab was $43 million after tax, covered by current provisions. 

Saab has 302 regional aircraft on lease with 30 airlines worldwide. The insurance programme protects the deemed lease income from 203 of the jets against market cycles, competition, obsolescence and customer default. The remaining 99 aircraft present no exposure to Saab, as they are funded with non-recourse long-term loans or covered by asset-value insurance issued by the Swedish government agency for export guarantees.

Financial risk insurance was the most cost- and time-efficient solution, and one that was “deliverable”, comments Peter Sandehed, senior vice-president at Saab’s corporate treasury in Linköping. The group had been discussing how to manage the risk in its regional aircraft lease portfolio for more than two years, and attempted to securitise the portfolio. That is when BAe Systems, which has a 35% stake in Saab, suggested its own blueprint, says Sandehed. The company subsequently advised Saab on the deal. “When we took the shareholding [in Saab] a couple of years ago, we looked for synergies that it could bring,” explains Stephen Hough, vice-president of portfolio management at BAe Systems in Hatfield. In particular, BAe had developed a stochastic model for projecting forward over 15 years the value of its aircraft lease portfolio. This was the model used to place Saab’s risk.

MMC Enterprise Risk and other major players in the alternative risk transfer market are reporting growing demand for their services, including residual value and leasing type transactions. Aon Capital Markets, for example, says it has just completed an aircraft residual value insurance deal for an unnamed manufacturer of regional aircraft. “The Saab transaction is a very good example of how we can use capital-markets technology and insurers’ risk-taking capacity and capital,” adds Bob Khanna, New York-based president and chief executive officer of MMC Enterprise Risk.