Exhibit 99.1
2015 Third Quarter Results
49% Increase in Q3 Adjusted Net Income; Q3 Adjusted ROE of 17.9%
Dublin | November 11, 2015: Avolon (NYSE: AVOL), the international aircraft leasing company, today announces results for the third quarter of 2015 (“Q3”) and the first nine months of 2015.
2015 Third Quarter | Financial Highlights
| • | Net Income up 33% to $58 million versus Q3 2014 |
| • | Adjusted Net Income up 49% to $76 million versus Q3 20141 |
| • | Seven aircraft sold with a net book value of $276 million at a gain of $21 million or 7.6% premium to net book value |
| • | $350 million of new aircraft deliveries in Q3 |
| • | 200 basis point year-on-year increase in Return on Equity from 12.6% in Q3 2014 to 14.6% |
| • | 330 basis point increase in Adjusted Return on Equity from 14.6% in Q3 2014 to 17.9% |
| • | Increased, extended and re-priced unsecured debt facility up to $525m with availability until 2019 |
| • | Undrawn debt of $937 million at end Q3; average interest rate2 of 3.5% at end of Q3 |
| • | Signed Merger Agreement with Bohai Leasing Co., Ltd. for $31 per Avolon common share |
| • | Incurred $5.9m of transaction costs related to the Merger Agreement in Q3 |
2015 Third Quarter | Key Performance Measures
| Three Months Ended September 30 | Nine Months Ended September 30 | |||||||||||||||
| $’000 except where indicated | 2014 | 2015 | 2014 | 2015 | ||||||||||||
Total Revenue | 164,440 | 201,937 | 433,288 | 561,572 | ||||||||||||
Net Income | 43,830 | 58,371 | 104,180 | 163,344 | ||||||||||||
Adjusted Net Income1 | 50,959 | 75,920 | 130,447 | 199,161 | ||||||||||||
ROE | 12.6 | % | 14.6 | % | 10.0 | % | 13.6 | % | ||||||||
Adjusted ROE1 | 14.6 | % | 17.9 | % | 12.5 | % | 16.5 | % | ||||||||
Diluted EPS ($) | 0.56 | 0.72 | 1.33 | 2.01 | ||||||||||||
Adjusted EPS1 | 0.62 | 0.92 | 1.60 | 2.27 | ||||||||||||
Weighted Average Shares Outstanding Diluted | 78,762,263 | 81,341,979 | 78,402,375 | 81,170,595 | ||||||||||||
Issued Shares | 81,681,131 | 3 | 82,428,607 | 4 | 81,681,131 | 3 | 82,428,607 | 4 | ||||||||
| 1 | Throughout this release, we use adjusted metrics. See Non-GAAP reconciliation for the three months and nine months ended September 30, 2015 on page 9 together with reconciliation for 2015 guidance |
| 2 | Annualised Cost of Funds at end of period does not include the effect of up-front fees, undrawn fees, issuance cost amortization or fair value gains / losses on derivative financial instruments |
| 3 | Issued shares as at December 31, 2014 including 2014 LTIP grant |
| 4 | Issued shares as at September 30, 2015 including 2014 and 2015 LTIP grant |
| Avolon | Q3 2015 | Page 1 |
2015 Third Quarter | Portfolio Highlights
| • | Owned and managed fleet of 154 aircraft at end of Q3; Owned, managed and committed fleet of 258 aircraft |
| • | At end of Q3, average age of owned fleet of 2.7 years; average remaining lease term of 7 years |
| • | Delivered 8 new aircraft to 7 airlines based in 6 countries in Q3 |
| • | Avolon Capital Partners acquired one aircraft on lease to Vueling Airlines during Q3 |
| • | All new deliveries placed through July 2018 |
Outlook
| • | Re-affirm 2015 full year expectations to deliver aircraft with a net book value of $1.65 billion |
| • | Expected net trading gains of c.$68 million representing a margin of c. 9% |
| • | Guidance on 2015 reported returns materially unchanged: expected to deliver a Return on Equity of 12.8% to 13.1% or Adjusted Return on Equity of 15.0% to 15.3%1, including Q3 costs related to the Merger Agreement |
| • | At 30th September 2015 Avolon’s total fleet commitments for delivery in 2016 were 29 aircraft or $1.7 billion |
| • | Trading volume of approximately $800m secured for 2016; already ahead of 2015 expected outcome |
Dómhnal Slattery, Avolon CEO commented:
“The positive momentum in the business has continued through the third quarter as illustrated by the 49% year-on-year growth in adjusted net income and the 330 basis points expansion of adjusted ROE. We have delivered on our committed pipeline and we are very pleased to reaffirm our 2015 full year guidance for reported returns on the back of our improving funding costs and a strong trading performance.
Our team has produced another impressive quarter with eight new aircraft delivered to seven airlines in six countries at a value of $350 million. We have also secured a sale and leaseback transaction for five Boeing 787-9 aircraft delivering to Hainan Airlines in 2016 and 2017 subject to the closing of the Bohai merger transaction. Our total committed fleet for delivery in 2016 now stands at 29 aircraft valued at $1.7 billion; all of which is already funded.
The third quarter saw Avolon achieve its thirteenth consecutive quarter of profitable aircraft trading. Further highlighting the strength and sustainability of our trading franchise is the $800m of volume we have committed for sale in 2016 – already ahead of our 2015 expected outcome of $756 million.
Following the recent approval of the merger agreement with Bohai Leasing by Avolon shareholders, we remain on track for an expected closing of the transaction by Q1 2016. We are pleased to have delivered strong returns for our shareholders in the year to date and look forward to the future with confidence under Bohai’s ownership.”
| Avolon | Q3 2015 | Page 2 |
Conference Call and Webcast
Avolon will host a conference call and live webcast at 8.30am ET (1.30pm GMT) today, November 11, 2015. Dial in details are outlined below and the webcast will be available on:www.avolon.aero
| US: | +1 718 873 9077 | |
| Europe: | +44 203 139 4830 | |
| Asia: | +86 400 681 5421 | |
| Passcode: | 51477978# |
A copy of the related slide presentation is available on the Avolon website. An audio archive and transcript of the event will be available on the website shortly following the call. A conference call replay will also be available for 30 days on US: 1 866 535 8030 or UK: +44 20 3426 2807. Passcode is 663311#
Avolon Portfolio
| September 30, 2014 | September 30, 2015 | |||||||
Owned aircraft | 122 | 144 | ||||||
Managed aircraft | 12 | 10 | ||||||
Committed aircraft | 93 | 104 | ||||||
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Total | 227 | 258 | ||||||
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Average age of owned fleet* (years) | 2.5 | 2.7 | ||||||
Average remaining lease term* (years) | 6.9 | 7.0 | ||||||
| * | Weighted by net book value. |
Avolon Owned Managed & Committed Portfolio at September 30, 2015
Aircraft Type | Owned | Managed | Committed | Total | ||||||||||||
A319ceo | 1 | — | — | 1 | ||||||||||||
A320ceo | 49 | 3 | 13 | 65 | ||||||||||||
A321ceo | 10 | 2 | 9 | 21 | ||||||||||||
A320neo | — | — | 20 | 20 | ||||||||||||
A330neo | — | — | 15 | 15 | ||||||||||||
A330-200/300 | 10 | — | — | 10 | ||||||||||||
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B737-800 | 62 | 3 | 14 | 79 | ||||||||||||
B737 MAX | — | — | 20 | 20 | ||||||||||||
B787-8/9 | 3 | — | 13 | 16 | ||||||||||||
Boeing B777-300ER | 3 | — | — | 3 | ||||||||||||
B777-200LRF | — | 2 | — | 2 | ||||||||||||
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E190 | 6 | — | — | 6 | ||||||||||||
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TOTAL | 144 | 10 | 104 | 258 | ||||||||||||
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| Avolon | Q3 2015 | Page 3 |
2015 Third Quarter and 9 Months Performance
3 Months Ended September 30, 2015
Lease Revenue
Lease revenue increased by $43.2 million, or 31.4%, to $180.6 million for the three months ended September 30, 2015 compared to $137.4 million for the three months ended September 30, 2014, primarily as a result of an increase in the size of our portfolio offset by a decrease in the Annualized Lease Rate of 10.9% as of September 30, 2014 to 10.8% as of September 30, 2015. Our owned portfolio continued to expand during the three months ended September 30, 2015, building from 122 aircraft delivered as of September 30, 2014 to 144 aircraft as of September 30, 2015. As a result, our Aggregate Net Book Value rose from $5,261.6 million at September 30, 2014 to $6,370.2 million at September 30, 2015, an increase of 21.1%. Lease revenue benefited from 36 new aircraft deliveries during the 12 months ended December 31, 2014 and 30 new aircraft deliveries during the nine months ended September 30, 2015, which together resulted in an increase in lease revenue of $48.6 million for the three months ended September 30, 2015 as compared to September 30, 2014. This increase was offset in part by the disposal of nine aircraft during the 12 months ended December 31, 2014 and 12 aircraft during the nine months ended September 30, 2015, which together resulted in a decrease in lease revenue of $10.3 million and a $0.3 million decrease due to lease amendments and lease revenue for aircraft on floating rate leases for the three months ended September 30, 2015 as compared to September 30, 2014. All of the aircraft in our fleet were on lease during the three months ended September 30, 2014 and September 30, 2015. Our lease revenues for the three months ended September 30, 2015 included supplemental maintenance rent income of $7.6 million as compared to supplemental maintenance rent income of $2.4 million in the three months ended September 30, 2014. The supplemental maintenance rent income for the three months ended September 30, 2015 includes $5.2 million of income due to the timing of future maintenance events.
Net Gain on Disposal of Flight Equipment
Net gain on disposal of flight equipment decreased by $5.6 million, or 21.1%, to $20.9 million for the three months ended September 30, 2015 compared to $26.5 million for the three months ended September 30, 2014, as a result of our program of aircraft sales. During the three months ended September 30, 2015 we sold seven single-aisle aircraft compared to one single-aisle aircraft and one twin-aisle aircraft sold during the three months ended September 30, 2014. The decrease in net gain on disposal of flight equipment on a per aircraft basis was primarily due to the type and vintage of twin-aisle aircraft sold during the three months ended September 30, 2014. See “-Expenses-Interest Expense” below for the interest costs incurred with respect to the extinguishment of debt associated with the disposal of flight equipment during the three months ended September 30, 2015.
Expenses
Depreciation
Depreciation expense increased by $13.2 million, or 27.7%, to $60.9 million for the three months ended September 30, 2015 compared to $47.7 million for the three months ended September 30, 2014. The increase in depreciation was attributable to 36 new aircraft deliveries in 2014 and 30 new aircraft deliveries during the nine months ended September 30, 2015, which resulted in an increase in depreciation of $17.2 million for the three months ended September 30, 2015 as compared to September 30, 2014. In addition, new office equipment and furniture were acquired during the year ended December 31, 2014 which resulted in an increase in depreciation of $0.2 million during the three months ended September 30, 2015. This increase was offset in part by the disposal of nine aircraft during 2014 and 12 aircraft during the nine months ended September 30, 2015, which resulted in a decrease in depreciation of $4.2 million for the three months ended September 30, 2015 as compared to September 30, 2014.
| Avolon | Q3 2015 | Page 4 |
Interest Expense
Interest expense increased by $0.4 million, or 0.7%, to $57.0 million (including $3.6 million adverse fair value adjustment on derivative financial instruments) for the three months ended September 30, 2015 compared to $56.6 million (including $0.1 million positive fair value adjustment on derivative financial instruments) for the three months ended September 30, 2014. The increase was primarily the result of an increase in debt outstanding to $5,057.9 million as of September 30, 2015 from $4,258.3 million as of September 30, 2014, an increase of 18.8% and $1.4 million of costs incurred with respect to the extinguishment of debt associated with the disposal of flight equipment during the three months ended September 30, 2015. This increase was offset in part by the reduction in the weighted average interest rate (not including the effect of upfront fees, undrawn fees, issuance cost amortization or fair value gains/losses on derivative financial instruments) from 4.0% at September 30, 2014 to 3.5% at September 30, 2015. This reduction in the weighted average interest rate was primarily driven by additional drawdowns of debt at lower interest rates in addition to repayment of debt at higher interest rates during the 12 months ended September 30, 2015.
Maintenance Expenses
Maintenance expenses increased by $0.5 million to $0.5 million for the three months ended September 30, 2015 compared to $Nil million for the three months ended September 30, 2014. The increase was due to maintenance expenses being incurred during the three months ended September 30, 2015 in respect of three aircraft which the Company, on a consensual basis with the lessees, early terminated the leases. These three aircraft were on lease during the three months ended September 30, 2015.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased by $5.5 million, or 35.7%, to $20.9 million for the three months ended September 30, 2015 compared to $15.4 million for the three months ended September 30, 2014. The increase was due to both increased variable costs associated with a larger delivered fleet, an increase in headcount, share based compensation expenses incurred in relation to our Long Term Incentive Plan and one-off costs incurred relating to the Bohai transaction. The increase was offset in part by one-time costs incurred relating to the preparation and structuring for the Initial Public offering of the Company during the three months ended September 30, 2014. Our selling, general and administrative expenses (excluding the one-off expenses outlined above) as a percentage of total revenue remained constant at approximately 7% for the three months ended September 30, 2015 and September 30, 2014.
Taxes
The effective tax rate for the three months ended September 30, 2015 was 7.0% compared to 2.5% for the three months ended September 30, 2014. The Company is incorporated in the Cayman Islands and domiciled in Ireland, whereas its predecessor, Avolon Investments S.à r.l. was incorporated in Luxembourg. The statutory rate of tax in Ireland is 12.5% and the statutory rate of tax in Luxembourg was 29.2% for the year ended December 31, 2014. The increase to the effective tax rate in the current period was due to an increase in pretax income in Irish taxable entities while the tax benefit of non-taxable income stayed relatively constant.
Net Income
Net income increased by $14.6 million, or 33.3%, to $58.4 million for the three months ended September 30, 2015 compared to $43.8 million for the three months ended September 30, 2014. The increase in net income was primarily attributable to the acquisition and leasing of additional aircraft and a decrease in the weighted average interest rate of the Company. This increase was offset in part by the increase in depreciation attributable to the acquisition and leasing of additional aircraft, an increase in interest expense as a result of an increase in debt outstanding, a decrease in the net gain on disposal of flight equipment, an adverse fair value adjustment on derivative financial instruments and one-time expenses incurred in relation to the Bohai transaction.
| Avolon | Q3 2015 | Page 5 |
9 Months Ended September 30, 2015
Lease Revenue
Lease revenue increased by $123.7 million, or 32.7%, to $502.4 million for the nine months ended September 30, 2015 compared to $378.7 million for the nine months ended September 30, 2014, primarily as a result of an increase in the size of our portfolio offset by a decrease in the Annualized Lease Rate of 10.9% as of September 30, 2014 to 10.8% as of September 30, 2015. Our owned portfolio continued to expand during the nine months ended September 30, 2015, building from 122 aircraft delivered as of September 30, 2014 to 144 aircraft as of September 30, 2015. As a result, our Aggregate Net Book Value rose from $5,261.6 million at September 30, 2014 to $6,370.2 million at September 30, 2015, an increase of 21.1%. Lease revenue benefited from 36 new aircraft deliveries during the 12 months ended December 31, 2014 and 30 new aircraft deliveries during the nine months ended September 30, 2015, which together resulted in an increase in lease revenue of $150.9 million for the nine months ended September 30, 2015 as compared to September 30, 2014. In addition to this, our lease revenue included a $1.9 million termination fee generated following the early termination of two leases on a consensual basis with the lessee during the nine months ended September 30, 2015, which had been on lease throughout the year ended December 31, 2014. This increase was offset in part by the disposal of nine aircraft during the 12 months ended December 31, 2014 and 12 aircraft during the nine months ended September 30, 2015, which together resulted in a decrease in lease revenue of $36.1 million and a $2.5 million decrease due to lease amendments, three early terminated leases and the reduced lease revenue for aircraft on floating rate leases for the nine months ended September 30, 2015 as compared to September 30, 2014. All of the aircraft in our fleet were on lease as of September 30, 2014. Our lease revenues for the nine months ended September 30, 2015 included supplemental maintenance rent income of $13.9 million and $4.4 million in the nine months ended September 30, 2014. The supplemental maintenance rent income for the nine months ended September 30, 2015 includes $4.5 million of income recognized as lease revenue for two aircraft where the Company, on a consensual basis with the lessee, agreed to early terminate two leases during 2015 and $5.2 million supplemental maintenance rent income due to the timing of future maintenance events. This was offset in part by a $2.7 million supplemental maintenance rent income reversal due to the extension of the lease term for one aircraft during the nine months ended September 30, 2015.
Net Gain on Disposal of Flight Equipment
Net gain on disposal of flight equipment increased by $5.4 million, or 10.3%, to $58.0 million for the nine months ended September 30, 2015 compared to $52.6 million for the nine months ended September 30, 2014, as a result of our program of aircraft sales. During the nine months ended September 30, 2015 we sold ten single-aisle aircraft and two twin-aisle aircraft compared to three single-aisle aircraft and two twin-aisle aircraft sold during the nine months ended September 30, 2014. The increase in net gain on disposal of flight equipment was primarily due to a larger volume of aircraft sold in the nine months ended September 30, 2015. See “-Expenses-Interest Expense” below for the interest costs incurred with respect to the extinguishment of debt associated with the disposal of flight equipment during the nine months ended September 30, 2015.
Expenses
Depreciation
Depreciation expense increased by $40.9 million, or 31.3%, to $171.8 million for the nine months ended September 30, 2015 compared to $130.9 million for the nine months ended September 30, 2014. The increase in depreciation was attributable to 36 new aircraft deliveries in 2014 and 30 new aircraft deliveries during the nine months ended September 30, 2015, which resulted in an increase in depreciation of $51.3 million for the nine months ended September 30, 2015 as compared to September 30, 2014. In addition, new office equipment and furniture were acquired during the year ended December 31, 2014 which resulted in an increase in depreciation of $0.5 million during the nine months ended September 30, 2015. This increase was offset in part by the disposal of nine aircraft during 2014 and 12 aircraft during the nine months ended September 30, 2015, which resulted in a decrease in depreciation of $10.9 million for the nine months ended September 30, 2015 as compared to September 30, 2014.
| Avolon | Q3 2015 | Page 6 |
Interest Expense
Interest expense increased by $9.7 million, or 6.3%, to $163.1 million (including $6.9 million adverse fair value adjustment on derivative financial instruments) for the nine months ended September 30, 2015 compared to $153.4 million (including $9.4 million adverse fair value adjustment on derivative financial instruments) for the nine months ended September 30, 2014. The increase was primarily the result of an increase in debt outstanding to $5,057.9 million as of September 30, 2015 from $4,258.3 million as of September 30, 2014, an increase of 18.8% and $1.4 million of costs incurred with respect to the extinguishment of debt associated with the disposal of flight equipment during the nine months ended September 30, 2015. This increase was offset in part by the reduction in the weighted average interest rate (not including the effect of upfront fees, undrawn fees, issuance cost amortization or fair value gains/losses on derivative financial instruments) from 4.0% at September 30, 2014 to 3.5% at September 30, 2015. This reduction in the weighted average interest rate was primarily driven by additional drawdowns of debt at lower interest rates in addition to repayment of debt at higher interest rates during the 12 months ended September 30, 2015.
Maintenance Expenses
Maintenance expenses increased by $1.5 million to $1.5 million for the nine months ended September 30, 2015 compared to $Nil million for the nine months ended September 30, 2014. The increase was due to maintenance expenses being incurred during the nine months ended September 30, 2015 in respect of three aircraft the Company, on a consensual basis with the lessee, early terminated the leases. These three aircraft were delivered to new lessees during the nine months ended September 30, 2015 and were on lease as of September 30, 2015.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased by $8.9 million, or 21.4%, to $50.5 million for the nine months ended September 30, 2015 compared to $41.6 million for the nine months ended September 30, 2014. The increase was due to both increased variable costs associated with a larger delivered fleet, an increase in headcount, share based compensation expenses incurred in relation to our Long Term Incentive Plan and one-off costs incurred relating to the Bohai transaction. The increase was offset in part by one-time costs incurred relating to the preparation and structuring for the Initial Public offering of the Company during the nine months ended September 30, 2014. Our selling, general and administrative expenses (excluding the one-off expenses outlined above) as a percentage of total revenue remained constant at approximately 8% for the nine months ended September 30, 2015 and September 30, 2014.
Taxes
The effective tax rate for the nine months ended September 30, 2015 was 7.0% compared to 3.1% for the nine months ended September 30, 2014. The Company is incorporated in the Cayman Islands and domiciled in Ireland, whereas its predecessor, Avolon Investments S.à r.l. was incorporated in Luxembourg. The statutory rate of tax in Ireland is 12.5% and the statutory rate of tax in Luxembourg was 29.2% for the year ended December 31, 2014. The increase to the effective tax rate in the current period was due to an increase in pretax income in Irish taxable entities while the tax benefit of non-taxable income stayed relatively constant.
Net Income
Net income increased by $59.1 million, or 56.7%, to $163.3 million for the nine months ended September 30, 2015 compared to $104.2 million for the nine months ended September 30, 2014. The increase in net income was primarily attributable to the acquisition and leasing of additional aircraft, an increase in the net gain on disposal of flight equipment and a decrease in the weighted average interest rate of the Company. This increase was offset in part by the increase in depreciation attributable to the acquisition and leasing of additional aircraft, an increase in interest expense as a result of an increase in debt outstanding, one-time expenses incurred in relation to the Bohai transaction and share based compensation expenses incurred in relation to our Long Term Incentive Plan.
| 1 | Annualised Cost of Funds at end of period does not include the effect of up-front fees, undrawn fees, issuance cost amortization or fair value gains / losses on derivative financial instruments. |
| Avolon | Q3 2015 | Page 7 |
About Avolon Holdings Limited (“Avolon”)
Headquartered in Ireland, with offices in the United States, Dubai, Singapore and China, Avolon provides aircraft leasing and lease management services. Avolon had an owned, managed and committed fleet of 258 aircraft serving 56 customers in 33 countries as of September 30, 2015. Avolon is listed on the New York Stock Exchange, under the ticker symbol AVOL.
www.avolon.aero
Contacts
| Dónal O’Neill | T: +353 1 231 5843 | M: +353 87 251 1799 | ir@avolon.aero | |||
| Jonathan Neilan | T: +353 1 663 3686 | M: +353 86 231 4135 | ir@avolon.aero | |||
| Jennifer Peters | T: +353 1 663 3684 | M: +353 87 178 7021 | ir@avolon.aero |
Note Regarding Forward-Looking Statements
This document includes forward-looking statements, beliefs or opinions, including statements with respect to Avolon’s business, financial condition, results of operations and plans. These forward-looking statements involve known and unknown risks and uncertainties, many of which are beyond our control and all of which are based on our management’s current beliefs and expectations about future events. Forward-looking statements are sometimes identified by the use of forward-looking terminology such as “believe,” “expects,” “may,” “will,” “could,” “should,” “shall,” “risk,” “intends,” “estimates,” “aims,” “plans,” “predicts,” “continues,” “assumes,” “positioned” or “anticipates” or the negative thereof, other variations thereon or comparable terminology or by discussions of strategy, plans, objectives, goals, future events or intentions. These forward-looking statements include all matters that are not historical facts. Forward-looking statements may and often do differ materially from actual results. No assurance can be given that such future results will be achieved.
These risks, uncertainties and assumptions include, but are not limited to, the following: risks and uncertainties related to the merger transaction with Bohai Leasing; general economic and financial conditions; the financial condition of our lessees; our ability to obtain additional capital to finance our growth and operations on attractive terms; decline in the value of our aircraft and market rates for leases; the loss of key personnel; lessee defaults and attempts to repossess aircraft; our ability to regularly sell aircraft; our ability to successfully re-lease our existing aircraft and lease new aircraft; our ability to negotiate and enter into profitable leases; periods of aircraft oversupply during which lease rates and aircraft values decline; changes in the appraised value of our aircraft; changes in interest rates; competition from other aircraft lessors; and the limited number of aircraft and engine manufacturers. These and other important factors, including those discussed under “Item 3. Key Information—Risk Factors” included in our Annual Report on Form 20-F filed with the U.S. Securities and Exchange Commission on March 3, 2015, may cause our actual events or results to differ materially from any future results, performances or achievements expressed or implied by the forward-looking statements contained in this document. Such forward-looking statements contained in this document speak only as of the date of this document. We expressly disclaim any obligation or undertaking to update these forward-looking statements contained in this document to reflect any change in our expectations or any change in events, conditions, or circumstances on which such statements are based unless required to do so by applicable law.
The financial information included herein includes financial information that is not presented in accordance with generally accepted accounting principles in the United States (“GAAP”), including adjusted net income, adjusted earnings per share and adjusted return on equity. The reconciliation below includes a reconciliation of adjusted net income, adjusted earnings per share and adjusted return on equity with the most directly comparable financial measures calculated in accordance with GAAP.
More detailed information about these and other factors is set forth in the Annual Report on Form 20-F which is available on the Avolon website,www.avolon.aero and has also been filed with the U.S. Securities and Exchange Commission.
| Avolon | Q3 2015 | Page 8 |
Reconciliation of Non-GAAP Measures
| Three Months Ended September 30 | Nine Months Ended September 30 | |||||||||||||||
| 2014 | 2015 | 2014 | 2015 | |||||||||||||
Net Income | 43,830 | 58,371 | 104,180 | 163,344 | ||||||||||||
Amortization of debt issuance costs | 7,548 | 7,188 | 17,929 | 20,003 | ||||||||||||
Unrealized loss on derivatives | (277 | ) | 3,583 | 9,189 | 6,514 | |||||||||||
Share based compensation | — | 2,076 | — | 5,706 | ||||||||||||
Bohai transaction costs | — | 5,867 | — | 5,867 | ||||||||||||
Tax effect | (142 | ) | (1,165 | ) | (851 | ) | (2,267 | ) | ||||||||
Adjusted net income | 50,959 | 75,920 | 130,447 | 199,167 | ||||||||||||
| Three Months Ended September 30 | Nine Months Ended September 30 | |||||||||||||||
| 2014 | 2015 | 2014 | 2015 | |||||||||||||
Net Income | 43,830 | 58,371 | 104,180 | 163,344 | ||||||||||||
Weighted Average Shares Outstanding Diluted | 78,762,263 | 81,341,979 | 78,402,375 | 81,170,595 | ||||||||||||
Diluted EPS | 0.56 | 0.72 | 1.33 | 2.01 | ||||||||||||
Amortization of debt issuance costs | 0.09 | 0.08 | 0.23 | 0.25 | ||||||||||||
Unrealized loss on derivatives | (0.01 | ) | 0.04 | 0.12 | 0.08 | |||||||||||
Share based compensation | 0.00 | 0.03 | 0.00 | 0.07 | ||||||||||||
Bohai transaction costs | 0.00 | 0.07 | 0.00 | 0.07 | ||||||||||||
Tax effect | (0.00 | ) | (0.01 | ) | (0.01 | ) | (0.03 | ) | ||||||||
Effect of number of issued shares | (0.02 | ) | (0.01 | ) | (0.07 | ) | (0.04 | ) | ||||||||
Adjusted EPS | 0.62 | 0.92 | 1.60 | 2.41 | ||||||||||||
| Three Months Ended September 30 | Nine Months Ended September 30 | 2015 Year End Guidance | ||||||||||||||||||||||
| 2014 | 2015 | 2014 | 2015 | 2015 | 2015 | |||||||||||||||||||
ROE | 12.6 | % | 14.6 | % | 10.0 | % | 13.6 | % | 12.8 | % | 13.1 | % | ||||||||||||
Amortization of debt issuance costs | 2.2 | % | 1.8 | % | 1.7 | % | 1.7 | % | 1.4 | % | 1.4 | % | ||||||||||||
Unrealized loss on derivatives | (0.1 | %) | 0.9 | % | 0.9 | % | 0.5 | % | — | — | ||||||||||||||
Share based compensation | 0.0 | % | 0.5 | % | 0.0 | % | 0.5 | % | 0.6 | % | 0.6 | % | ||||||||||||
Bohai transaction costs | 0.0 | % | 0.4 | % | 0.0 | % | 0.4 | % | 0.3 | % | 0.3 | % | ||||||||||||
Tax effect | (0.1 | %) | (0.3 | %) | (0.1 | %) | (0.2 | %) | (0.1 | %) | (0.1 | %) | ||||||||||||
Adjusted ROE | 14.6 | % | 17.9 | % | 12.5 | % | 16.5 | % | 15.0 | % | 15.3 | % | ||||||||||||
| Avolon | Q3 2015 | Page 9 |
Avolon Holdings Limited
Unaudited Condensed Consolidated Interim Financial Statements
As of December 31, 2014 and September 30, 2015 and for the three and nine months ended September 30, 2014 and 2015
| Avolon | Q3 2015 | Page 10 |
Avolon Holdings Limited
Unaudited Condensed Consolidated Interim Financial Statements
Table of Contents
| Page | ||||
Unaudited Condensed Consolidated Balance Sheets as of December 31, 2014 and September 30, 2015 | F-2 | |||
Unaudited Condensed Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2014 and 2015 | F-4 | |||
Unaudited Condensed Consolidated Statements of Changes in Shareholders’ Equity for the nine months ended September 30, 2015 | F-5 | |||
Unaudited Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2014 and 2015 | F-6 | |||
Notes to the Unaudited Condensed Consolidated Interim Financial Statements | F-8 | |||
Avolon Holdings Limited
Unaudited Condensed Consolidated Balance Sheets
December 31, 2014 and September 30, 2015
(In US$ thousands except share and per share data)
| December 31, 2014 | September 30, 2015 | |||||||
Assets | ||||||||
Cash and cash equivalents | 111,392 | 126,862 | ||||||
Restricted cash | 195,095 | 249,602 | ||||||
Accounts receivable | 11,010 | 9,248 | ||||||
Flight equipment, net | 5,606,556 | 6,370,249 | ||||||
Derivative financial assets | 8,137 | 5,725 | ||||||
Deposits on flight equipment | 199,514 | 133,952 | ||||||
Deferred issuance costs, net | 105,952 | 100,307 | ||||||
Deferred income taxes | 18,996 | 6,664 | ||||||
Investment in unconsolidated equity investees | 16,453 | 19,544 | ||||||
Other assets | 53,002 | 49,608 | ||||||
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Total Assets including US$6,326,107 as of December 31, 2014 and US$7,071,761 as of September 30, 2015 representing collateral of VIE entities | 6,326,107 | 7,071,761 | ||||||
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Liabilities and Shareholders’ Equity | ||||||||
Accounts payable | 203 | 10 | ||||||
Accrued expenses and other liabilities | 27,223 | 34,221 | ||||||
Income tax payable | 434 | 254 | ||||||
Deferred revenue | 35,193 | 44,058 | ||||||
Accrued maintenance liabilities | 180,526 | 223,428 | ||||||
Lease deposits liability | 82,677 | 90,512 | ||||||
Debt financing, including debt financing of VIEs of US$1,385,762 as of December 31, 2014 and US$1,019,336 as of September 30, 2015 that do not have recourse to the general credit of the Company | 4,465,187 | 4,982,974 | ||||||
Capital lease obligation | 83,261 | 74,881 | ||||||
Deferred income taxes | 17,006 | 17,006 | ||||||
Derivative financial liabilities | 1,400 | 2,545 | ||||||
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Total Liabilities | 4,893,110 | 5,469,889 | ||||||
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The accompanying notes are an integral part of these unaudited condensed consolidated interim financial statements.
F - 2
Avolon Holdings Limited
Unaudited Condensed Consolidated Balance Sheets (continued)
December 31, 2014 and September 30, 2015
(In US$ thousands except share and per share data)
| December 31, 2014 | September 30, 2015 | |||||||
Shareholders’ Equity | ||||||||
Common shares: US$0.000004 par value | ||||||||
Authorized: 750,000,000 shares; | ||||||||
Issued and outstanding: 80,960,882 and 80,964,798 shares at December 31, 2014 and September 30, 2015, respectively | — | — | ||||||
Additional paid-in-capital | 1,421,864 | 1,427,395 | ||||||
Retained earnings | 11,133 | 174,477 | ||||||
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Total Shareholders’ Equity | 1,432,997 | 1,601,872 | ||||||
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Total Liabilities and Shareholders’ Equity | 6,326,107 | 7,071,761 | ||||||
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The accompanying notes are an integral part of these unaudited condensed consolidated interim financial statements.
F - 3
Avolon Holdings Limited
Unaudited Condensed Consolidated Statements of Comprehensive Income
Three and nine months ended September 30, 2014 and 2015
(In US$ thousands, except per share data)
| Three months ended September 30, | Nine months ended September 30, | |||||||||||||||
| 2014 | 2015 | 2014 | 2015 | |||||||||||||
Revenues | ||||||||||||||||
Lease revenue | 137,379 | 180,570 | 378,674 | 502,434 | ||||||||||||
Management fee revenue | 478 | 453 | 1,395 | 1,029 | ||||||||||||
Net gain on disposal of flight equipment | 26,523 | 20,881 | 52,567 | 58,001 | ||||||||||||
Interest income | 60 | 33 | 652 | 108 | ||||||||||||
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Total revenues | 164,440 | 201,937 | 433,288 | 561,572 | ||||||||||||
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Expenses | ||||||||||||||||
Depreciation | (47,731 | ) | (60,918 | ) | (130,857 | ) | (171,757 | ) | ||||||||
Interest expense | (56,579 | ) | (56,979 | ) | (153,448 | ) | (163,117 | ) | ||||||||
Maintenance expense | — | (533 | ) | — | (1,481 | ) | ||||||||||
Selling, general and administrative costs | (15,389 | ) | (20,914 | ) | (41,574 | ) | (50,498 | ) | ||||||||
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Total expenses | (119,699 | ) | (139,344 | ) | (325,879 | ) | (386,853 | ) | ||||||||
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Income before income tax and interest in earnings from unconsolidated equity investees | 44,741 | 62,593 | 107,409 | 174,720 | ||||||||||||
Income tax expense | (1,132 | ) | (4,394 | ) | (3,371 | ) | (12,261 | ) | ||||||||
Income from unconsolidated equity investees, net of tax | 221 | 172 | 142 | 885 | ||||||||||||
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Net income and total comprehensive income | 43,830 | 58,371 | 104,180 | 163,344 | ||||||||||||
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Net income per share of: | ||||||||||||||||
Basic | 0.56 | 0.72 | 1.33 | 2.02 | ||||||||||||
Diluted | 0.56 | 0.72 | 1.33 | 2.01 | ||||||||||||
Weighted average number of shares outstanding: | ||||||||||||||||
Basic | 78,745,481 | 80,964,907 | 78,390,298 | 80,962,867 | ||||||||||||
Diluted | 78,762,263 | 81,341,979 | 78,402,375 | 81,170,595 | ||||||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated interim financial statements.
F - 4
Avolon Holdings Limited
Unaudited Condensed Consolidated Statement of Changes in Shareholders’ Equity
Nine months ended September 30, 2015
(In US$ thousands)
| Common shares | Additional paid in capital | Retained earnings | Total | |||||||||||||
| Shares | US$’000 | US$’000 | US$’000 | |||||||||||||
Balance at December 31, 2014 | 80,960,882 | 1,421,864 | 11,133 | 1,432,997 | ||||||||||||
Net income and total comprehensive income | — | — | 163,344 | 163,344 | ||||||||||||
Settlement of restricted share units | — | (175 | ) | — | (175 | ) | ||||||||||
Exercise of share options | 4,025 | — | — | — | ||||||||||||
Share-based compensation | — | 5,706 | — | 5,706 | ||||||||||||
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Balance at September 30, 2015 | 80,964,907 | 1,427,395 | 174,477 | 1,601,872 | ||||||||||||
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The accompanying notes are an integral part of these unaudited condensed consolidated interim financial statements.
F - 5
Avolon Holdings Limited
Unaudited Condensed Consolidated Statements of Cash Flows
Nine months ended September 30, 2014 and 2015
(In US$ thousands)
| Nine months ended September 30, | ||||||||
| 2014 | 2015 | |||||||
Cash flows provided by operating activities | ||||||||
Net income | 104,180 | 163,344 | ||||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
Depreciation | 130,857 | 171,757 | ||||||
Net gain on disposal of flight equipment | (52,567 | ) | (58,001 | ) | ||||
Amortization of debt issuance costs | 17,929 | 20,180 | ||||||
Deferred income tax provision | 3,152 | 12,467 | ||||||
Share based compensation | — | 5,706 | ||||||
Earnings from unconsolidated equity investees | (142 | ) | (885 | ) | ||||
Unrealised loss on derivatives | 9,189 | 6,514 | ||||||
Changes in operating assets and liabilities: | ||||||||
(Increase)/ decrease in receivables | (3,676 | ) | 1,762 | |||||
(Increase)/ decrease in other assets | (7,678 | ) | 2,539 | |||||
Increase in deferred revenue | 5,476 | 8,865 | ||||||
(Decrease)/ increase in accounts payable, accrued expenses and other liabilities | (11,057 | ) | 5,027 | |||||
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Net cash provided by operating activities | 195,663 | 339,275 | ||||||
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Cash flows from investing activities | ||||||||
Acquisition of flight equipment | (1,429,144 | ) | (1,431,969 | ) | ||||
Investment in unconsolidated equity investees | (6,279 | ) | (2,206 | ) | ||||
Deposits for flight equipment purchases | (59,588 | ) | (36,880 | ) | ||||
Proceeds from disposal of flight equipment | 413,208 | 657,682 | ||||||
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Net cash used in investing activities | (1,081,803 | ) | (813,373 | ) | ||||
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Cash flows from financing activities | ||||||||
(Increase)/ decrease in restricted cash | 39,283 | (54,507 | ) | |||||
Purchase of ordinary shares and settlement of restricted share units | (5,592 | ) | (175 | ) | ||||
Drawdown of debt | 1,638,525 | 1,801,054 | ||||||
Repayment of debt | (915,879 | ) | (1,290,226 | ) | ||||
Debt issuance costs paid | (26,302 | ) | (14,358 | ) | ||||
Acquisition of interest rate caps | (6,169 | ) | (2,957 | ) | ||||
Disposal of interest rate caps | 8,867 | — | ||||||
Maintenance payments received | 52,781 | 65,360 | ||||||
Maintenance payments returned | (3,781 | ) | (22,458 | ) | ||||
Security deposits received | 32,730 | 25,888 | ||||||
Security deposits returned | (10,378 | ) | (18,053 | ) | ||||
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Net cash provided by financing activities | 804,085 | 489,568 | ||||||
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Net (decrease)/increase in cash and cash equivalents | (82,055 | ) | 15,470 | |||||
Cash at beginning of period | 177,924 | 111,392 | ||||||
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Cash at end of period | 95,869 | 126,862 | ||||||
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F - 6
Avolon Holdings Limited
Unaudited Condensed Consolidated Statements of Cash Flows (continued)
Nine months ended September 30, 2014 and 2015
(In US$ thousands)
| Nine months ended September 30 | ||||||||
| 2014 | 2015 | |||||||
Supplemental cash flow information: | ||||||||
Cash paid for interest including amounts capitalized of US$2.2m, and US$0.9m for the nine months ended September 30, 2014 and 2015, respectively | 132,839 | 142,654 | ||||||
Cash paid for income taxes | 79 | 386 | ||||||
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Supplemental disclosures of non-cash investing and financing activities: | ||||||||
Security deposits, maintenance liabilities and other liabilities settled on sale of flight equipment | 2,854 | 39,503 | ||||||
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Advance lease rentals, security deposits and maintenance reserves assumed in asset acquisitions | 17,467 | 2,920 | ||||||
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The accompanying notes are an integral part of these unaudited condensed consolidated interim financial statements.
F - 7
Avolon Holdings Limited
Notes to the Unaudited Condensed Consolidated Interim Financial Statements
Six months ended June 30, 2014 and 2015
(In US$ thousands, except as otherwise stated)
| (1) | Organization |
Avolon Holdings Limited (“Avolon Holdings” or the “Company”), is a publicly traded company whose shares trade on the NYSE market under the trading symbol “AVOL”. The Company was incorporated in the Cayman Islands on June 5, 2014 for the purpose of an initial public offering (“IPO”) of the Company’s common shares. The Company historically conducted its business through Avolon Investment S.à r.l. (“Avolon S.à r.l.”). On September 3, 2015, the Company entered into a definitive merger agreement to be acquired by Bohai Leasing Co., Ltd. (“Bohai”) at a price of US$31 cash per common share. The merger agreement is subject to customary conditions including receipt of certain required regulatory approvals and the approval of the Company’s and Bohai’s shareholders. The transaction is expected to close by the first quarter of 2016. The Company is a global aircraft leasing company focused on acquiring, managing and selling commercial aircraft. These unaudited condensed consolidated interim financial statements comprise the Company and its subsidiaries and the Company’s investment in unconsolidated equity investees. The Company is primarily involved in acquiring, leasing and selling commercial jet aircraft to various airlines and lessees and acting as servicer for third party aircraft owners.
| (2) | Basis of preparation |
The unaudited condensed consolidated interim financial statements are presented in United States dollars (“US$”) and have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”) for interim financial reporting and in accordance with the United States Generally Accepted Accounting Principles (“US GAAP”). As permitted by the rules and regulations of the SEC, certain information and footnote disclosures required by US GAAP for complete annual financial statements have been omitted, however, we believe that the disclosures are adequate to make the information presented not misleading. These unaudited condensed consolidated interim financial statements should be read in conjunction with the Company’s audited consolidated financial statements for the year ended December 31, 2014 included in the Company’s Form 20-F filed with the SEC on March 3, 2015.
In the opinion of management, these financial statements contain all adjustments, consisting of normal recurring accruals, necessary to present fairly the financial position, results of operations and cash flows for the periods indicated. Results of operations for the periods presented are not necessarily indicative of results of operations that may be expected for the entire year.
| (3) | Principles of consolidation |
The Company consolidates all entities in which it has a controlling financial interest, including the accounts of any variable interest entities (“VIE”) in which the Company has a controlling financial interest and for which it is the primary beneficiary. All intercompany balances are eliminated on consolidation.
| (4) | Use of estimates |
The preparation of the unaudited condensed consolidated interim financial statements in conformity with US GAAP requires management to make judgments, estimates and assumptions that affect the application of policies and reported amounts of assets and liabilities, revenue and expenses. The estimates and associated assumptions are based on historical experience and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis of making the judgments about carrying values of assets and liabilities that are not readily apparent from other sources. While the Company believes that the estimates and related assumptions used in the preparation of the unaudited condensed consolidated interim financial statements are appropriate, actual results could differ from those estimates.
| Avolon | Financial Statements | F - 8 |
Avolon Holdings Limited
Notes to the Unaudited Condensed Consolidated Interim Financial Statements
Six months ended June 30, 2014 and 2015
(In US$ thousands, except as otherwise stated)
| (4) | Use of estimates (continued) |
The most significant estimates are those in relation to the residual value of flight equipment, the impairment of flight equipment, the proportion of supplemental maintenance rent that will not be reimbursed and the valuation allowance recognized against deferred tax assets.
| (5) | Accounting standards issued but not yet adopted |
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606). The new standard is effective for reporting periods beginning after December 15, 2017 and early adoption is not permitted. The comprehensive new standard will supersede existing revenue recognition guidance and require revenue to be recognized when promised goods or services are transferred to customers in amounts that reflect the consideration to which the Company expects to be entitled in exchange for those goods or services. Adoption of the new rules could affect the timing of revenue recognition for certain transactions. The guidance permits two implementation approaches, one requiring retrospective application of the new standard with restatement of prior years and one requiring prospective application of the new standard with disclosure of results under old standards. The new standard will be effective January 1, 2018 and the Company is currently evaluating the effects of adoption on the Company’s consolidated financial statements.
In February 2015, the FASB issued ASU 2015-02, Amendments to the Consolidation Analysis (Topic 810). The new standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. The ASU significantly changes the consolidation analysis required under US GAAP. Amendments include the inclusion of limited partnerships as variable interest entities, changes the effect fees paid to a decision maker or service provider have on a consolidation analysis, amends how variable interests held by a reporting entity’s related parties or de facto agents affects its consolidation conclusion and for entities other than limited partnerships, clarifies how to determine whether the equity holders (as a group) have power over the entity. These changes could result in the deconsolidation of entities and reporting entities will be required to re-evaluate all previous consolidation conclusions. The Company is currently in the process of evaluating the impact of adoption of this ASU on the Company’s consolidated financial statements.
In April 2015, the FASB issued ASU 2015-03, Interest - Imputation of Interest. The standard will require debt issuance costs to be presented in the balance sheet as a direct deduction from the related debt liability rather than as an asset. Amortization of the costs will be reported as interest expense. Entities will be required to apply the new guidance retrospectively to all prior periods presented. ASU 2015-03 will be effective for annual periods beginning after December 15, 2015, and interim periods within those fiscal years. Early application is permitted. The Company expects new guidance will reduce total assets and debt financing on its consolidated balance sheets by amounts currently classified as deferred issuance costs, but does not expect this update to have any other effect on its consolidated financial statements.
| Avolon | Financial Statements | F - 9 |
Avolon Holdings Limited
Notes to the Unaudited Condensed Consolidated Interim Financial Statements
Six months ended June 30, 2014 and 2015
(In US$ thousands, except as otherwise stated)
| (6) | Flight equipment |
Flight equipment and related accumulated depreciation are as follows:
| December 31, 2014 | September 30, 2015 | |||||||
Flight equipment - aircraft | 6,036,199 | 6,944,608 | ||||||
Less accumulated depreciation | (429,643 | ) | (574,359 | ) | ||||
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Total flight equipment, net | 5,606,556 | 6,370,249 | ||||||
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| (6) | Flight equipment (continued) |
At September 30, 2015 the Company owned 144 aircraft (December 31, 2014: 126 aircraft). During the three and nine months ended September 30, 2015, the Company sold 7 and 12 aircraft, respectively (12 months to December 31, 2014: 9 aircraft). In addition the Company purchased 8 and 30 aircraft during the three and nine months ended September 30, 2015, respectively (12 months to December 31, 2014: 36 aircraft).
At September 30, 2015, the Company had 2 aircraft (December 31, 2014: 2 aircraft) held under capital lease. The carrying value of these aircraft at September 30, 2015 was US$133.2m (December 31, 2014: US$137.6m). The gross amount of these aircraft at September 30, 2015 was US$158.6m (December 31, 2014: US$158.6m).
The accumulated depreciation relating to the aircraft held under capital lease at September 30, 2015 was US$25.3m (December 31, 2014: US$21m). The depreciation charge for the three and nine month periods ended September 30, 2015 relating to these aircraft was US$1.4m and US$4.3m (three and nine month periods ended September 30, 2014: US$1.4m and US$4.3m).
The Company’s obligations under its secured bank loans are secured by charges over, amongst other things, the Company’s aircraft and related assets with a carrying value as of September 30, 2015 US$6.4bn (December 31, 2014: US$5.6bn).
| (7) | Deposits for flight equipment purchases |
| December 31, 2014 | September 30, 2015 | |||||||
Balance at beginning of period | 206,781 | 199,514 | ||||||
Increase in purchase deposits | 76,365 | 32,231 | ||||||
Capitalized interest | 7,430 | 4,617 | ||||||
Capitalized expenses | 222 | 32 | ||||||
Deposits applied against the purchase of flight equipment | (91,284 | ) | (102,442 | ) | ||||
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Balance at end of the period | 199,514 | 133,952 | ||||||
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It is the Company’s policy to capitalise specific aircraft acquisition related interest costs and to depreciate these costs in line with the respective flight equipment over its useful life.
| Avolon | Financial Statements | F - 10 |
Avolon Holdings Limited
Notes to the Unaudited Condensed Consolidated Interim Financial Statements
Six months ended June 30, 2014 and 2015
(In US$ thousands, except as otherwise stated)
| (8) | Other assets |
| December 31, 2014 | September 30, 2015 | |||||||
Deferred lease incentive, net of amortization | 43,566 | 40,139 | ||||||
Other property, plant and equipment, net of depreciation US$0.7m (December 31, 2014: US$0.6m) | 2,876 | 2,630 | ||||||
Deposits paid | 453 | 29 | ||||||
Prepayments | 2,310 | 3,148 | ||||||
Deferred tax asset | 3,797 | 3,662 | ||||||
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| 53,002 | 49,608 | |||||||
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| (9) | Lease deposits liability |
At September 30, 2015, lessee security deposits amounted to US$90.5m (December 31, 2014: US$82.7m). This related to cash security received of US$72.3m (December 31, 2014: US$70.2m) with respect to 74 aircraft currently on lease (December 31, 2014: 66) and US$18.2m (December 31, 2014: US$12.5m) which was received from lessees who have signed a letter of intent with the Company. Lessee security deposits are generally refundable at the end of the contract lease period after all lease obligations have been met by the lessee.
Furthermore, the Company held security on lease obligations for other aircraft in the form of letters of credit in the amount of US$170.7m as of September 30, 2015 (December 31, 2014: US$145.7m).
| Avolon | Financial Statements | F - 11 |
Avolon Holdings Limited
Notes to the Unaudited Condensed Consolidated Interim Financial Statements
Six months ended June 30, 2014 and 2015
(In US$ thousands, except as otherwise stated)
| (10) | Debt financing and capital lease obligations |
The Company’s debt obligations are summarized below:
| Type of Debt | At December 31, 2014 | At September 30, 2015 | Average Nominal Interest Rate as of September 30, 2015 | Undrawn debt facilities | Maturity | |||||||||||||||
Non-recourse term facilities | 797,305 | 460,524 | 4.32 | % | — | 2015-2025 | ||||||||||||||
Full recourse term facilities | 1,973,891 | 3,045,031 | 3.44 | % | 105,168 | 2015-2027 | ||||||||||||||
Securitization | 588,457 | 558,812 | 4.89 | % | — | 2015-2020 | ||||||||||||||
ECA and EXIM backed facilities | 725,113 | 655,955 | 2.49 | % | — | 2015-2026 | ||||||||||||||
Warehouse facility | 170,863 | 222,843 | 2.66 | % | 327,157 | 2015-2018 | ||||||||||||||
Lines of credit | 198,006 | 29,813 | 3.45 | % | 505,000 | 2015-2019 | ||||||||||||||
Loan interest accrued but not paid | 11,552 | 9,996 | N/A | — | N/A | |||||||||||||||
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| 4,465,187 | 4,982,974 | 937,325 | ||||||||||||||||||
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Capital lease obligation | ||||||||||||||||||||
Capital lease | 82,906 | 74,569 | 4.07 | % | — | 2015-2021 | ||||||||||||||
Capital lease interest accrued but not paid | 355 | 312 | N/A | — | N/A | |||||||||||||||
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| 83,261 | 74,881 | — | ||||||||||||||||||
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| 4,548,448 | 5,057,855 | 937,325 | ||||||||||||||||||
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| Avolon | Financial Statements | F - 12 |
Avolon Holdings Limited
Notes to the Unaudited Condensed Consolidated Interim Financial Statements
Six months ended June 30, 2014 and 2015
(In US$ thousands, except as otherwise stated)
| (10) | Debt financing and capital lease obligations (continued) |
Maturities
The anticipated aggregate principal and interest repayments due for its debt financing for each of the fiscal years subsequent to September 30, 2015, are as follows:
| Principal | Interest | Total | ||||||||||
2015 | 119,185 | 42,926 | 162,111 | |||||||||
2016 | 394,847 | 164,493 | 559,340 | |||||||||
2017 | 446,752 | 149,134 | 595,886 | |||||||||
2018 | 701,610 | 130,608 | 832,218 | |||||||||
2019 | 515,711 | 109,287 | 624,998 | |||||||||
Thereafter | 2,796,056 | 224,912 | 3,020,968 | |||||||||
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| 4,974,161 | 821,360 | 5,795,521 | ||||||||||
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Capital lease obligation
The anticipated aggregate principal and interest repayments due for its capital lease obligations for each of the fiscal years subsequent to September 30, 2015, are as follows:
| Principal | Interest | Total | ||||||||||
2015 | 2,823 | 775 | 3,598 | |||||||||
2016 | 11,585 | 2,787 | 14,372 | |||||||||
2017 | 12,029 | 2,306 | 14,335 | |||||||||
2018 | 12,510 | 1,785 | 14,295 | |||||||||
2019 | 12,991 | 1,263 | 14,254 | |||||||||
Thereafter | 22,631 | 890 | 23,521 | |||||||||
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| 74,569 | 9,806 | 84,375 | ||||||||||
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At December 31, 2014 and September 30, 2015 the Company was in compliance with the covenants in its credit agreements. The Company’s debt facilities contain customary covenants and events of default; included within certain debt facilities are covenants that limit the ability of the Company to incur additional indebtedness and create liens, covenants that limit the ability of the Company to consolidate, merge or dispose of all or substantially all of its assets and enter into transactions with affiliates and covenants that limit the ability of the Company to pay dividends.
Full Recourse Term Facilities
In the nine month period to September 30, 2015, the Company drew down on new facilities totalling US$1,177m and made repayments totalling US$130.6m for the nine months period to September 30, 2015. During the period to September 30, 2015, a number of the Company’s existing debt facilities have changed from non-recourse term facilities to full recourse facilities totalling US$24.5m. Each of these loans contains provisions that require the payment of principal and interest throughout the terms of the loans.
| Avolon | Financial Statements | F - 13 |
Avolon Holdings Limited
Notes to the Unaudited Condensed Consolidated Interim Financial Statements
Six months ended June 30, 2014 and 2015
(In US$ thousands, except as otherwise stated)
| (10) | Debt financing and capital lease obligations (continued) |
Non-Recourse Term Facilities
In the period to September 30, 2015, the Company made repayments totalling US$312.2m for the nine months period to September 30, 2015. During the period to September 30, 2015, a number of the Company’s existing debt facilities have changed from Non-Recourse term facilities to Full Recourse facilities totalling US$24.5m. Each of these loans contains provisions that require the payment of principal and interest throughout the terms of the loans.
Lines of credit
In the period to September 30, 2015, the Company drew down on the unsecured debt facilities totalling US$300m and made repayments totalling US$468.2m for the nine months period to September 30, 2015.
A detailed summary of the principal terms of our indebtedness can be found in our 2014 annual financial statements. There have been no material changes, except for Full Recourse term facilities, Non-Recourse term facilities and Lines of Credit as described above, to the indebtedness since December 31, 2014. During the period to September 30, 2015, the Company drew down on new facilities totalling US$323.8m and made repayments totalling US$379m for the nine months period to September 30, 2015 in relation to the other debt facilities not mentioned above.
| (11) | Income taxes |
The effective tax rate was 7% for the three and nine months ended September 30, 2015 compared to 2.5% and 3.1% for the three and nine months ended September 30, 2014. The Company is incorporated in the Cayman Islands and domiciled in Ireland, whereas its predecessor, Avolon S.à r.l. was incorporated in Luxembourg. The statutory rate of tax in Ireland is 12.5% and the statutory rate of tax in Luxembourg was 29.2% for the year ended December 31, 2014.
| (12) | Derivative financial instruments |
Gains/(losses) from changes in fair values of derivatives are recognized in the consolidated statement of comprehensive income as a component of interest expense. These amounts are shown in the table below for the nine months ended September 30, 2014 and 2015.
| Nine months ended September 30, | ||||||||
| 2014 | 2015 | |||||||
Interest Rate Contracts: | ||||||||
Unrealised (loss) on derivatives | (9,189 | ) | (6,514 | ) | ||||
Realised (loss) on derivatives | (221 | ) | (378 | ) | ||||
The table on F-15 shows the notional amounts of the Company’s outstanding derivative instruments and credit risk amounts associated with outstanding or unsettled derivative instruments as of December 31, 2014 and September 30, 2015. These amounts are considered indicative of the Company’s derivative transaction volume during each of the respective years presented.
| Avolon | Financial Statements | F - 14 |
Avolon Holdings Limited
Notes to the Unaudited Condensed Consolidated Interim Financial Statements
Six months ended June 30, 2014 and 2015
(In US$ thousands, except as otherwise stated)
| (12) | Derivative financial instruments (continued) |
| December 31, 2014 | September 30, 2015 | |||||||
Interest rate contracts: | ||||||||
Interest Rate Swaps | 32,629 | 92,953 | ||||||
Interest Rate Caps | 361,816 | 518,577 | ||||||
| (13) | Offsetting disclosure |
In connection with its derivative activities, the Company enters into master netting agreements and collateral agreements with its counterparties. These agreements provide the Company with the right, in the event of a default by the counterparty (such as bankruptcy or a failure to pay or perform), to net a counterparty’s rights and obligations under the agreement and to liquidate and set off collateral against any net amount owed by the counterparty. However, in certain circumstances: the Company may not have such an agreement in place; the relevant insolvency regime (which is based on the type of counterparty entity and the jurisdiction of organization of the counterparty) may not support the enforceability of the agreement; or the Company may not have sought legal advice to support the enforceability of the agreement. In cases where the Company has not determined an agreement to be enforceable, the related amounts are not offset in the tabular disclosures below. The Company’s policy is generally to recognise all derivative assets and derivative liabilities on a gross basis on the consolidated balance sheet. The following tables present information about the offsetting of derivative instruments.
| At December 31, 2014 | ||||||||||||||||||||
| Gross Amounts | Amounts offset in the consolidated balance sheets | Net Amounts Presented in the consolidated balance sheets | Financial instruments not offset in the consolidated balance sheets | Net Exposure | ||||||||||||||||
Derivative Assets | 14,021 | (5,884 | ) | 8,137 | — | 8,137 | ||||||||||||||
Derivative Liabilities | (7,284 | ) | 5,884 | (1,400 | ) | — | (1,400 | ) | ||||||||||||
| At September 30, 2015 | ||||||||||||||||||||
| Gross Amounts | Amounts offset in the consolidated balance sheets | Net Amounts Presented in the consolidated balance sheets | Financial instruments not offset in the consolidated balance sheets | Net Exposure | ||||||||||||||||
Derivative Assets | 13,329 | (7,604 | ) | 5,725 | — | 5,725 | ||||||||||||||
Derivative Liabilities | (10,149 | ) | 7,604 | (2,545 | ) | — | (2,545 | ) | ||||||||||||
| Avolon | Financial Statements | F - 15 |
Avolon Holdings Limited
Notes to the Unaudited Condensed Consolidated Interim Financial Statements
Six months ended June 30, 2014 and 2015
(In US$ thousands, except as otherwise stated)
| (14) | Lease revenue |
At September 30, 2015 the Company had contracted to receive the following minimum cash lease rentals under non-cancellable operating leases:
2015 | 172,331 | |||
2016 | 684,054 | |||
2017 | 657,629 | |||
2018 | 605,692 | |||
2019 | 536,935 | |||
Thereafter | 1,946,083 | |||
|
| |||
| 4,602,724 | ||||
|
|
The Company recognised supplemental maintenance rent for the three month and nine month periods ended September 30, 2015 of US$7.6m and US$13.9m (3 month and nine month periods ended September 30, 2014 of $2.4m and $4.4m) which is included in lease revenue.
| (15) | Interest income / (expense) |
Three months ended September 30, | Nine months ended September 30, | |||||||||||||||
| 2014 | 2015 | 2014 | 2015 | |||||||||||||
Interest income on cash and cash equivalents | 60 | 33 | 237 | 108 | ||||||||||||
Other interest income | — | — | 415 | — | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Interest income | 60 | 33 | 652 | 108 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Interest on borrowing | (50,578 | ) | (51,132 | ) | (141,256 | ) | (147,731 | ) | ||||||||
Amortization of debt issuance costs | (7,549 | ) | (7,188 | ) | (17,929 | ) | (20,003 | ) | ||||||||
Less interest capitalized | 1,548 | 1,341 | 5,737 | 4,617 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Net interest expense | (56,579 | ) | (56,979 | ) | (153,448 | ) | (163,117 | ) | ||||||||
|
|
|
|
|
|
|
| |||||||||
| (16) | Segment information |
The Company manages its business, analyzes and reports its results of operations on the basis of one operating segment – leasing and selling of commercial flight equipment. The Board of Directors is the chief operating decision maker.
| Avolon | Financial Statements | F - 16 |
Avolon Holdings Limited
Notes to the Unaudited Condensed Consolidated Interim Financial Statements
Six months ended June 30, 2014 and 2015
(In US$ thousands, except as otherwise stated)
| (17) | Commitments and contingencies |
Capital commitments
As at September 30, 2015 the Company had committed to purchasing 104 aircraft scheduled to deliver from 2015 through 2022. All of these commitments are based upon fixed price agreements with the manufacturers or sale-leaseback transactions with airlines, which are adjusted for inflation and include price escalation formulas. The capital commitments include 30 aircraft under non-binding letters of intent to the amount of $1.8bn. Capital commitments amount to US$7.3bn at September 30, 2015 and are as follows:
| September 30, 2015 | ||||
2015 | 129,459 | |||
2016 | 1,673,086 | |||
2017 | 868,622 | |||
2018 | 763,525 | |||
2019 | 1,393,215 | |||
Thereafter | 2,448,411 | |||
|
| |||
Total | 7,276,318 | |||
|
| |||
Guarantees
The Company is financed by a number of limited recourse loans, totalling US$5.1bn (December 31, 2014: US$4.6bn) and at an average nominal interest rate of 3.5%. These loans are secured by some or all of a mortgage on the flight equipment, share pledge over the flight equipment owning entity, assignment of lease contracts and in some cases a limited guarantee from Avolon Aerospace Leasing Limited. Based on the projected cash flows from the assets, the directors of the Company believe that these loans will continue to perform for the foreseeable future.
As of September 30, 2015 the Company has US$937m (December 31, 2014: US$1,176m) in undrawn debt facilities. The conditions of our availability of the undrawn debt facilities vary between our debt facilities. The Company has US$505m of unsecured debt facility with limited restrictions to its availability. The Company can avail of US$432m of secured debt facilities where the availability period is between 2015 to 2017. The Company is charged an interest rate between 0.5% to 1% on undrawn balances. The conditions attributable to the utilization of some of these facilities are permitted aircraft types, country and region limits and age limits.
As at September 30, 2015 there were no contingent liabilities.
| Avolon | Financial Statements | F - 17 |
Avolon Holdings Limited
Notes to the Unaudited Condensed Consolidated Interim Financial Statements
Six months ended June 30, 2014 and 2015
(In US$ thousands, except as otherwise stated)
| (18) | Fair value measurements |
The following table presents our assets and liabilities that are measured at fair value and are categorized using the fair value hierarchy:
| As at December 31, 2014 | ||||||||||||
| Level 1 | Level 2 | Level 3 | ||||||||||
Assets | ||||||||||||
Derivative financial assets | — | 8,137 | — | |||||||||
|
|
|
|
|
| |||||||
Total Assets | — | 8,137 | — | |||||||||
|
|
|
|
|
| |||||||
Liabilities | ||||||||||||
Derivative financial liabilities | — | 1,400 | — | |||||||||
|
|
|
|
|
| |||||||
Total Liabilities | — | 1,400 | — | |||||||||
|
|
|
|
|
| |||||||
| As at September 30, 2015 | ||||||||||||
| Level 1 | Level 2 | Level 3 | ||||||||||
Assets | ||||||||||||
Derivative financial assets | — | 5,725 | — | |||||||||
|
|
|
|
|
| |||||||
Total Assets | — | 5,725 | — | |||||||||
|
|
|
|
|
| |||||||
Liabilities | ||||||||||||
Derivative financial liabilities | — | 2,545 | — | |||||||||
|
|
|
|
|
| |||||||
Total Liabilities | — | 2,545 | — | |||||||||
|
|
|
|
|
| |||||||
| Avolon | Financial Statements | F - 18 |
Avolon Holdings Limited
Notes to the Unaudited Condensed Consolidated Interim Financial Statements
Six months ended June 30, 2014 and 2015
(In US$ thousands, except as otherwise stated)
| (18) | Fair value measurements (continued) |
There were no transfers between Levels 1, 2 and 3 during the periods presented. The fair values and related carrying values of financial instruments that are not required to be remeasured at fair value on the consolidated balance sheets were as follows:
| As at December 31, 2014 | ||||||||||||||||||||
| Carrying Value | Fair Value | Level 1 | Level 2 | Level 3 | ||||||||||||||||
Cash and cash equivalents | 111,392 | 111,392 | — | 111,392 | — | |||||||||||||||
Restricted cash | 195,095 | 195,095 | — | 195,095 | — | |||||||||||||||
Trade and other receivables | 11,010 | 11,010 | — | 11,010 | — | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Total | 317,497 | 317,497 | — | 317,497 | — | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Liabilities | ||||||||||||||||||||
Debt financing | 4,465,187 | 4,572,515 | — | 4,572,515 | — | |||||||||||||||
Capital lease obligation | 83,261 | 84,235 | — | 84,235 | — | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Total | 4,548,448 | 4,656,750 | — | 4,656,750 | — | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
| As at September 30, 2015 | ||||||||||||||||||||
| Carrying Value | Fair Value | Level 1 | Level 2 | Level 3 | ||||||||||||||||
Cash and cash equivalents | 126,862 | 126,862 | — | 126,862 | — | |||||||||||||||
Restricted cash | 249,602 | 249,602 | — | 249,602 | — | |||||||||||||||
Trade and other receivables | 9,248 | 9,248 | — | 9,248 | — | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Total | 385,712 | 385,712 | — | 385,712 | — | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Liabilities | ||||||||||||||||||||
Debt financing | 4,982,974 | 5,119,825 | — | 5,119,825 | — | |||||||||||||||
Capital lease obligation | 74,881 | 76,756 | — | 76,756 | — | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Total | 5,057,855 | 5,196,581 | — | 5,196,581 | — | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Level 2 Valuations – Significant other observable inputs
The fair value of debt financing and derivative financial liabilities are calculated using Level 2 observable inputs as defined by ASC 820, which includes quoted prices for similar assets or liabilities, and market-corroborated inputs. The fair value for debt financing and capital lease obligations includes the fair value of the unsecured notes which is determined based on market information provided by third parties. The fair value of derivatives is based on estimated amounts the Company would receive or have to pay to terminate the agreements, taking into account the current interest rate environment or current foreign currency forward rates. The Company develops internal fair value for such instruments and considers other inputs as broker.
| Avolon | Financial Statements | F - 19 |
Avolon Holdings Limited
Notes to the Unaudited Condensed Consolidated Interim Financial Statements
Six months ended June 30, 2014 and 2015
(In US$ thousands, except as otherwise stated)
| (18) | Fair value measurements (continued) |
quotes in developing fair value. The carrying value of the other financial instruments, which are measured at other than fair value, approximate fair value due to the short terms to maturity.
| (19) | Share based payments |
During the three months ended September 30, 2015, no equity awards were granted under the Equity Incentive Plan. In February 2015, 690,673 share options and 41,650 restricted share units were granted under the Equity Incentive Plan. These share awards have a seven year term and a nominal exercise price. Of these share awards, 45% will vest in equal instalments on December 31 of each year for a three year period beginning in 2015 and 55% will be subject to performance-based vesting requirements over stated periods.
At September 30, 2015, 1,279,999 share options and 83,727 restricted share units were outstanding and were all subject to future time and/or performance-based vesting criteria or restrictions, as applicable. 4,025 options were exercised during the nine months ended September 30, 2015 at an exercise price of $0.000004. The Company recognized a share based compensation expense in respect of the Equity Incentive Plan of $2.1m and $5.7m for the three and nine month period ended September 30, 2015. As at September 30, 2015, there was approximately $12.2m of total unrecognized compensation costs related to the Incentive Plan. These costs are expected to be recognized over a weighted average of two years. The Company used a Black Scholes pricing model to determine the grant date fair value of the awards.
| (20) | Related party transactions |
The Company received revenue of US$0.1m and US$0.4m for the three and nine month periods to September 30, 2015 (September 30, 2014: US$0.1m and US$0.4m for the three and nine month periods) from a related party, OH Aircraft Acquisitions, LLC.; an affiliate of Oak Hill Capital Partners II, LP for the servicer management of 2 aircraft during the period ended September 30, 2015 (September 30, 2014: 4 aircraft). The Company received revenue of US$0.4m and US$0.6m for the three and nine months period to September 30, 2015 (September 30, 2014: US$0.3m and US$0.8m for the three and nine month periods) from a related party, Avolon Capital Partners Limited for the management of 8 aircraft (September 30, 2014: 5).
The Company paid directors’ fees and expenses to the members of the Board of US$0.2m and US$0.6m for the three and nine month periods to September 30, 2015 (September 30, 2014: nil). The Company paid monitoring fees to CVC Capital Partners of US$0.04m and US$0.2m for the three and nine month periods to September 30, 2015 (September 30, 2014: Nil).
| Avolon | Financial Statements | F - 20 |