Part of a Morningstar report issued 12/22
Currency amounts expressed with "$"
are in U.S. dollars (USD) unless
otherwise denoted.
by Nicholas Cavallaro
Stock Analyst
Analysts covering this company do not
own its stock.
Pricing data through November 21, 2008.
Rating updated as of
November 21, 2008.
04 05 06 07 08
5.0
7.0
9.0
16.0
24.0
Stock Price
Thesis Nov. 21, 2008
As a tiny player in the aircraft leasing business, Genesis
Lease has no competitive advantages and relies on GE
Commercial Aviation Services (GECAS) to operate. The
premise of purchasing aircraft on borrowed funds and then
lending it to airlines can deliver superior returns in better
times; however, a shaky economic environment and
stringent credit terms puts this operating model into
question. We advise shareholders to exercise extreme
caution when considering a position in this company.
Genesis outsources most of its operations to GECAS and
has little bargaining power in the arrangement. Genesis
pays GECAS to handle the purchasing, marketing, and
negotiation of aircraft; the monitoring of lessees and
collecting of rental payments; and various administrative
items such as legal services and compliance issues. Even
though General Electric is Genesis’ largest shareholder, it
is still a competitor, and we do not think General Electric
would hesitate to keep the best opportunities for itself,
leaving the scraps for Genesis. In fact, Genesis was
formed to purchase aircraft from General Electric and its
affiliates, a move that shifted risk away from General
Electric, in our opinion.
Concurrent with its initial public offering in 2006, Genesis
issued $810 million of securitized notes to fund its
continue repossessing and re-leasing planes at lower
lease rates, if it is able to re-lease planes at all. This
increases the likelihood that Genesis itself may
experience financial distress.
Today’s tightened credit environment exacerbates
Genesis’ problems. Few lenders are willing to extend
credit, and when credit is available, interest rates will
likely be higher. This hinders Genesis’ ability to grow and
modernize its fleet, and if Genesis is unable to replace
aging aircraft, airlines may choose to lease newer planes
from other suppliers. Furthermore, a restricted credit
market hinders the refinancing of its outstanding debt.
Genesis has been making interest-only payments on its
securitized debt, but it will need to refinance it by
December 2011 or else face an accelerated repayment
schedule.
With problems on multiple fronts, the business model will
surely be tested.
Valuation
We are lowering our fair value estimate to $0.80 from $9
per share as we transfer coverage to a new analyst and
re-evaluate the different likely outcomes for Genesis. In
our base-case scenario, which we assign a 75%
probability, we see revenue contracting through 2012 as
Genesis fails to lease its entire fleet. Funding costs will
continue to increase, dragging profitability and limiting |
