Kremlin leasing company to set up Irish finance arm

GTLK Europe, the Russian state-controlled leasing company involved in aviation, is expanding its Irish operation with plans to open a dedicated finance arm.

The Dublin-based company, which manages a portfolio of air and sea vehicles worth of over $1.5 billion (€1.2 billion), has made an application to establish a financing unit with initial capital of $100 million, according to a filing last month to the Companies Registration Office.

The company, which has been in the Republic since 2012 and operates from an office off St Stephen's Green, is a wholly owned subsidiary of the Russian State Transport Leasing Company, the number one player in Russia based on acquisitions last year.

The only two listed directors of the new entity, GTLK Europe Capital Dac, are secretary Declan Fitzpatrick and Roman Lyadov, who is also chief executive of GTLK Europe. Mr Lyadov declined to comment.

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The Republic is considered the birthplace of aircraft leasing and is recognised as the premier location globally in the sector, with most of the leading lessors long present in Dublin. About 40 per cent of the world’s commercial aircraft fleet is currently leased, and the IDA estimates that around 60 per cent of these leased aircraft are owned and managed from the State.

GTLK Europe manages more than 40 narrow-body and wide-body airplanes, according to its website. It also controls 10 multi-purpose dry cargo ships, 11 bulk carries and one oil tanker.

Three-quarters of GTLK's clients are Russian, including the state-owned Aeroflot airline, but it also has customers from Kazakhstan, Lithuania, Poland and Bulgaria. Executives from GTLK took part in the recent 21st Annual Global Airfinance in Dublin and met aircraft manufacturers, such as Boeing and Bombardier, and a host of international banks.

Angela Fleming, a tax director with BDO Ireland, said it is not unusual for leasing companies from China, Russia or elsewhere to set up their own financing operations in Ireland.

“It’s very common in the industry for leasing companies to set up their own financing arms,” said Ms Fleming, a member of BDO’s aviation finance team. “It’s not specific to Russian companies as we have seen the trend is for other foreign investors to establish their aircraft leasing platforms in Ireland in a bid to get a share of the global market for aircraft leasing.”

Chinese players

More than a dozen Chinese players are using Dublin as a beachhead in a push to grab a larger share of the estimated $270 billion global market. More than 1,100 Chinese-owned airplanes are managed from Dublin, according to data from FlightGobal.

GTLK's expansion comes as the Government tries to attract more aviation business from Russia via ministerial trade missions and participation in trade fairs. Training and Skills Minister John Halligan was due to lead a trade mission to Moscow last week to participate in the MRO aviation trade fair, but poor weather prevented the visit. Enterprise Ireland nontheless had a stand at the event and the Irish Embassy in Moscow hosted a reception for 60 contacts from the aviation sector afterwards.

This comes as Russian banks have been active in the aviation leasing industry in Ireland for over a decade. Sberbank, Russia's largest lender, has a unit called SB Leasing that is operational in Dublin and last year hired a new managing director, Katerina Ryzhenkova Doyle. VEBL Europe, a unit of Russia's development lender VEB, also has a base in Ireland.

Research from Trinity College Dublin, reported in the Sunday Business Post, has found that 125 Russian-linked companies have raised €103 billion through the IFSC since 2007.

While Russian airlines have been exempt from sanctions over Ukraine, Russian banks, such as VEB and Sberbank, are subjected to tough restrictions on accessing financing on international capital markets. Analysts are surprised that this has so far not restricted them from leasing out aircraft manufactured in countries outside Russia.

"This is because leasing companies operate as separate entities from the banks and they don't face all these challenges," said Elena Sakhnova, an industrials and transport analyst at VTB Capital in Moscow

In a debut issue, GTLK Europe sold a Eurobond worth $500 million in July 2016 and that was followed a similar-sized deal in May last year.

In a prospectus to the Irish Stock Exchange in 2016, GTLK said it is involved in transport leasing in Crimea, the territory that Russia annexed from Ukraine and which is subject to comprehensive EU sanctions.

The company said none of the bonds’ proceeds would not be used to fund any operations in Crimea, which constitutes 1 per cent of its total assets and 1.5 per cent lease portfolio.

However, GTLK admitted in the prospectus that the group’s operations in Crimea “are not in full compliance with the current economic sanctions which the US, the EU and other countries have imposed against Russian individuals and legal entities” and no assurance can be given that such Crimea sanctions will not be expanded in the future.

In June last year, GTLK was ranked number 50 in the world’s leading lessors by FlightGlobal, but has grown since.

GTLK Europe acquired CBM Ireland Leasing Limited in January this year from Credit Bank of Moscow in a deal involving CBM's six Boeing 737-800 narrow-bodies planes.

Credit Bank of Moscow, a top ten Russian lender, was one of the creditors of Russian carrier Transaero Airlines, which went bankrupt two years ago. Transaero had been the second-largest Russian airline after state-controlled Aeroflot.

In November last year, the High Court ordered the seizure of the Irish assets of the owner of VIM-Avia, another Russian airline that went under. The collapse of both Transaero and VIM-Avia led to a spate of court cases in the Republic.

Not in best shape

“The Russian aviation market is not in the best shape,” said Ms Sakhnova. “A weak ruble, caused by low commodity prices and economic sanctions, has dampened air traffic and passenger demand.”

However, BDO’s Ms Fleming doesn’t think the financial difficulties of Russian airlines will tarnish Ireland’s reputation as a hub for aviation leasing.

“I wouldn’t say it has an impact on Ireland, per se,” she said. “The greater impact is that on the credit ratings for airlines in general. One of the reasons why aircraft leasing is so popular is because poor credit ratings for airlines can restrict their access to good value credit, while leasing provides access to the aircraft they need at a different cost to credit.”