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INTERVIEW-New air finance kingpin promises more cautious style

Conor Humphries and Tim Hepher
Wednesday, 22 Jan 2014 | 11:52 AM ET

* Accountant Aengus Kelly to head new air leasing giant

* Career marked by cautious financing, few big plane orders

* Began career in wreckage of industry pioneer GPA

DUBLIN, Jan 22 (Reuters) - When he takes a top seat in the $200 billion aviation finance world later this year, Irish accountant Aengus Kelly will bring a new caution to an industry long known for risk taking and marketing swagger.

After steering his underdog firm AerCap through the financial crisis unscathed, he engineered the most audacious deal in the sector for two decades with the takeover of struggling industry pioneer ILFC, quadrupling its fleet.

Last month's provisional deal propels AerCap to be the world's second largest lessor behind General Electric's GECAS and has spurred talk of consolidation in the tier below.

Yet by electing to keep the AerCap name, a byword among bankers for cautious financing, rather than that of swashbuckling industry pioneer ILFC, he has sent a clear message about how he plans to run the business.

"There are four risks in the business, and they are the four pillars on which AerCap is run on," said Kelly, 40, in an interview in which he described his defensive management style.

"When you get a handle on those things ... you are going to do well in this business."

Rather than focusing on speculative orders, AerCap claims its philosophy is built around managing credit risk, optimising the plane fleet through disciplined selling, a long-term liability structure and a careful interest rate hedging policy.

"In 2009, this (cautious culture) allowed us to double the size of the business when no one else could move, when everyone else was paralysed," he said.

CLEARING UP THE MESS

Kelly learned his trade amidst the ruins of Irish aviation leasing pioneer GPA in the 1990s, as a new management slowly rebuilt following an ill-timed $17 billion plane order and a risky portfolio of short-term debt.

As a trainee accountant spending 8 hours a day photocopying leases he absorbed the risk-averse culture he would later use to run the company when it was renamed AerFi and ultimately AerCap.

The cardinal sin was funding long-term leases with cheap short-term financing in the hope the market would roll over the debt - a gamble that helped bring GPA and ILFC down to earth.

"If you ever walked into a management meeting in that company with a short-term debt facility, it would be the last time you walked into the office," he said, referring to the period following GPA's effective collapse in 1993.

"The culture was, if you have discipline on the liability side, opportunity will come your way on the asset side."

He said the current head of ILFC, Henri Courpron, had already addressed this in four years at the helm of the company, resulting in AerCap buying a substantially remodelled group.

Courpron, a former Airbus executive turned aircraft financier, told Reuters he would step down as ILFC comes under AerCap's control, having brought it back "from the cliff-edge" and restored its ability to order and lease aircraft smoothly.

POST-CRISIS GROWTH

When the global financial crisis hit rivals like ILFC hard, AerCap had long-term financing in place that allowed it to increase its balance sheet from $5.4 billion to $9.6 billion between 2008 and 2010.

The balance sheet of the new merged company, which owns around 1,300 aircraft, will be $41 billion, Kelly said.

AerCap's purchase took the leasing industry by surprise and was seen as a dramatic coup after U.S. insurer AIG had focused publicly on selling ILFC to a Chinese consortium.

But Kelly had begun as far back as 2009 to quietly investigate the possibility of picking up assets from ILFC, which was struggling from the credit crunch, only to decide that its debt profile was too risky to touch.

Three years later, with ILFC's debt profile improved, AerCap calculated that an approach by the relatively unknown P3 Investments of Hong Kong investors contained significant risks for seller AIG, so it decided to draw up its own counter-proposal, which was ultimately accepted last December.

In an industry renowned for flamboyant deal-making, Kelly kept his cards close to chest. Insiders say only a handful of people on either side knew about his talks with AIG.

At a lunch in New York last May, Kelly secured a promise from investment bank UBS that it could fund the deal alone to minimize the risk of leaks.

"We said we are going to need ... to do this absolutely off the books as it were. We didn't want to be out there with rumours of us being the buyer who never actually shows up."

ORDERING STYLE

Kelly is hopeful that a steadier management hand would help the new AerCap pick up business that some in the industry say eluded ILFC when question marks remained over its future.

Industry executives are expecting a sharp change of style.

"I think you will see that company being run by Excel spreadsheet rather than Powerpoint presentation in future," said an aircraft industry executive, asking not to be named.

Kelly will be a key partner for the two giants of the aviation world, Airbus and Boeing, with one of the largest fleets in the world of each company's planes.

While ILFC was known for directly placing mega-plane orders, AerCap has historically built up its fleet by buying newly delivered planes from airlines and renting them back out.

However that gamble was running out of steam as it faced increased competition and industry executives say AerCap was running short of options to grow its portfolio, having held off buying directly from mamnufacturers for so long.

But Kelly, working through a queue of airline executives at a hotel suite in Dublin, said that while he would always remain cautious in terms of financing, the new AerCap would not shy away from large deals.

"So long as you understand the risks of what you are doing and are able to mitigate those, you should not be afraid of the scale you are taking on," he said.

(Reporting by Conor Humphries, editing by David Evans)

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