Jan. 12, 2017
For many operators, getting a loan or lease for a business aircraft has been difficult since the 2008 recession, but several new finance providers have recently entered the market. Heading into 2017, aircraft financiers and attorneys who handle aircraft transactions see certain types of credit becoming more available, even as a “new normal” sets in for aircraft values.
The credit crunch that hit the economy in 2008 has been slower to abate for business aircraft, with continued soft demand in certain market segments. Since the financial crisis, aircraft resale values have fallen faster and less predictably than before the crisis.
“Financing sources have been hit by the fall in aircraft values,” said Ford von Weise, director and head of global aircraft finance for Citi Private Bank. That’s because financiers must make pricing and credit decisions based on the anticipated future value of the aircraft. And with a lease, the aircraft ends up on the lender’s books at the end of the term.
“We used to assume the aircraft’s value fell by around 6 percent per year. Now, we have to assume it’ll fall by 10 percent per year,” said von Weise. “That has put upward pressure on lease monthly payments.”
Aircraft resale values are falling faster – and less predictably – for several reasons. The pace of technological change, as well as avionics mandates and tougher emissions standards, are making aircraft obsolete faster. OEMs are introducing more new models to keep up. While fleet demand has been buoyed by new membership-based aircraft programs, overall demand is hard to predict.
This has also made banks less inclined to offer aircraft leasing – or to finance older aircraft. Several new non-bank lenders, backed by investors and capital markets, have stepped into that gap.
“When most banks finance aircraft, it’s not to add aircraft loans or leases to their portfolio. Banks are customer- and credit-focused, and aircraft financing is one of many products they can offer to their customers,” said Edward Gross, an aviation finance attorney with the law firm Vedder Price. “That’s different from non-bank lenders and lessors, which have performance goals driven by investors. They do aircraft transactions that fit in their portfolio, based on their funding strategies and the deal’s potential yield.”
Non-bank lenders are more likely to offer different types of credit, with more flexible structures, such as no-covenant loans, limited-recourse loans or operating leases. Qualifying for this type of credit depends more on the value of the asset than the borrower’s balance sheet or cash on hand.
Right now, only a few financiers are offering true, short-term operating leases on aircraft (where the aircraft is not capitalized on the lessee’s balance sheet and the lease payments are treated as operating expenses), but Gross and von Weise see a possible increase in leasing activity.
“There will always be demand for leasing, because it’s 100 percent financing,” said von Weise. Leasing also shifts the market risk to the financier. “I think non-bank lenders will move more aggressively into the operating lease space.”
At the policy level, two opposing trends will affect aircraft financing. The new presidential administration might move to loosen some financial regulations, which could make aircraft financing more available from banks. Meanwhile, interest rates are expected to rise, making it more expensive.
“Right now, debt capital is cheap, disproportionately cheaper than lease capital,” said von Weise. “But, interest rates are rising. Over the next two years, I see leasing becoming more competitive, and the gap between aircraft lease rates and loan rates narrowing.”
Gross and von Weise will each moderate panels about the aircraft financing market at the NBAA 2017 Business Aircraft Finance, Registration & Legal Conference set for March 5-7 in Bonita Springs, FL.