May 9, 2011
Although there is cautious optimism that the market for business aircraft sales may be slowly rebounding, buyers still face a very challenging environment compared to the one that existed in the years prior to September 2008. That’s particularly true when it comes to financing an aircraft purchase; as with the market for other significant business investments, lenders remain reluctant to take risks on aircraft.
“Challenging” doesn’t have to mean impossible, though. Acknowledging that the credit crunch “took a huge percentage of the buying market out of our universe,” Jay Mesinger, President and CEO of Jay Mesinger Aircraft Sales and Chairman of the Associate Member Advisory Council (AMAC) for NBAA, notes that opportunities still exist. “Some buyers are able to generate funds through other credit facilities they may have available, or by generating out of cash flow,” he says.
“There are circumstances that make it more challenging to obtain aircraft financing today,” says Dave Labrozzi, President of Corporate Aircraft Finance for GE Capital. “Creditworthiness is now just as important as the aircraft valuation. There are fewer financiers who are able and willing to structure complex transactions, and there are fewer financiers who are willing to finance aircraft that are older than 10 years.”
Jeff Wieand, Senior Vice President & General Counsel for Boston Jet Search, notes potential buyers seem aware of at least some of those stipulations. “I would say our customers have a sense that financing will be more difficult, because all financing is more difficult right now,” he says. “Interest rates remain exceptionally low, though 100-percent financing is difficult to obtain and the time required to close the financing is often much longer. That means buyers who don’t want to pay cash have to begin arranging financing as soon—and maybe even before—they reach a deal on an aircraft.”
Ron Duncan, President of Alaskan telecommunications provider GCI, recently signed the papers on his third aircraft purchase, a low-time 1998 Challenger 604. “I assumed there would be no financing issue whatsoever,” he recalls. “I signed the purchase contract, and discovered afterwards the bank I had a 15-year relationship with broke out in hives, because the aircraft was more than 10 years old.
“Three out of five lenders I spoke with didn’t even want to do an inspection,” Duncan continues. “The individual aircraft did not matter; they just wanted to do the low end of book value.” Duncan says he ultimately found acceptable terms from the Royal Bank of Scotland. “They did an inspection and came up with a value that was a reasonable number. I still expected to put some money down, and I did, even though I’ve financed 100 percent in the past. I came away with a very clear impression that while the banks say they’re open for business, they’re not there yet.”
That sentiment is echoed by Mesinger. “We’ve never had a recovery that didn’t include a very strong, vibrant lending community… until now,” he says. “Even now, transactions are still down 40-50 percent from those days. That impacts our recovery.”
So, what can business aviation – and credit lenders – do to break that cycle? Labrozzi with GE Capital recommends anyone looking to finance the purchase of an aircraft be ready to make their case to the lender. “You should be prepared to discuss your previous corporate aircraft experience, the outlook for the business and how the aircraft will help you achieve company goals,” he says. “Finally, you should be able to provide detailed financial information about your business.”
From a seller’s perspective, Mesinger says, “We can get out of this one aircraft loan at a time. Banks are going to have to change their mindset, and not paint the entire market with such a large brush.
“I actually agree with them – not every buyer should be a borrower, and not every aircraft should have a loan against it,” he adds. “So lenders must take a close look at the specific aircraft and borrower. That’s how we come back from this!”