Capital Market Cash Flows into Airliner Financing

 - May 13, 2013, 11:20 AM
Boeing Capital sees capital markets accounting for a growing proportion of money funding airliner transactions. (Chart: Boeing Capital)

Airlines are benefitting from growing capital market support for new aircraft financing, with this source of funding expected to account for as much as 15 percent of all transactions this year, according to Boeing Capital. A few years ago, capital markets accounted for barely 2 to 3 percent of aircraft financing.

Speaking to media ahead of the company’s European financiers’ and investors’ conference in London on May 9, Kostya Zolotusky, managing director for capital markets development and leasing at Boeing Capital, said that the trend is especially welcome because new Basel III regulations are expected to make it harder for banks to fund aircraft purchases due to tighter controls on capital requirements and liquidity risk.

According to Zolotusky, the widespread international adoption of the Cape Town Treaty has reassured lenders about asset protection in the event of airline bankruptcy and this has made the capital markets more willing to get involved in bond offerings for airlines outside the U.S. (even though none of the European Union states, with the exception of Ireland, has yet endorsed the treaty). He pointed to the recent example of a $700 million bond for Air Canada backed by five new Boeing 777-300ERs slated for delivery this year and next. The offering was heavily oversubscribed and resulted in attractive bond pricing for the carrier.

Another factor attracting the capital markets to airline fleet financing, said Zolotusky, is that this sector now offers attractive returns on investment at a time when they are finding it increasingly hard to get worthwhile yields from other avenues of investment. He pointed specifically to Japanese banks that recently paid high prices to acquire aircraft leasing assets, such as last year’s purchase of the Royal Bank of Scotland’s leasing business by Sumitomo Mitsui Financial Group.

He predicted that U.S. banks, which also face the challenge of making good use of large pools of private investor cash on their books, will increasingly turn to the aircraft finance sector too. “If I had more airplanes [to finance], the capital markets would snap up everything they could,” Zolotusky said. “I sleep well at night because I can’t name another asset class [other than airliners] that has performed better over the past 20 years or through the financial crisis. Until 2007 you could have said ‘real estate,’ but not now. Our track record of loss default is exceptional.”