The nation’s foremost aircraft repossessor is counseling his bank and leasing company clients not to take back delinquent aircraft. “We are telling banks not to repo,” said Nick Popovich, president of Sage-Popovich, the global aircraft repossession, aviation parts and services company. Popovich said the declining value of used aircraft and the flat resale market make this a bad time to take back airplanes and that the move would only compound banks’ well publicized problems.
Popovich has been in the repossession business since 1979 and his firm has repossessed more than 1,400 aircraft, but now, he said, is generally not the time.
“The aircraft market is distressed and everyone knows it,” Popovich said. “I’ve seen it with my own airplanes. My Challenger went from a $9 million airplane to a $3 million airplane in eight months.” Popovich painted a hypothetical scenario for a bank to illustrate his point. “If you are a bank [with] a $3 million note on an airplane that is now worth only $1 million, you have a $2 million deficiency, and now you have to insure it, store it and worry about maintaining it.”
Banks have another problem if they take back an aircraft right now and resell it at a distressed price: they are forced to write down the value of the assets of all similar aircraft in their loan portfolio–a huge hit to their bottom line at a time they need it least.
They can also count on the owner suing them. “The banks have to be able to prove that they have done everything commercially reasonable to get the highest value for their aircraft” before they go after the owner to make up the gap between the value of the loan and the price obtained for the aircraft. Because of that, many repossessed aircraft have lengthy disposal times. Popovich currently has 30 repossessed aircraft in storage at his facility at Gary, Ind., and said the typical time to process, document, repair, market and resell an aircraft spans any period from 30 days to two years. He had a Boeing 747 in inventory for six years.
In the current environment, Popovich said, “More often than not the bank ends up bidding the debt and buying the airplane back because no one bids on it.”
Protecting the Investment
Popovich attributes much of the financing problem to market conditions, but he added that some of it was caused by the banks’ own bad lending practices. “There were banks that were making aircraft loans without first inspecting the airplanes. So when we got there to repossess, we would just find some parts or even [discover] that the airplane had been destroyed years ago.”
“We had a lot of banks that were buried in airplanes,” he said. “Some of the banks are in such trouble they just can’t comprehend it. I’ve got one bank with a $2 billion problem and it just doesn’t know what to do.”
Rather than repossessing, Popovich is advising banks “to go out and inspect the airplane. Is it current on its maintenance and reserve program such as JSSI or MSP? Is it insured? In those cases, work something out with the guy. But in cases where that is not being done, the banks have no choice” and must repossess to protect the value of the asset, Popovich said.
Popovich said he empathizes with the plight of some distressed owners who have fallen victim to declining market values. “Ninety-nine percent of these people got in trouble because the value of the airplane dropped and the bank said, ‘Hey, the value of your $4 million airplane just dropped to $3 million and you need to come up with a million bucks.’ How many people can come up with $1 million cash? It is no fault of their own. They bought the airplane in good faith and are still making payments.”
Popovich sees the current state of affairs as temporary and predicts a market rebound by 2012, at which time, he said, there might actually be a shortage of corporate aircraft.
Meanwhile, he thinks most owners will hang onto their airplanes. “There are those cases when we get a call from a lender who has just had it with the borrower and he says, ‘I want you there now.’ In those cases, we can have a team on the way in as little as two hours. About 20 to 25 percent of our repossession cases are like that,” he said.
However, for now, Popovich counsels aircraft owners to work with their banks. “Banks want to know that the airplane is properly protected and insured. They might not want you to fly the airplane or [they might] limit how you use it until you get current, but nine times out of ten they are going to work with you,” he said.
“Banks don’t want to repossess the airplane and I do not want to repossess the airplane.”