Tight credit revamps face of aircraft financing
For prospective buyers of business aircraft there’s good news and not so good news.
The good news is that there are some great bargains on pre-owned turbine-powered aircraft languishing in a stubbornly large inventory of unsold aircraft. Many companies and even sole proprietorships may be able to afford a corporate or personal jet that they wouldn’t even have contemplated acquiring just three years ago before prices tanked.
The not so good news is that lenders are more particular about those to whom they extend credit than they were before 2008. Rather than almost throwing money at aircraft buyers as many banks did–sometimes financing 110 percent of asset value with interest-only loans and little consideration of the buyer’s credit–lenders are carefully vetting loan applicants and approving only those with high qualifications. As a result, more than a few would-be buyers are experiencing difficulty in acquiring the funds to take advantage of those great aircraft bargains.
This was the backdrop for the 11th annual Conklin & de Decker Aircraft Acquisition Seminar, held late last year in Scottsdale, Ariz. Aircraft acquisition is in many ways quite a different proposition from what it was just three years ago, and the seminar agenda–particularly the parts dealing with financing options–reflected that reality.
The conference focused on financing–who gets it and how to obtain it. Jay Mesinger, CEO of Boulder, Colo.-based J. Mesinger Corporate Jet Sales, said that the changed climate of the aircraft market obliges current and prospective operators to pay more attention to “the value proposition.” He explained this as a systematic quantification of a company’s travel needs and objective analysis of the best way to meet them. “Is there a better way to provide corporate transportation? Is it a company aircraft? Will it provide value?” Mesinger noted that a changing transportation mission may call for aircraft with different capabilities or even different ownership options, such as outright ownership, fractional ownership or charter. “Each delivers in different missions.”
He advised using a quantified annual use estimate to measure the relative benefits of each option. Mesinger told AIN that even for well qualified customers, the choice of aircraft can mean the difference between receiving financing or not. Mesinger remarked on a clear change in lenders’ appetite to loan money for aging (20 years or older) aircraft and the role that reluctance will play in how the prices of aging aircraft recover.
Conklin & de Decker co-founder Bill de Decker noted that the financing landscape has changed dramatically between 2007 and 2010. Company upper management, particularly CFOs, is more directly involved in the process and wants to see hard numbers justifying an aircraft acquisition. The same goes for the bank where financing is sought.
“Come to them with a good story and they’ll listen. They may not give you the loan, but they’ll listen, “de Decker said, adding that banks are operating much more conservatively. “They want to know they’ll be repaid,” de Decker said, contrasting that constraint with the prevailing attitude during the sub-prime mortgage binge that precipitated the current economic downturn.
Bankers and financial institutions insist that financing is available and loans are being made. Ford von Weise, with Citi Private Bank’s Global Aircraft Finance group, echoed that claim: “Financing is available, but banks have gone back to the basics of the ‘Three Cs’: credit, character and collateral. In other words, if we make a loan can they pay it back?”
In the halcyon days before the bubble burst, there were “lots of crazy deals” on financing aircraft, von Weise conceded. Now, because banks subject prospective borrowers to greater scrutiny and hold them to higher creditworthiness standards, some lenders (including his firm) “do not have enough transactions to meet lending goals. But are we going to do the stupid deals? No.
“Transaction times are much longer, because we take the time” to inquire about the borrower’s qualifications and background.Banks spend a lot more time working on character.” Older aircraft are “a real problem,” von Weise added. “You may not be able to get financing on a 15-year old airplane. We’re looking harder at collateral now. There is no 100 percent financing on old aircraft. Loan-to-values are down, with higher spreads (basis points over Libor). Existing relationships between banks and clients do matter, he emphasized. “A good strong overall relationship may enable someone to get a deal that is less favorable for the bank.”
Turning to the brighter side, von Weise said that from banks that have repossessed aircraft for short term (less than 12 months) loans for leases “there are great deals. Money is cheap, and it’s going to stay there for another 12 to 18 months, until inflation kicks in,” he predicted, adding, “Rates are (still) going down. This is a great time to buy an airplane.”
Von Weise’s advice to prospective buyers: “Don’t call us and start by asking, ÔWhat’s the interest rate?’ There is no one rate for everybody.” He explained that it has to do with aircraft age, the loan term, the borrower’s credit and liquidity. Von Weise advised people seeking financing to do their homework beforehand and gather as much hard financial data as they can to bolster their qualifications.
Von Weise said leasing simplifies budgeting. “You know exactly how much that asset is going to cost you. The downside is that there are no tax advantages, and early termination is costly.”
Aircraft age has major impact on loan-to-value percentages, he explained. For a “young” (one to five years old) large bizjet 90 percent is average “for a borrower with really good credit and strong liquidity.” For a midsize it is typically 85 percent of value, and 80 percent for a “small” jet. Aircraft of intermediate ages (six to 15 years) warrant 80 percent and 75 percent, respectively, while “old” (more than 15 years) aircraft–if financing is offered at all–would normally not exceed 70 percent.
Seminar attendees were advised that new aircraft sales may bottom out in 2011.
Recovery, when it begins, will have a decided international flavor as all manufacturers are looking outside the U.S. for new aircraft sales. Brazil, Russia, India, China, the Middle East and other areas of growth and prosperity are where new aircraft are being sold. Serving to confirm that trend was von Weise’s remark that his firm’s financing activity is currently 70 percent international.
For virtually every OEM, two out of three new-aircraft sales are to non-U.S. customers. Markets outside North America are spurring sales strength among the larger business jets. The upper end of the global market has held up well since certain individuals, large corporations and many governments remain well heeled.
Companies with a global scope fuel demand for longer-range aircraft and contribute to stronger demand at the upper end. As a result, the larger, long-range business jets are holding value much better than the mid-size and smaller aircraft. Consequently, large aircraft, even pre-owned, do not represent the bargains that the still-high inventory of smaller jets do.
This year’s seminar branched out beyond selecting, buying and insuring the acquired asset to include considerations of operating flight departments, asset management and maintenance, budgeting, operating cost analysis and safety management system (SMS) requirements and implementation.