There is good news and bad news when it comes to financing for pre-owned business aircraft. The good news is that financing is available for aircraft buyers; the bad news is that banks are primarily lending only to those with exceptionally good credit who are buying an aircraft that is less than 20, and even in some cases less than 10, years old, according to a panel of aircraft financiers at the recent NBAA Aircraft Registration, Finance and Legal Conference in St. Petersburg, Fla.
According to Mike Kahmann, group head and managing director of CIT Business Aircraft Finance, banks are simply trying to establish a margin of safety in aircraft finance deals. “Depreciation is a big part of that margin,” he said. “Three- to 6-percent depreciation is consistent with a 15- to 20-year life of an aircraft, so banks now look at a business aircraft as a 20-year asset, at maximum.”
Chris Miller, the managing director for business aircraft investments at Guggenheim Partners, said aircraft owners must come to terms with the reality that business aircraft are no longer considered appreciating assets, like they were just 10 years ago. “In 1990 a new Gulfstream IV sold for $22.4 million. In 1999, it was selling for roughly $22 million. But now you can buy one for $5 million; that’s an average of 6 percent depreciation over the life of the aircraft, which is what owners should be expecting. Also, lenders are now building in a bigger depreciation buffer for older aircraft.”
Further, Miller said that while prices for pre-owned light and midsize jet were over-valued several years ago, they “are now where they should be, and I don’t expect to see them going up.” While this isn’t good for sellers looking to get a better price for their aircraft, it does allow buyers to obtain financing since lenders now consider these aircraft appropriately depreciated, which reduces the lender’s risk.
And it is all about risk. After the economic meltdown in 2008 and 2009, regulators tightened the asset-to-credit ratios at banks. “Regulators look at business jets as toxic assets if their values haven’t stabilized,” noted Dave Labrozzi, president of GE Capital’s corporate aircraft lending division.
While loan-to-value is important, Citi Private Bank director and global head of aircraft finance Ford von Weise said there are other factors to consider when deciding whether to approve an aircraft financing deal. “Credit matters,” he said, “so we need to look at the underlying credit of the customer. We’ve really changed our underwriting philosophy since 2008 in this regard. They have to be a good credit risk.”
Kahmann said CIT is using a “credit matrix” to drive deals that comply with the regulations. And this regulatory environment will only get tougher, von Weise added, when the upcoming Basel III and Dodd-Frank requirements come into effect later this year. “Loan terms will be shorter and costs will be higher,” he said. “Aircraft loans aren’t all that profitable for banks as it is. We will see a lot more creativity for aircraft financing under the stricter regulations, but it will come at a cost.”
Meanwhile, as more aircraft are sold to foreign buyers, the U.S. aircraft lenders are competing against banks in Asia, the Middle East and Europe. CIT’s Kahmann specifically cited Minsheng Bank, which has quickly emerged as a large player in business jet financing in China.
However, von Weise cautioned that there are several risks with lending to customers in emerging markets. “Basically, the biggest risk here is transparency,” he said. “There is a reluctance for customers to disclose their net worth and income, and a reluctance to work with banks and too many middle layers involved. For example, a Singapore client was unable to provide us with financial statements, but Forbes listed his net worth as $3 billion. This kind of situation presents a real dilemma for lenders that want to get in on the emerging markets.”