Compressing the Spread

By R. Randall Padfield

November 1, 2005
Aviation Financing, Business Aviation

Interest rates for aircraft loans and leases are typically negotiated individually for each case, so lenders rarely publish their rates. Aircraft type, the value of the specific aircraft, its intended use, its location and the financial standing of the client, along with the down payment and length of the loan, all figure into the interest rate.

Lenders use a variety of indices to establish a starting point for the rate, although the borrower could sometimes specify a particular index. Traditionally, many U.S. lenders use the prime rate for simple domestic loans and one of the London Interbank Offered Rates (Libor) for more complex domestic and international loans. Fixed loans are often based on the five- or 10-year U.S. Treasury bill rates or the Libor swap rate, while variable- rate loans may be based on the prime rate or one of the floating Libor rates.

Today’s low starting points for interest rates, as determined by the various indices, have stimulated buyers. But lately there’s been another factor working in borrowers’ favor–competition within the finance industry. Said James Dickerson of Banc of America Leasing, “With the strength of the corporate aircraft market in the past two years, we have seen numerous new aircraft finance entrants.”

“This is the keenest competition I’ve experienced in 20 years,” said Greg Babcock of U.S. Bancorp Equipment Finance. “There’s more money chasing fewer deals and driving down the rate spreads to lenders and lessors. This has produced artificially low rates on new and pre-owned aircraft loans and leases.”

Though this is good news for buyers, it has made the lenders’ job more difficult. Whatever the index used as the basic rate for a loan, the lender tacks on “the spread,” basis points that make the loan worthwhile for the lender. If the spread becomes too small, it makes more economic sense for the lender to invest the money elsewhere. But the influx of new players into the market has forced lenders to accept smaller and smaller spreads just to get the business.

Dickerson said, “With growing demand for a limited supply of aircraft and an increased number of competitors for the financing, the cost of financing has decreased, causing a significant compression of margins for aircraft lenders.”

Susan Foster of National City Commercial Capital said several regional banks have entered the market, and David Davis of 1st Source Bank said that lenders without aircraft experience “will figure out some way to do the loan” when a current corporate customer or wealthy client asks about financing the aircraft. “They obviously want to keep the business in-house if they can,” he explained.

Said Babcock of U.S. Bancorp Equipment Finance, “The net effect [of this interest rate and yield compression] will be a shaking out of the corporate aviation finance industry with fewer lenders in the future.”

Back

Aviation Partners ‘Intensely Interested’ in Spiroids August 21, 2008 Years after testing an unusually shaped “spiroid” winglet on a Gulfstream II, Aviation Partners remains “intensely interested” in continuing... [more]
Eclipse Production Slowdown Trickling to Suppliers August 21, 2008 With a strong vested interest in a revitalized Eclipse Aviation, Eclipse 500 suppliers are walking on eggshells when discussing planned... [more]
Despite Grob’s Woes, PlaneSense Stands By SPn Order August 21, 2008 George Antoniadis, the president and CEO of Alpha Flying’s PlaneSense fractional ownership program, is standing by the company’s order for 25... [more]
FAA, Congress Turn a Critical Eye to the Eclipse 500 August 20, 2008 Since August 11, the FAA has been conducting a special certification review (SCR) of the Eclipse 500 very light jet, the agency said today. A... [more]
Grob Insolvent after Lender Balks at More SPn Delays August 19, 2008 Grob Aerospace yesterday filed for insolvency in Germany after its main source of capital suddenly withdrew financial support for the new SPn... [more]