Embraer Capitalizing on Healthy Financing Market

 - March 6, 2017, 4:45 PM

An undeniably healthy market for financing commercial aircraft has the likes of Brazil’s Embraer accessing capital markets at a vigorous rate, as low interest rates and strong yields within the airline business create an environment airframers describe as nothing less than robust. Speaking on Monday with AIN during this year’s International Society of Transport Aircraft Trading Americas conference in San Diego, Embraer director of customer finance Marcelo Santiago noted his company saw six Enhanced Equipment Trust Certificate (EETC) placements for E-Jets over the past three years, a clear indicator of the confidence financiers have shown in the marketability of that narrowbody line in particular.

“There’s a lot of liquidity out there,” said Santiago. “I would say that all the sources are very open to the customers nowadays. Capital markets are very strong in the U.S., we have commercial debt from banks, lessors and the [Brazilian export credit agency, BNDES.]”

Deliveries for Embraer this year will involve roughly one third lessors, one third commercial banks and a third BNDES, he added, giving Embraer a healthy balance of financing sources.

“I would say that Embraer is in a different position in the regional aviation segment because the E-Jet from an asset standpoint is considered by the financial markets as a narrowbody aircraft,” noted Santiago. “So we don’t face the historical constraints that the regional aircraft have from the financing segment. The regional segment was heavily dependent on ECA financing, which is not our case.”

While regional airlines generally continue to consider ECA financing “more efficient” or, in a word, cheaper to access than private markets, this year Embraer expects that BNDES financing will account for only about 25 percent of its deliveries.

Although Santiago said he hasn’t seen any chilling effect resulting from the protectionist rhetoric of U.S. president Donald Trump, the company has seen more hesitation to support a negotiated sale to Iran on the part of the financiers, he reported. “With Iran, since Trump, we are facing some challenges in moving forward, to move quickly with the discussions because a lot of the banks and lessors we are talking with want better visibility of what is going to happen,” said Santiago.

Overall, however, the Embraer finance executive said the regulatory reforms Trump has proposed could actually bring more liquidity to the market. “But when you have a lot of liquidity you can have a big problem later on,” he added. “We saw what happened in 2008.”

Santiago also sees a potential for higher interest rates, and thereby a trend toward more leasing deals. “Lessors can access capital more efficiently than the airlines, which can help them because now they face a lot of competition with EETCs and bank debt and other sources,” he noted. “So I think the interest rate is a key factor in what might happen. It can change a little bit the dynamics of the financing source not only for regional aviation but everybody.”