TEN QUESTIONS FOR NAFA 2010
Category: Business Aviation Interviews & Profiles
Author: Dave Higdon
Ten Questions For NAFA
President Mary Schwartz addresses a complex aircraft finance world.
Once-upon-a-time, financing an aircraft involved assuring proper paperwork, a clean title, qualifying the borrower and closing the deal. Loan capital was readily available. Into the present day and it’s a rather different world from just a couple of years ago. The new aircraft market pitched down like an airplane that lost its elevator, and order backlogs deflated like a balloon after the party.
Ripples had already started making waves for the pre-owned business-turbine market, where inventories grew near to record highs, sending values into their own perilous slide – in turn prompting many lenders to back away from the market and capital, in general, to depart the aviation market.
Even the fractional operators faced painful adjustments, in part due to the sudden depression of residual values for their existing fleets and customers less enamored with the costs of owning even a share of a business aircraft.
Those working in the upper levels of the business aviation market faced an unrelenting churn of these factors, and only in recent months has any sense of stability crept slowly back into the market. But even before this small leveling and slight upward edge in pre-owned aircraft sales, lenders continued to write deals – though with terms substantially different than what prevailed before the downturn.
In many ways, the story of business aviation’s state closely parallels what happened in real estate and real estate-financing. Anyone who’s faced unusually tough challenges getting to that round-the-table paper passing of a closing – whether a business, home or airplane, likely gets the picture.
Aircraft financing in general is not a field for the casual participant. Even though they may offer to write the loan, it’s not necessarily something where your family banker is apt to have in-house expertise to efficiently address all the contingencies.
As with so many elements of business aviation, experts usually best serve the business of lending for aircraft purchases, and it’s to help aircraft lenders be the best-prepared and well-informed experts in their field that the National Aircraft Finance Association (NAFA) exists.
AN ASSOCIATION OF SPECIALISTS
With its 40th annual meeting set for next spring, NAFA boasts more than 150 members and associate members – among them more than 50 active members, all lenders active in the aviation finance field. As we’ve seen in past interviews, the association is hard at work helping its members stay informed and up-to-date on regulatory and statutory requirements in addition to financial rules and regulations.
Recently, the FAA added yet another new element to the mix, a total re-registration of all U.S. aircraft – with an ongoing renewal cycle that puts registrations on a three-year calendar – after which the listing expires. Meanwhile, the economy remains a puzzlement with the stock market generally gaining, signs of GDP growth in general, but without generating the widespread job and business-growth that would signal a return to solid growth.
Sales of new business aircraft dipped again in the second quarter of this year, according to numbers from GAMA, and sales of pre-owned business aircraft are up, down or mixed – depending on the segment you examine – with signs of slight overall growth.
Generally, however, the market is still far-off its dizzying peak of three years ago and any return to those levels is considered remote and, if it happens, well out in the future. It’s into this mix rich in challenges for the aircraft-finance community, that a new president stepped into the hot-seat at NAFA earlier this year.
MEET MARY SCHWARTZ
Stepping into such a job in the midst of flux of the magnitude experienced by the business aviation community is seldom without its own challenges. Sixteen years in the aircraft industry should serve NAFA’s new president, Mary Schwartz well as she guides the association’s activities during her two-year term.
As a Managing Director and Head of Global Aircraft Finance at Citi Private Bank in New York City, Schwartz brings to the table the institutional strength gained during her 28 years with the firm. Schwartz has held a variety of positions within Citi, primarily in its leasing group.
In 2001 Schwartz started Citi’s Aircraft Finance Group in the Global Wealth Management division, drawing on her years in the aircraft industry. In her role at Citi, Schwartz is responsible for globally marketing, structuring and arranging transactions for the firm’s high-net-worth clients and prospects.
Her team assists clients in all aspects of aircraft acquisition, providing advice and guidance on various aircraft-related issues. As a result of her successful efforts, Schwartz has closed more than $3.0 billion in aircraft transactions over the last seven years.
As president of NAFA, she oversees staff efforts, the association’s continuing education and training programs and coordinates the association’s annual meeting and a joint effort with the National Aircraft Resale Association at the NBAA Convention. This month, we tapped into her depth of experience and strength of knowledge to gain answers to ten questions on aircraft finance-related issues for the readers of World Aircraft Sales Magazine.
WAS: You’ve been in the president’s post for just a few months after spending years in the aviation and aviation finance business. What is the biggest concern for your segment of the aviation community and your members today?
Schwartz: A couple of things. First, the FAA has passed new registration rules that go into effect in October. It will require all owners to re-register their aircraft every three years. My concern is that the size of this undertaking together with the already significant responsibilities of the FAA, could create a backlog of new registrations as well as old, potentially causing a great deal of problems.
Second, there is still a fairly large inventory of pre-owned aircraft with values still low. This has created buying opportunities for buyers, but created problems for existing owners and lenders as many loans are ‘underwater’.
WAS: Eighteen long months ago, the pre-owned aircraft sales and the aircraft finance businesses seemed caught in the same vortex: excess inventory begging above-market asking prices that depressed both sales and values, with loans on the reduced number of transactions more difficult to obtain – if, that is, prospective buyers could find lenders comfortable with the deal and the long-term stability of the asset’s value.
For months before the collapse, capital was leaving the aircraft market. Are conditions much different today, and if so, how?
Schwartz: Yes, conditions have improved dramatically. Even eighteen months ago, capital was available for the right buyers. However, for a while there was a feeding frenzy with lenders, with as many as five firms bidding for one deal. Things have changed and now a buyer might get one firm to issue a term sheet.
We are again seeing a number of lenders bidding on transactions, though not as many, and not with the frenzy previously seen. Also, I would say that although terms are not quite as favorable as in the past, they have returned to more reasonable terms and structures.
WAS: What’s been the impact of this extended downturn on the aircraft finance business itself; fewer participants, more participants, better returns – or worse?
Schwartz: Better returns, fewer participants, to put it simply.
WAS: With some regularity word comes along of a great deal on an aircraft either returned to the financer by the owner or repossessed by the lender - but how much do those sorts of returns and repossessions complicate work for your member lenders?
Schwartz: I can only speak for myself - we have been fortunate in that we’ve seen very few returns/repossessions on aircraft. Other firms may have more returns and repossessions, but I believe they are all well equipped to handle it as they have large infrastructures to do so.
WAS: Over the past two or three years aircraft finance executives have frequently referred to interest rates being “at historic lows;” would that statement still be true today? Within what range do interest rates run in these days?
Schwartz: The historic lows are still there as the Federal Reserve has kept interest rates very low - therefore LIBOR is still historically low. Spreads are, however, higher than they were a few years ago. As I previously stated, they have returned to more reasonable numbers.
WAS: What are the prevailing variables these days in terms of aircraft age lenders are willing to handle, as well as down-payment requirements and terms?
Schwartz: Lenders are more cautious about lending on a 15–20 year aircraft, particularly if they have a long tenor. I believe lessors are even more cautious as a lessee can return an aircraft at the end of term. In addition, loan-to-values, particularly on older aircraft, are slightly lower with tenors shorter.
WAS: A few years ago lengthy backlogs drove many an impatient operator to refurbish and renew their existing aircraft while waiting out the time before the new plane was ready. Today, with the economy struggling, again, operators reportedly turn increasingly to refurbishment and renewal of their existing aircraft in lieu of moving up. In both examples, the owners often used the aircraft as collateral to finance the improvements.
Is much of today’s finance business attributable to past customers seeking refinancing to renew?
Schwartz: I do not see that as being the case. There are bargains to be had, therefore buyers are returning to the market to upgrade.
The buyers may not be flocking to the market like they have in the past, but we are definitely seeing an increase. (Note, the normal summer slow-down is occurring now. Even in the strong market that we saw a couple of years ago, the summer proved to be slower).
WAS: The FAA recently announced plans to require re-registration of the nation’s entire fleet of 330,000 aircraft along with a continuing three-year renewal cycle. Will this requirement create any issues or complications for NAFA members holding loans on many of the aircraft?
Schwartz: Yes, it will create issues for lenders and lessors both, as well as for owners.
WAS: Addressing NAFA specifically, how well has NAFA’s membership level weathered these challenging times?
Schwartz: We have a record high number of members and are still growing. I’m sure it’s due to the new regime (just kidding!).
WAS: Looking ahead with your own ‘crystal ball’, where do you see the aircraft finance business five, and 10 years from now?
Schwartz: Improved. The industry has been cyclical in the past and will continue to be so in the future. Things will wax and wane as they have previously done. However, business aircraft are still very desirable and buyers will continue to buy.
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