- 12 Oct 2023
- René Armas Maes
- Aircraft Ownership
Whether you’re buying a new or pre-owned jet it’s important to have the right people onside leading you through an extremely complex process. This month René Armas Maes considers the role of the Aircraft Financier on the buyer’s team...Back to Articles
Having started this series looking at the role of the captain of any aircraft sales or acquisition team – the Broker – this time we will focus on another central team member for acquisition teams seeking to go down the financing route: The Aircraft Financier.
Global market liquidity and multiple sources of aircraft financing have been readily available for those who are buying jets in the past. Indeed, the financing market has been highly competitive, with many players able to lend money using tailor-made structures meeting their clients’ needs.
As a result, loan covenant requirements were reduced with competitive interest rates offered, enabling lenders to access a larger pool of potential borrowers. Today, that is not the case, which makes sourcing an experienced aircraft financier even more important...
According to AMSTAT’s recent Q2 2023 market report, a relative slowdown in resale transaction activity for business aircraft has taken hold, compared to the 2020- 2022 Covid/post-Covid-era. Pre-owned aircraft inventory levels have continued to climb since last year, but they remain below their historical averages.
AMSTAT’s report also reveals seller expectations have cooled somewhat. Within the Super Mid-Size Jet market, for example, a lowering in average asking prices of private jets for sale has been recorded, tracing back to the start of 2023.
In contrast, when it comes to factory-new aircraft sales and backlogs, ongoing robust demand can be seen, helped by the fact all the leading aircraft OEMs have backlogs stretching out two to three years.
Before the Covid pandemic, private jet acquisitions could be achieved through several traditional and non-traditional mechanisms, including cash, debt (Bank or Capital Markets), Export Credit Agencies (ECAs), lessors/finance companies, and Original Equipment Manufacturer (OEM) Financing Arms.
Today, the same options are available, but there are fewer players in the game. This is due to several ‘revised’ financing conditions (compared to the pre-Covid years), including higher interest rates, higher down payment requirements, updated individual/corporation credit score requirements (AAA rating), and more. These have collectively caused several aircraft financing players to exit the industry.
Evaluating interest rates and down payments, in the past (depending on jurisdiction, credit history, the amount to be financed, and the size of down payment, among other things) the interest rate varied from 3.5% up to about 7%.
Today, the Secured Overnight Financing Rate (SOFR), a reference rate established as an alternative to LIBOR, starts at 5.5% and can go as high as 13%, depending on an individual’s or corporation’s credit and risk profiles.
Moreover, for credits considered ‘high-risk’ a larger down payment was required pre-Covid for a deal to close or to negotiate a better interest rate. While a medium- to low-risk pre-Covid credit might have commanded a down payment of between 15-18%, a higher credit risk might have required 30% or more. Today, down payments of 40% or higher are not uncommon.
What exactly makes an experienced, versatile aircraft lender worth your business? Is there a tangible way to demonstrate how they pay their way as part of your aircraft acquisition team? Let’s review...
A financier should allow you - through their due diligence and negotiation - to find the best interest rate (based on credit risk/history, type of collateral guarantees, and ability to make balloon payment(s) if required). They will present you with the best financing package, while allowing you to achieve the right strategy to maximize your cash flow.
A versatile lender should provide you with the opportunity to refinance if necessary. This is an important aspect of any financing deal, and crucial to freeing up equity if it’s needed.
For example, if interest rates are lower, refinancing may optimize cash flow and be a cost-effective alternative to you. On the other hand, if a variable rate was selected, a flexible financer should help you lock in a better rate through a fixed-rate transaction if market instability should suddenly arise.
Well-resourced financing institutions operate global market research and risk assessment units. They should be able to advise and direct clients on the most suitable aircraft make/model, or at least provide comments on an intended purchase.
Moreover, they should be comfortable offering insights into the values of the most suitable aircraft for sale, providing additional intelligence on how the asking price of a pre-owned aircraft compares to recent sales of similar aircraft.
Indeed, a well-resourced financier will need to evaluate the condition of a pre-owned aircraft and its intended jurisdiction before any deal is signed, adding a further safety net for the buyer in their acquisition.
A flexible lender should be able to offer multiple solutions based on your cash flow needs. Most lenders will prefer to finance aircraft for up to 10 years, but more typically between 4-7 years.
Be aware, however, that older aircraft types and less marketable aircraft might be difficult to find financing for and are most likely to command a penalty in terms of premium rates and/or shorter lending terms (typically two to three years).
Keep in mind that the interest rates of non-bank financing companies can be higher than those of commercial banks, since they are primarily backed by private sources requiring higher transaction margins. Nonetheless non-bank financing companies typically bring extra creativity and flexibility if it is needed.
With the current state of the Business Aviation and financing markets, it is imperative to carefully choose your financier if that is the route you plan to go.
The right financier for your team will help you secure the best financing structure and deal possible for the aircraft you need and will have the foresight and flexibility to build the room to renegotiate terms if the market changes dramatically.
When pre-screening potential aircraft financiers, focus on the following qualities:
In addition, look at what feedback they can provide in terms of aircraft values, market research and knowledge, and even residual values, since an experienced aircraft financier ought to relate to the ebb and flow of the marketplace.
Although the pool of Business Aviation financing players has declined today, there are still several excellent financiers to select from. In the current environment, aligning with the right lender who understands and can advise on the needs of those buying jets is essential, and you will have made a valuable addition to your acquisition team!
Read more articles in this series, including: