In this series of aviation articles- we have explored the various ways to secure the exclusive use of a business aircraft. This aviation article discusses the use of basic secured financing to fund the purchase of the aircraft. There is a wide array of options available- and knowing your options in advance can save you a great deal of money and time.
CHOOSING YOUR 'BANK'
The Home Town Bank:
Business aircraft get financed in an unusually wide range of ways. For a corporate buyer- the first instinct is to work with your primary corporate lender. A few factors favor this approach. Your regular lender should have a high comfort level with you- and it understands your business. This greatly reduces the underwriting burden- and should translate into marginally better terms for your financing.
Keep in mind that your regular bank will tie together existing loans to establish cross-defaults (where a default under your line-of-credit creates a default under your aircraft loan) and cross-collateralization (making all of your pledged assets act as collateral for all of your outstanding loans). This makes the bank more comfortable- but blends your corporate finance with your aircraft financing. As long as your combined debt to the bank does not exceed their comfort level- banks tend to prefer being in a dominant position with exclusive collateral rights to most of your assets.
It is important to keep in mind that any of your cash on account with that bank can be frozen and may be offset by the bank in satisfaction of any of your outstanding debt. This is an underwriting benefit for your primary bank as lender. No borrower (and no bank) likes to consider the consequences of a default when negotiating loan documents- but if you ever find your business in distress and facing the possibility of selective defaults- these cross-default- cross-collateral and offset provisions become crucial factors that narrow your recovery options.
Determine your bank’s familiarity with aircraft financing. The nuances of financing are discussed below- but you would prefer not to have your bank learning these nuances as part of making your loan – particularly if the bank is charging you for their underwriting and documentation costs. Quite often- the bank will rely on outside lawyers who are not adept at aircraft financing- and this will multiply the cost of getting the transaction done.
If your lender is willing to make the loan even though it is not familiar with aircraft finance- chances are that the lender is not giving full credit to the collateral value of the aircraft and is instead basing the loan on your corporate creditworthiness and other collateral it holds. Most commercial banks do not have expertise or personnel to handle aircraft collateral- and they will need to assume a higher re-marketing cost if they repossess the aircraft from you.
This could force the cost of your loan to be higher (interest and fees)- becoming a major issue if your financing is made more complex due to the use of a special purpose entity- or if you are engaging in a tax-free exchange transaction.
Most business aircraft manufacturers have financing programs offered through financing affiliates. This financing generally is offered with new aircraft for sale purchases- but also may be available with used aircraft sales. In the used marketplace- manufacturer-sponsored financing firms will prefer to finance certain types (generally financing their own brands or aircraft sold by the manufacturer’s resale arm).
Because business aircraft finance is all that they do- these financiers offer several advantages to the buyer/borrower. First- they offer a wide variety of pre-packaged loan structures that are tailored to the specifics of aircraft ownership and operational needs. Second- they have the documentation 'in the can' and savvy personnel who are able to work quickly and efficiently to closure. Tax-free exchanges and other complexities will not baffle a seasoned aircraft finance company.
These financiers will be looking to the collateral value of the aircraft itself as the primary support for the loan- and secondarily to the borrower and other credit enhancements. A lender specializing in certain aircraft brands will often place a marginally higher value on the collateral because the lender has a higher confidence in its ability to re-market a re-possessed aircraft with lower marketing costs.
A specialist in a brand and type will have a deeper understanding of things that affect aircraft value (such as scheduled aircraft maintenance requirements- airworthiness directives- and other characteristics affecting aircraft cost of ownership). For the borrower- the lender’s reliance on aircraft value to support the loan should mean that the financing is not tied to existing corporate financings by cross-defaults and cross-collateralizations.
Institutional Aircraft Financiers:
Several institutional firms (CIT- GE Capital and Fleet Capital- for example) offer corporate aircraft financing through specialized groups. Dozens of smaller finance firms also offer similar financing of corporate aircraft. In operation- these firms offer many of the advantages of the manufacturer-financiers in that they are well versed in the art of aircraft finance.
They offer many loan structures- and have the staff and expertise to get the loans done quickly and efficiently. Institutional firms generally have no preference for aircraft types- but they will have on staff or under contract- specialists that assist them in underwriting aircraft loans.
Nuances of Financing Business Aircraft:
Business aircraft finance- in some ways- is simpler than financing real estate or equipment. Most aircraft have a readily determinable fair market value- and unlike real estate- they are not unique assets- which facilitates their valuation and sale. For a U.S. registered aircraft- the financier records its mortgage with the FAA Civil Aircraft Registry in Oklahoma City- Oklahoma.
The OKC filing creates a perfected security interest in the airframe and engines. Additional filings can be made in the borrower’s state of incorporation as a precaution and to create a perfected lien on ancillary assets (other than the airframe and engines) such as accounts and warranties. Many other national registries (in countries that are signatories to the Geneva Convention on Recognition of Rights in Aircraft) create a similar- simplified means to record a lien on aircraft.
Maintenance is critical to the value of aircraft as collateral. Unfortunately- a borrower that is in default on loan payments is more likely to have scrimped on maintenance obligations. A neglected aircraft loses value very quickly- and bringing the aircraft current on maintenance and airworthiness directives can be costly. Quite often- the corporate aircraft of a struggling corporate borrower has been abandoned on the eve of a costly maintenance or repair requirement; leaving the financier with a costly repossession. To control this risk- lenders may seek reserve payments over the term of the lease to make certain that a pool of funds is available to meet these obligations.
Aircraft are highly mobile assets; and even a fully secured and perfected lien on an aircraft will not help repossession if the aircraft is grounded in a remote country – particularly if the aircraft has become un-airworthy due to owner neglect. Aircraft financiers need to maintain relationships with consultants- attorneys and crews that are capable of performing high-risk- high-sensitivity repossessions from remote locations. This cost is reflected in the loan terms.
It is worth addressing the issue of special purpose entities or SPEs. There are a number of valid (and some less-than-valid) reasons to consider purchasing and financing an aircraft in a separate entity formed for this purpose. For purposes of financing aircraft- you can expect that a bank will expect a guaranty from the parent company- or a similar credit enhancement- if the debt is to be extended to a 'shell' entity that only holds the aircraft. If the aircraft is being purchased for purposes of leasing it to one or more operators- then your bank will want a collateral assignment of those leases and rents.
PREPARING FOR FINANCING
When to approach lenders?
Ideally- you should have established contact with lenders before you have identified your aircraft for acquisition. This not only allows you to work through ministerial paperwork in advance- but it also facilitates a rapid closing when you reach agreement with your seller. Most financial institutions will allow an officer to negotiate a term sheet- but the commitment will be subject to approval by a credit committee. You need to factor in several days to allow the loan to be approved- particularly with a commercial bank.
Try to get a non-binding term sheet from your financier(s) summarizing the principal terms of the loan. Most lenders are not particularly concerned with the type or condition of the aircraft until you have settled on one. They are likely to want an appraisal of some depth (either a 'desk appraisal' or a full-blown inspection and appraisal). As with any purchase and sale- sellers may give precedence to a buyer that has financing in place over a buyer that is just beginning to work with financiers.
How many lenders should I work with?
Money is a fungible commodity- and shopping for an aircraft loan is like any other transaction in a fungible commodity – you can get the best terms through competition. This can be an awkward and time-consuming process- particularly if one of the prospective lenders is your existing bank- but the rewards are significant. You will 'complete' the deal at the term sheet level- and proceed to definitive documents with one lender. Lenders do not like being cross-shopped like this- but as long as you behave professionally and honestly- the friction should be minimal.
As noted above- it is also somewhat difficult to make an 'apples to apples' comparison when you are dealing with financiers with differing specialties. The offer you receive from your commercial bank will reflect their cross-collateralization and their ability to seize your accounts; but it may not give full credit to the aircraft’s value. A specialized aircraft lender may give a higher value to the aircraft- but will show the benefit of cross-collateralization or the ability to seize accounts. Choosing between the two may depend on how much value you put on: (a) developing a deeper relationship with your corporate lender- or (b) keeping your aircraft financing separate from your corporate financing.
What can I do now to be ready for bank financing?
If you are already familiar with corporate financing- and you already produce audited financial statements- then financing a corporate aircraft will be relatively simple. If you are not familiar with corporate financing- then this process will be more difficult- but no more difficult than any corporate financing.
Financiers will be concerned with the ability to service the debt from excess positive cashflow; and if you cannot show this cashflow- expect the financier to seek credit support in the form of a personal guaranty of principal(s) or affiliates. You can offer pro forma information that shows some offsetting revenue generated by the aircraft in business charter usage- but do not expect the financier to factor this into its underwriting unless you can offer binding contracts supporting the revenue stream.
Finally- the aircraft you select will have an impact on your financing. New aircraft are easier to finance (and financing will be readily available from the affiliated financing arm of the aircraft manufacturer). Used aircraft can become difficult to finance as their values drop- and the potential for costly maintenance or airworthiness directives increases.
At any given point- the value of a 25 or 30 year old business jet can be scuttled by a corrosion problem- an engine failure- a critical airworthiness directive- a change in noise emission standards- or a requirement to upgrade avionics. On a $20 million aircraft- the cost of a private jets for sale are painful but accepted; on a $3 million aircraft- they may be the final straw that puts the aircraft permanently out of service. Experienced financiers know and factor in this risk. On the contrary- a 'seasoned' aircraft will suffer less in depreciation over time (as a percentage of original value) and as the market as a whole declines.
Next in the Series
Our next aviation articles in this series will review typical aircraft finance documentation- and how to negotiate the best terms.