The finance experts that make jet buys smooth affairs The National Aircraft Finance Association may not be the best known of business aviation’s myriad trade groups. But chances are you or your company dealt with one or more of NAFA’s members if you’ve purchased a business-turbine aircraft. Currently in its 35th year- NAFA covers a wide swath of business aviation money sources- as well as insurers- appraisers- and others- among its 114 members. Under the guidance of Karen Griggs- NAFA’s ...
The finance experts that make jet buys smooth affairs
The National Aircraft Finance Association may not be the best known of business aviation’s myriad trade groups. But chances are you or your company dealt with one or more of NAFA’s members if you’ve purchased a business-turbine aircraft.
Currently in its 35th year- NAFA covers a wide swath of business aviation money sources- as well as insurers- appraisers- and others- among its 114 members.
Under the guidance of Karen Griggs- NAFA’s Executive Director and a Member of its board- NAFA sets professional standards- offers education and training- and serves as a clearinghouse for buyers in search of financing assistance.
The current President- Michael T. Amalfitano- Sr.- serves as SVP- Division Executive- for Banc of America Leasing in the company’s Dallas Corporate Aircraft Finance office and has a long association with aircraft finance and corporate aviation.
Many of the most relevant topics for the aircraft finance community were on the agenda during NAFA’s 35th annual meeting this past May when Amalfitano ascended to the NAFA presidency. Members in attendance heard discussions on issues including FAA funding- business jet forecasts- training and continuing education for aircraft appraisers in concert with the American Society of Appraisers (ASA).
The ASA course covers the fundamentals of the Uniform Standard of Appraisal Practices (USAP) and highlights different components of the aircraft appraisal process each year.
Previous NAFA meeting seminars incorporated classroom presentations from market research services- value guides- OEMs- maintenance tracking companies- and tours of specific aircraft- service centers and manufacturing facilities.
But with both interest rates rising and demand for new aircraft on its own stronger-than-normal growth curve- World Aircraft Sales Magazine wanted to gain some perspective from the finance community on the impact of these and other issues. So we put the following 10 questions to Amalfitano- as NAFA’s top executive.
WAS – The Federal Reserve recently avoided raising short-term interest rates for the 18th time in 26 months but sounded a note that hints at the possibility of further increases should inflation worries gain when the Fed next meets.
What impact has the two-year climb in interest rates had on the ability to acquire financing for business turbine aircraft? And will the Fed’s hold-the-line decision change the finance environment?
Amalfitano – Actually- despite the nominal rise of interest rates- borrowers and lessees have benefited from a flattened yield curve in accessing long-term financing for their aircraft purchase. Very little difference – just a few basis points - exists in the cost of obtaining 10-year fixed rate money over that of five-year capital.
In addition- clients have greater access to capital with many more investors entering or expanding their presence in the corporate aircraft market- which has led to further rate compression and more aggressive structures as banks and financial institutions compete for their share of the business jet market.
Near-term Fed decisions should not impact today’s marketplace. It would take a major economic event to truly shake the current finance environment.
WAS – Demand for pre-owned aircraft seems on a rebound that’s close in growth to the increased demand for new aircraft.
Is the finance market for pre-owned business-turbine equipment any tougher or easier than the market for financing new equipment?
Amalfitano – Interestingly- the pre-owned aircraft demand is as dynamic as that of new production; however- the forces at work are much different. OEM backlog- depending on cabin class- is pushed out 18-36 months. Manufacturers’ production is spooling up with greater capacity. This level of demand has reduced or- in some instances- eliminated any signs of manufacturer discounts.
The need for progress payment financing during the aircraft construction is more common given the long lead times. And- some buyers are again looking for interim lift. Aircraft values are fully recovered with new shipments continuing to increase.
Aircraft owners have been forced to look to pre-owned aircraft to meet today’s aviation needs. That has served to stabilize or increase the value of used aircraft significantly as clients seek to obtain late-model- low-time- state-of-the-art- pre-owned aircraft as a replacement to new.
As demand has risen- the available supply has decreased making it ever harder to locate high-quality assets. This has provided unique financing opportunities with owners seeking higher advance rates- longer terms- and lower rates to mitigate the costs of operation.
Inventories- however- have increased due to the abundance of older- vintage units that have lost their ramp appeal as the technological curve has passed them by. So- most financial companies are staying away from or limiting their exposure to the older models. There has also been a resurgence of refinancing as owners seek to regain invested equity or reduce interest costs.
WAS – What are the most common difficulties buyers face when trying to secure financing for corporate aircraft?
Amalfitano – Most buyers have become much more informed about their financing choices but still need to select a trusted aviation finance company that fully understands the FASB- GAAP- IRS- FAA- and other regulatory compliance-related matters in securing the best financial product for acquiring a corporate aircraft.
This is important whether it is the creation of an LLC or SPE entity to hold the aircraft- the negotiation of a LOI or purchase contract- the 97-10 operating lease treatment of a particular financial structure- the management contract- which may impact the operational control of the aircraft- the liability limits of insurance to protect the investment- or the international registry of the secured interest in the aircraft object under the new Cape Town Convention. Buyers must partner with an industry leader when it comes to financing their corporate aircraft.
Buyers must decide whether to guarantee the indebtedness to obtain the lowest cost financing- or be willing to pay a higher cost to limit the guaranty- given the strength of the collateral value or equity position in the aircraft.
WAS – A few years ago there seemed to be some consolidation of companies that provide financing for corporate aircraft. Are buyers’ choices any better today than they were five years ago?
Amalfitano – Buyer choices have improved over the last five years due to the influx of new entrants into the market. Banks that did not have aviation specialty units have increased their interest in aircraft to attempt to take a slice of this growing market. Those financial institutions and banks that have had dedicated aviation lending areas have expanded their presence with greater market coverage- new products and services- or additions to staff to fully capture this growth.
Buyers do have more choices but should select a lender that has the proven track record to thrive through all of the market cycles in the years ahead.
The product choices have been streamlined to include traditional debt financing or the cost-effective- tax-oriented lease; however- there are now a myriad of structuring alternatives within each product that offer lower all-in rate of ownership as well as the flexibility of fixed- variable or swap rate funding. Buyers need to make smart choices with the advice of an aviation expert.
WAS – What should a prospective buyer know about their financing prospects before they start shopping for that business jet or corporate propjet?
Amalfitano – Prospective buyers should know how they plan to use the aircraft; its flight missions; how many hours a year the aircraft intends to fly; where it will be based; if it will conduct any flights overseas; if it will be chartered for revenue; what entity can utilize the tax benefits of ownership; what impact user fees will have on the cost of ownership; the impact of the new tax laws and IRS rules governing personal use of corporate aircraft; and have a full understanding of the impact of higher fuel costs.
In addition- they need to analyze their flight department structure versus the need for managed services- evaluate the creation of a LLC or SPE entity- research the cost of insurance- understand the sales and use tax charges- and determine the access and disclosure of financial data required to secure a credit facility.
Often times a buyer may be best served by hiring an aviation attorney- aircraft dealer- or industry consultant to assist in analyzing the needs of the buyer. Some leading banks that specialize in aviation can also provide these value-added services.
WAS – Similarly- what should prospective buyers look for when scouting for a financing deal – and what should they look to avoid?
Amalfitano – Avoid the temptation of contacting too many financing sources in hopes of creating an auction-type environment. Instead select two or three of the industry-leading aircraft financial providers that specialize in corporate aircraft finance to quote competitive terms.
The key is finding the lender that can deliver on what they claim that they can do with their financial product on terms that achieve both your business and aviation objectives.
Avoid simple term sheets and seek full proposals that clearly describe all the terms and conditions of the transaction. It is best to deal with a bank that not only requires full financial disclosure of its clients- but also offers full disclosure of its product.
In seeking the right financial partner- look for one that takes the time to not only understand your aviation needs of today but structures its financial product to solve your future objectives as well. NAFA members are committed to this higher standard and should make a good choice.
WAS – The new South African convention on international registrations has generated some debate on its usefulness and complexities. Has the convention produced any new issues for the aircraft finance industry?
Amalfitano – The Cape Town Convention provides an international registry for lenders and lessors- buyers and sellers to secure their interests in an aircraft object as defined by the aircraft protocol and treaty. This new process has increased the costs of closing an aircraft transaction as well as delayed the timing of such closings.
The system offers some unique benefits when transacting business in a contracting state under the treaty. However- it has also added complexities to the closing process that can be very costly for the aircraft buyer- seller and finance company. It requires the users of the registry to gain specific access and approval well in advance of a transaction closing.
Several system limitations have been reported and process enhancements have been suggested to an advisory board that was recently created to address areas of improvement.
WAS – Speaking of international issues; Is financing any more or less difficult for foreign purchases or purchases by foreign buyers?
Amalfitano – Yes- international purchases can be much more complicated. In addition to all of the financial and regulatory aspects I mentioned for domestic transactions- foreign deals tend to involve multiple jurisdictions.
There may be one or two jurisdictions for the buyer as the company acquiring the aircraft may be based in one country with the principal owner having his or her assets in another. In addition- the aircraft may be domiciled in yet another jurisdiction and intended to be used for travel among various foreign countries as well as travel back and forth to the United States.
Each foreign country has different governing laws for leases- which impacts the class of depreciation for the aircraft. Also- some aircraft that are free to fly internationally are restricted when flying in the USA- given the more stringent regulatory compliance requirements.
Furthermore- the use of the aircraft for third-party charter is much more prevalent with an international transaction. This higher usage may impact the value of the aircraft or the amount that can be financed.
WAS – As a segment of the aviation industry- how difficult is it for our members to find- qualify and keep the people it needs to compete?
Amalfitano – As the saying goes- good people are always hard to find. With the demands for safety and quality- and an emphasis on process excellence- there is no place for mediocrity. Fortunately- the great people tend to stay in one place as they are cherished by their employers.
Having a pay for performance program that rewards continual success helps ensure that employers can attract and retain these star performers – whether they be a chief pilot- the head of maintenance- a crew mechanic- a flight attendant- a caterer- or the director of aircraft sales.
Individual results that drive team success will be rewarded with the benefits of top compensation and recognition for this elite class.
WAS – If you weren’t personally involved in the aircraft finance industry- what other aspect of aviation would you most want to work in- and which would you work hardest to avoid?
Amalfitano –That is an interesting question. I really have enjoyed all my years in corporate aircraft finance and truly feel it is the best aspect of the industry to be a part of- due to the ever-changing economic landscape- competitive challenges- and financial rewards.
I guess if I had to choose- I would be a corporate pilot so I could finally get an opportunity to fly around on all these phenomenal business jet aircraft and enjoy the benefits of private executive travel.
I would work hardest to avoid being an aviation attorney as it would be filled with tons of work trying to decipher the unique aspects of tax- legal- financial and aviation matters throughout this dynamic industry.
WAS: – Thanks- Michael!