With COVID-19 causing havoc among businesses and individuals worldwide, how are aircraft finance borrowers and lenders reacting, and what can they do to help each other weather the storm? Rohit Jaggi asks a panel of industry experts…
Unprecedented is normally an overused word. But the frequent usage it has had in the coronavirus crisis are, in a completely unprecedented way, utterly justified. In the world of buying and selling business aircraft, activity has almost completely stopped.
Aoife O’Sullivan, partner and co-founder of the Air Law Firm, points out “9/11 and the 2008 global financial crash were nothing like this. In this global pandemic everyone is affected.
“We can’t get any deals done because we can’t get the engineers over to do the pre-purchase inspections, and we can’t get the crew to fly the aircraft.”
What’s the News for Existing Aircraft Loans?
But while finance for new deals is in a holding pattern, waiting for politicians to judge when they can justify resuming normal economic activity, existing loans are on a different, more troubled planet.
There is some good news amid the gloom, but it’s worth first examining the negative in some detail.
The Bad News First…
For companies caught by a sudden drop in their turnover and ability to service loans, there may be help from governments. But this is generally in the form of loans rather than grants. And any application for government assistance might not be helped by establishing the need for help making business jet payments.
The memory of US car company chiefs jetting off to Washington in three separate corporate aircraft to jointly ask for a state bailout in 2008 casts a long shadow.
On the second point, aircraft values are a sticky point. A dropping off in the number of deals makes it very difficult to assess how much aircraft will have fallen in value. But they will definitely have fallen, and for some lenders, even a rough assessment could be enough to ask for more security.
Leading private aviation lawyer Paul Jebely, managing partner of Pillsbury’s Hong Kong office, explains, “There have been a lot of early conversations and some uplifting of assets-under-management requirements to counteract downward valuation trends that result in loan-to-value ratios being triggered.”
But then we get into the same area as the preceding point: It’s all very well asking for more security, or asking for a partial repayment, but if the money is not there, neither request is any more than an exercise in frustration.
And that leads into the third point. Repossession may still be a theoretical option (and indeed there are a few aircraft being seized by lenders). But getting assessors and crew to do an end-of-loan inspection and fly it away is difficult. And anyway, fly it where? And why?
Boneyards are overflowing with resting airliners. And, in a market of falling values where the floor is not yet readily apparent, why would a financier take on any further price-drop risk? There would be precious little chance of a sale quickly, if at all.
As Gary Crichlow, director of aviation finance at debt adviser Arc & Co, notes, “None of the lenders I've talked to are interested in flooding the market with a bunch of repos.”
A potential complication for borrowers, O’Sullivan points out, is that “a typical loan or lease will not contain a force majeure clause – they are drafted in such a way that they are ‘hell or high water’ contracts, meaning that the payments need to be made no matter what.”
What is the Good News for Borrowers?
The good news peeping out behind all these clouds is that financiers are willing to talk. It may be partly because they have no alternative, but “they are listening to borrowers,” says O’Sullivan.
“The majority of lenders and lessors I have come across have been fair and are open to restructuring the loans and leases. And if transactions can be saved it protects the market.”
“From a lender's point of view, the aim is very much to work out a solution with the client that either enables the asset to be looked after properly until things improve, or disposes of the asset in a calm, orderly way,” Crichlow agrees.
“It's all about avoiding anything that would signal a distress sale in the market, and it's absolutely about not allowing the asset to sit and deteriorate. All of the aviation lenders I work with and have spoken with are very much in tune with that.”
Kirsten Bartok Touw, founder and managing partner of US-based AirFinance, reveals her company has “been busy providing manufacturers with working capital loans based upon inventory. Ex-Im Bank has been very innovative and supportive - historically Ex-Im has financed their customers. But right now people aren’t buying. They can’t even get here to buy.”
How are the Lenders Reacting?
Some lenders have changed the terms of deals or pulled out altogether. But others are being helpfully pro-active. Mike Francis, managing director of aircraft finance at First Republic Bank in the US, explains, “I’ve been reaching out to people who’ve bought planes for cash seeing if they want to finance them and release cash.”
The lenders are getting help from the authorities, Bartok Touw points out. “Right now the regulators are not penalizing banks for forbearance in their portfolios, which is so important and valuable.
“However, how long can a bank stay healthy with a large number of forbearance requests?” she adds.
Cash Buyers Cashing In?
But even amid the gloom there are opportunities. A number of brokers report that cash buyers are stalking distressed sellers. And the ranks of those who desperately want to unload their aircraft are bound to grow as, for all the uncertainty over values, the direction of travel is clear.
David Crick, international secretary of the American Society of Appraisers, said: “There’s been a significant decline in the number of transactions, but very little data on prices. It would be madness to think it won’t have an effect on values, but it’s difficult to assess right now.
“In some of the long-range, Large Cabin Jets, inventory has shot up by double digits in the past month. We’ve heard of 10-20% discounts just to get people to step up and sign letters of intent.”
…The Impact on Loans?
Jebely says that will soon have an impact on loans. “I personally think there will be a loan-to-value crisis in both the commercial and business aircraft finance markets,” he said. “I cannot think of any commercial or business aircraft that is worth as much today as it was last month.
“At a minimum, most – if not all – commercial and business aircraft lenders will be forced to take some action to re-align loan-to-value ratios in the coming months.”
So what is the best advice to borrowers in these unprecedented times? Talk to your lender, and talk early. “Pragmatism is ruling the day in terms of lenders working as far as they can with clients in distress,” Crichlow says, “though of course, it takes two to tango, and clients who are finding themselves in financial difficulty would do well to be upfront and transparent.”
“Calling in the loan would be a bad idea for everyone concerned if it can be avoided,” O’Sullivan says. “The nature of this is so unprecedented, we just don’t know yet what impact there will be on aircraft valuations.
“It’s the wrong time to try and value aircraft – if the deals are being suspended, then valuers are not using real data and are only giving estimates of what they think valuations should be. The knock-on effect is margin calls by the banks and even more pressure on the borrowers and lessees.
“Certainly it’s important to be open and honest with the financiers when seeking their support or forbearance. But it’s also important for the financiers to give support through the crisis where they can.”