How to secure aircraft finance in 2018
Is it likely to be easier or harder to access aircraft finance in 2018? AvBuyer's Matt Harris spoke with two prominent aircraft financiers to get their thoughts…
The signs toward the end of 2017 were of continued improvements in the volume of used aircraft sales activity. “There has been some encouraging news,” notes Dave Labrozzi, COO, Global Jet Capital (www.globaljetcapital.com). “Although it’s not the same across all asset classes and age, generally speaking we’re seeing much shallower depreciation rates than a year ago.
“Good pedigree, younger used aircraft are becoming more difficult to source. We’re seeing these aircraft available ‘For Sale’ in the mid- to low-single digits, which is an encouraging sign because it demonstrates values aren’t dropping as fast as they were a year ago on these types of assets.”
Labrozzi argues that the market is showing promising signs of healing as demonstrated by the much lower availability of popular aircraft with fewer flight hours, lower depreciation rates and growing flight activity. “All those things are very encouraging and hopefully coming to bear in a true recovery.”
But how much of 2017’s used aircraft sales activity level was due to the availability of financing, and how much to a high volume of cash buyers?
“Cash buyers continued to be a significant component of sales into 2017,” offers Greg Holst, Aircraft Division President for 1st Source Bank (www.1stsource.com).
“We should, however, expect a shift among these buyers to borrowing as they find better investments for their cash in expanding their businesses as commercial and retail markets improve.”
Aircraft Finance: Too Much or Too Little?
Interestingly, at the CJI Miami conference towards the end of 2017 almost 60% of attendees polled felt there was enough financing available to aircraft buyers, while 40% felt that wasn’t the case.
“As it relates to the 40% who felt there is insufficient financing available, this may be particularly true for aircraft more than 10 years old,” Labrozzi explains. “These assets see less access to bank capital availability.”
“While financing availability is improving for most aircraft buyers,” Holst adds, “some who are purchasing lower-value and older turboprops and jets will find lending resources thin at best. Those lenders will typically dictate more restrictive terms in an effort to offset maintenance, marketability and useful life risks.”
“Additionally, traditional bank lenders have continued to tighten their focus on bank customers, which includes a corresponding customer investment in assets under management,” notes Labrozzi.
“This trend, the changing capital/accounting rules and the possibility of continuation of reduced values could be deterrents for new entrants.
“A noteworthy change in our business is the acceptance and adoption of Operating Lease products globally and in emerging markets,” Labrozzi highlights.
“We’ve also seen increases in the US, and have been successful in writing a good amount of business outside of the US to add to our International Operating Lease portfolio. Operating Leasing is up twice the level from just one year ago.”
Banker Greg Holst expects traditional bank-lending to continue to dominate the market for those who are sound credit risks and seek standard structures. “There is a market of non-bank lenders and even a few banks that cater to non-standard loan structures and leases,” he said. “These lenders also may consider unique credit situations or asset-based lending.”
Aircraft Finance: 2018 Outlook
There were some interesting comments toward the end of 2017 as financiers looked ahead. Aircraft financing companies were advised to “be comfortable, stick to your knitting and stay in your comfort zone.” Could such advice imply that little will change in aircraft lending for the coming year?
“Generally, aircraft lenders will experience fewer defaults by focusing on the clients and collateral they know and understand,” Holst highlights. “Unnecessary defaults and liquidations negatively impact all lenders and owners.
“However, the current environment is likely to encourage some lenders to expand into new collateral types or geographic regions in a measured way," Holt adds. "As they do this, it is crucial that lenders closely monitor business and collateral trends as well as their clients in order to stay ahead of future downturns.
“With the improving business environment globally and strong deposit balances at many banks, aircraft lending should be more aggressive among lenders,” Holst projects. “Most aircraft lenders I have had contact with are in a growth mode.”
Global Jet Capital’s thinking is focused on the future.
“Forty-plus-years of experience through many economic cycles, both good and not-so-good, have confirmed our view that the industry is experiencing yet another cycle, albeit one that has taken significantly longer to move through,” Labrozzi explains.
“Ours is a long-term view. We are investing for the future. Although there continues to be substantial liquidity in the market, when it comes to private aviation, banks have continued to adjust their business models to focus on relationship-banking through corporate and Ultra-High-Net-Worth clients.
“In some ways, liquidity is more focused in this regard and allows a benefit and credibility to aviation-focused non-bank lenders,” concluded Labrozzi.
Aircraft Finance: Maximizing Your Chances
As we consider the aircraft sales market in 2018, what are some of the ways prospective aircraft buyers could maximize their chances of getting the aircraft finance they need in today’s environment?
Holst suggests robust financial reporting is a must. “Typically, the last three fiscal years plus interim statements will be required. Previewed or audited statements are beneficial, too.”
Furthermore, detailed insight into the nuances, markets and outlooks of the borrowers’ business are likely to be required. “While financial statements are essentially the rear-view mirror, this is the windshield looking forward. Forecasts are helpful,” Holst notes.
“And for used aircraft, you should provide detailed information on aircraft pedigree (ownership, maintenance, damage history), recent inspections, equipment and any engine/maintenance programs,” Holst concludes.
Global Jet Capital’s Labrozzi notes there are a few significant factors at play that could increase the chance of securing financing. “Matching the aircraft (total cost and cost of operation) to the appropriate scale of the business is one of the main factors,” he explains.
“Utilizing appropriate buyer representation is necessary to make sure the aircraft being considered is the right one for your mission and the financial scale of the business or organization.
“And last, but certainly not least, it is critical for a buyer to demonstrate forward-thinking. You will need to get in front of researching and sourcing the financing component of the transaction…
“In other words, don’t wait until the very end of the buying process to begin to address the financing.”
Ultimately, finance is available for the savvy buyer. And with the used aircraft market expected to be replenished during 2018 as the OEMs start delivering exciting new models, used aircraft buyers can position themselves at the front of the queue to purchase a great aircraft relatively cheaply by heeding the advice of the lenders at this early stage of the year.