What are the considerations that help buyers decide whether aircraft financing is the best way to make a purchase? And what can be done to ensure the rates offered make the best sense? Rohit Jaggi asks a panel of industry experts…
You’ve spent months finding that ‘perfect’ aircraft. It’s the right model, low on hours and cycles, and has an interior that’s more acceptable than garish. Now, how will you pay for it?
Aircraft finance can be a minefield. It’s not so much that any deal could blow up in your face – there are ways to minimize that risk. But choosing a careful path is the key to emerging on the other side intact.
Is Aircraft Financing Your Best Option?
The first question is whether taking out a loan really is the best route to making the aircraft yours. “Those who will find financing the easiest are the people who actually need it the least,” says Gary Crichlow, director, Aviation Finance at London-based finance brokerage and advisory firm Arc & Co.
Even if a person or business has the cash to buy a business aircraft outright, a loan may still make sense, he adds.
“The key benefit of financing is removing money that would otherwise be frozen in a depreciating asset and ploughing it into something that would earn a return (i.e. the client's business, or a property).”
An airplane could lose 60% of its value over five years, Crichlow points out. “Against that backdrop, servicing a loan and deploying the capital into something more useful would appear to be a prudent move.”
Brendan Lodge, UK-based advisory services specialist at Jet Support Services Inc (JSSI) and a veteran aircraft financier, puts it this way: “Rates are quite low at the moment and there’s an argument to, say, use your capital to do what you’re good at doing and use someone else’s to pay for the airplane.”
That holds particularly true in some regions, says Kirsten Bartok Touw, founder and managing partner of US-based financing and leasing specialist AirFinance.
“If they have rapid growth like in China, India and Latin America, entrepreneurs can justify financing at 7-8% because they know that, by reinvesting their cash in the business, they’re going to get much better returns. For them it makes perfect sense.”
There’s also the chance to optimize your balance sheet. “If I were the treasurer of a major corporation, I would always finance my aircraft rather than taking senior unsecured debt in the market,” says Bartok Touw. “Unsecured debt negatively affects your credit rating and is probably at the 6-7% rate. In the US you can probably get long-term financing for your jet at 3%.”
How to Improve the Cost of Your Aircraft Loan
The threshold for when financing becomes too expensive varies around the world, Bartok Touw notes. It also depends on your own credit score. “Five percent is excellent in Latin America,” she says, “while 7% is pretty good in Africa and Southeast Asia.” There are ways to bring down the cost of the loan, however. “Audited financials are a big deal,” she says.
“If you don’t have audited financials it is difficult for any bank to trust the financial information you’re giving them.
“If you want to get better lending rates, invest in getting a professional audit by a well-known firm,” she emphasizes.
Lodge has another tip. “A good broker will knit all your information into a well-written proposal that will ‘sell’ you beautifully to the right lender. They will select the right lender because they know which lender will like the look of you. The brokers really add value here.”
There are many other issues to consider, too, and Crichlow uses a checklist. “When advising a client who's deciding whether financing is going to make sense for them in terms of cost, time and complexity, a few things I think about are 1) the deal size; 2) the aircraft; and 3) the client,” he reveals.
1) The Deal Size
“The amount of paperwork required doesn't vary that much, so bigger deals are always going to be easier to finance because there's a wider pool of lenders,” Crichlow notes. “Generally, loans above $10m attract the most attention. Between $5m and $10m the field begins to thin out; and below $5m it really then becomes about making the deal as simple as possible - there is very little tolerance for complexity when doing smaller deals.”
For smaller deals to be viable, he adds, there needs to be little cross-border flow, the aircraft needs to be uncomplicated, and the buyer’s financial structure needs to be simple and transparent.
“This works particularly well when the client, the aircraft and the financier are all based and registered in the same jurisdiction; when the ultimate beneficial owner's identity and finances are straightforward; and when the financier has a standard suite of contractual documents that the client is happy to sign up to with a minimum of negotiation.”
2) The Aircraft
Second on Crichlow’s checklist is the aircraft, and he notes aircraft less than 10 years old are easier to find finance for.
“There’s absolutely nothing wrong with older aircraft,” he says, “and we regularly deal with financiers who will finance against them. But the overwhelming preference is for younger aircraft.”
3) The Client
The third item on the list is the client. “Line of sight to the ultimate beneficial owner, and transparency around the identities and source of wealth of all obligors is absolutely critical,” says Crichlow.
“Generally, if there are ties to sanctioned countries like Iran, then it is a no-go, but there are financiers willing to finance globally, outside the standard ‘safe’ jurisdictions of North America and Western Europe.
“However, a fairly consistent theme across all financiers is that if a client is not willing to provide the required disclosure, then financing is not going to be a viable option for them.”
Take a Rounded View of Your Financing Proposal
Crichlow adds a note of caution for would-be borrowers. “It's important when evaluating a financing proposal that it's looked at in the ‘round’.
“[In other words] don't just look at the quoted margin. Consider how much equity you are being asked to put in, or how much wealth you are being asked to place under management, and what your balloon payment is at the back-end.”
When to Organize Aircraft Financing
At least financing has become more accessible. “It’s easier now than it was after the credit crisis, when there was limited liquidity,” says Lodge. “I think that’s eased.”
There is, however, another factor that will help to make a deal happen. “It’s important to organise finance before starting your search – or risk losing the airplane you want,” Lodge warns.
Bartok Touw agrees. “It’s always good to have a relationship with a bank in advance and let them know you’re preparing to buy a jet,” she says.
“Bankers love predictable behaviour.” There is no one-size-fits-all answer to understand exactly when financing makes sense. But for the keenest rates and conditions, you should establish a good credit record and line up everything as much in advance as possible. And you should do so before scanning the ‘for sale’ inventory.
Then, even if you don’t need it, you’ll have the best chance of obtaining cheaper finance. And if you’re making your money work harder elsewhere, it’s probably the closest thing there is to flying for free.
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