When and How Should You Refinance a BizJet?

Each aircraft loan agreement can vary in terms and potential penalties, meaning there’s no blanket rule of thumb on if, or when, to explore loan renegotiation. Gerrard Cowan shares some industry advice, however...

The nature of the client-lender relationship is important, according to Brian Foley, an aviation analyst; a borrower with a long-time relationship with their lender covering multiple high-value aircraft will likely be preferred over the owner of an older aircraft with a small loan amount.

Still, it could be worth having the conversation in any scenario; for example, modifying or rewriting a loan to include the remaining principal plus any aircraft modifications or upgrades needed would be a win-win for both parties. “It’s still worth a conversation with your current aircraft finance lender to see if there’s some flexibility in revisiting the terms,” Foley adds.

Common Reasons for Refinancing

While it isn’t common, refinancing an already-leveraged aircraft does happen, says Keith Hayes, Senior Vice President & National Sales Manager for PNC Aviation Finance.

This could occur for a number of reasons, such as the current loan coming to maturity, or the owner wishing to modify the cash flow and/or payments on the existing loan.

An owner might also want to refinance due to fluctuations in interest rates, though Hayes says a number of factors should be taken into account, such as pre-payment premiums on the current loan, and the cost of entering into a new loan, including having the aircraft appraised and undertaking FAA lien searches.

What Will Lenders Consider Before Refinancing a Loan?

In certain circumstances it’s possible to restructure a loan with an existing lender. A number of factors come into play, Hayes explains, including:

• The structure of the loan – whether it’s a fixed- or floating-rate;
• Whether the loan is an asset-based loan secured solely by the aircraft, or potentially with limited recourse to an individual or corporation; and
• Whether it is a traditional debt setup or an operating lease.

Lenders will assess various factors when considering a refinance request, according to Steve Day, Head of Sales – Americas, for Global Jet Capital. These include:

• The length, performance and importance of the customer relationship;
• Changes in the customer’s credit profile;
• The current principal balance of the loan outstanding; and
• The current value of the underlying aircraft.

Refinancing With a Different Lender

Borrowers could also look to refinance via another lender, Day notes; most commonly to obtain a lower effective borrowing rate.

This is “especially common in a decreasing interest rate environment, since lower rates can be locked in for the new term of the loan”, though he adds that there could be a number of other reasons, including the potential to convert from a floating to a fixed rate.

Aircraft owners/buyers might also look to other products beyond a traditional loan, however, such as an operating lease or a sale leaseback. Leasing could provide benefits like minimizing the capital employed in a non-core asset.

However, fixed prepayment penalty fees are very common in term-loan contracts, Day notes, “and will likely come into consideration, depending on the remaining term of the existing loan and magnitude of the contractual fees”.

Day also highlights the possibility of a ‘Make Whole’ provision, a variable fee calculation that provides pre-payment protection to the lender in a decreasing market rates environment when the borrower pays off debt early. These are designed to compensate the lender for the need to reinvest in a lower-rate scenario.

When Should you Refinance an Aircraft Loan?

Most business jet finance packages have limited terms, usually about five years, so there may be limited benefits to restructuring the loan in order to tap lower interest rates, said Adam Meredith, president of AOPA Finance.

“It’s got to be a significant change in the interest rate environment to have it make much sense, and if there’s a prepayment penalty in place it would almost be impossible.’

Still, a range of lenders could have an interest in restructuring a loan to tap a lower interest rate, or to potentially secure a loan at today’s low rates for a longer period of time. This is likelier to succeed if the lender knows them well, knows their payment history and can therefore conclude there is a low risk of missed payments.

From the lender’s perspective, they could restructure the loan over a longer time period, which could be to their benefit.

For these reasons, Meredith says lenders should always first approach their existing lender, as “that’s always your best bet”. In general, AOPA Finance finds that borrowers with a good history can usually recast a loan when needed.

“Most times when somebody proactively comes to us looking for something different, we’re able to find something that’s better for both parties,” he says.

A Specialized Market

Aircraft acquisition and the corresponding financing is a specialized market, and “all buyers should align themselves with attorneys and financial institutions that specialize in this market”, Hayes says. Acquiring such expert advice is the first step a prospective buyer should take, he said.

“With the proper team engaged, there is far less of a chance the prospective owner will need to make modifications to the agreement during the ownership life of their aircraft,” Hayes added.

“Plus, if an issue does arise, both the attorney and the financial institution will most likely have experienced a similar problem in the past and know how to efficiently address it.”

Do your Homework

Customers always need to consider a variety of factors to ensure the benefits of refinancing outweigh the costs and potential risks, says Day.

They should assess the benefits of financing their asset outside of their existing bank relationships, which can preserve access to liquidity “for business growth opportunities, as well as providing protection during times of market volatility, as opposed to tying up borrowing capacity in a non-core asset”.

This can also offer more flexibility in some circumstances, as pricing and structure aren’t tied tightly to ongoing relationship requirements.

“Consider all your options with regard to products and structures – it may be an opportune time to find a more creative structure that brings more value and reduces unwanted risk and uncertainty, in addition to locking in today’s lower rates,” Day concludes.

More information from

AOPA Finance: https://finance.aopa.org/

Global Jet Capital: www.globaljetcapital.com/

PNC Aviation Finance: www.pnc.com