Financing Tips for Today’s Used Jet Market (Part 2)

Having shared advice on how to swiftly obtain financing in today’s overheated aircraft sales market, Chris Kjelgaard asks 1st Source Bank and PNC Aviation Finance for insights into today’s bank requirements and restrictions, and also enhancing your options in today’s financing market.

Chris Kjelgaard  |  09th March 2022
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    Chris Kjelgaard
    Chris Kjelgaard

    Chris Kjelgaard has been an aviation journalist for more than 40 years and has written on multiple topics...

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    Overwing photo of a private jet engine on a sunny day

    Every buyer’s chosen financial institution will quickly make the buyer aware of the various restrictions and requirements it has for the particular loan or lease in questionThe buyer should realize up-front that every bank treats every business aircraft financing transaction as a unique, one-off deal...

    “The amortization [of any loan the bank provides] is dependent on that particular aircraft,” says Hayes.

    When deciding the amount of financing it will offer the buyer, the amount of time over which it wants the loan to be amortized, and the proportion of the overall purchase price it will provide to the buyer in debt financing, the bank considers various important factors. Some are specific to the aircraft and some are reflective of the market conditions pertaining at the time the buyer purchases the aircraft, according to Hayes.

    In reaching its financing decision PNC Bank, for instance, always takes into account the aircraft’s age; its cabin size; its previous operating, damage, and corrosion history; whether the aircraft is currently in production; where and for how many hours annually the buyer plans to operate the aircraft; and the particular use(s) the buyer is planning for the aircraft. 

    However, when considering requests to finance business jets, all financial institutions today have one common, virtually non-negotiable requirement to which their customers must agree for the bank to advance any funds. This is that the aircraft’s engines must be covered by an hourly maintenance plan.

    Some experienced aviation finance lenders — 1st Source Bank is one such — are willing to finance aircraft which have a deferred-maintenance plan when the buyer has budgeted enough in the way of reserves to pay for the engines’ next major maintenance event, according to Lee.

    Experienced lenders are also usually willing to finance aircraft which require the purchaser to pay a buy-in amount in order to activate for the new owner the engine-maintenance plan in place under the aircraft’s previous owner.

    From the bank’s viewpoint, the required engine-maintenance plan needn’t be a fully comprehensive one, notes Hayes. The aircraft “can be on a light engine-maintenance program — we’re OK with a partial program.”

    But in almost every financing PNC Bank agrees, the purchaser of the aircraft must agree to have an engine plan in place. “It is all-but a requirement: The vast majority of planes we finance are either [already] on [a plan], or are put on it at closing.”

    Current Market Conditions

    Every financial institution has its own unique parameters in judging whether or not it will agree to finance a given aircraft.

    For instance, while PNC Bank is generally unwilling to finance business jets which are to be used purely for Part 135 charter operations, it is okay with financing aircraft for owners who intend to charter the aircraft out occasionally to redeem some operating costs.

    Likewise, it may be more difficult to finance aircraft which are to be configured and used for special missions, though 1st Source Bank says it is comfortable in financing both of those categories of aircraft.

    Ultimately, today’s market is overheated, and at some point it will experience some market correction, says Hayes, who notes that at present used-aircraft prices are inflated anywhere from 10% to 25%, depending on the aircraft.

    Many banks are adopting a conservative approach to their financing offers, in terms of the percentage of the overall purchase price they are prepared to advance as a loan, and the period over which they will make the loan available. In PNC Bank’s case, “We work with clients to ensure that they have some type of equity in the aircraft on Day One,” Hayes says.

    Additionally, while a client might seek a very long-term loan, and a loan advance amount that represents a very high percentage of the total aircraft sale price, the fact that today’s high prices will be adjusted downward at some point means “the plane might not have significant-enough [resale] value to retire the loan when the client sells it,” he adds.

    As has happened in the past, “inflated values will come back down, and if you don’t amortize it in anticipation of the market correcting, you could be in a position where the value of the airplane would be less than the amount owed on the loan,” says Hayes.

    On average, most business jets are resold or re-financed every 42-to-54 months, so “we do our best to structure each transaction so the debt can be retired in four years.”

    Experienced aviation finance lenders, such as PNC Aviation Finance, will adjust the amount they will advance for an aircraft purchase based on factors such as how the buyer plans to use the aircraft, and for how many hours annually the buyer plans to fly it.

    Banks will advise each would-be buyer on how a pre-approved financing can best be structured both to meet the bank’s required amortization profile, and also to provide the buyer with as much flexibility as possible in terms of aircraft choice, to maximize the pool of used aircraft potentially available.

    For instance, says Lee, 1st Source Bank might advise a buyer to put more equity into the purchase if the customer chooses an aircraft with a larger cabin than they were originally considering.

    Enhancing Your Options

    Customers shouldn’t view the restrictions — such as a hard aircraft age limit and a hard annual usage limit — negatively.

    These are restrictions many banks impose on the aircraft they are willing to finance, according to Lee, and they can actually benefit customers by effectively limiting the pool of aircraft from which they can select, making their choice easier.

    But if a would-be buyer wants to maximize his or her chances of obtaining bank financing for the purchase, it is important for the buyer to be “realistic with the expectations of the collateral”, says Lee.

    Buyers shouldn’t be so blinded by a particular aircraft’s charms that they ignore (for instance) its age, operating history, damage history and production status.

    Wherever possible, buyers should remain flexible in terms of the aircraft size and type they are willing to consider, and in today’s over-priced pre-owned aircraft market they should even leave themselves open to considering buying a new aircraft if they can afford it, says Lee.

    In a market where off-market deals are common and customers must move fast to close purchases, he says would-be buyers should also be willing to “get creative and work to find an alternative lift solution”, such as fractional ownership, a jet card, or an owner partnership, to give them more time to find the right aircraft to buy, at the right price, with suitable financing in place.

    Read Financing Tips for Today’s Used Jet Market (Part 1)

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