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We all know how tough these days are for most business-turbine sales and light general aviation aircraft. Times are only slightly better for turboprops and large cabin jets. Tough times for sales tend to go hand-in-hand with tough times for aircraft financing. When so many of the conditions and expectations of lending are so different than a few years ago- the sum impact of these factors actually seem to work against growth in aircraft sales in most corners.

Dave Higdon   |   1st November 2011
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Dave Higdon Dave Higdon

Dave Higdon writes about aviation from his base in Wichita Kansas. During three decades in...
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We all know how tough these days are for most business-turbine sales and light general aviation aircraft. Times are only slightly better for turboprops and large cabin jets. Tough times for sales tend to go hand-in-hand with tough times for aircraft financing.

When so many of the conditions and expectations of lending are so different than a few years ago- the sum impact of these factors actually seem to work against growth in aircraft sales in most corners. It isn’t that lenders have no capital to lend- or that no borrowers exist: buyers able and willing to meet today’s lending requirements are simply fewer than the numbers of buyers available when one could still obtain 90 percent financing. Today lenders want higher up-front investment from buyers- limiting what they’ll finance without even higher down-payments.

Then there’s the valuation equation: Between buyers and sellers- disagreements often exist between the believed value from the aircraft owner and the appraised valuation from a professional (the value at the start of the loan- not the end of the valuation equation).

There follows the parallel questions of aircraft value at the end of the loan term; the stability of today’s valuation; and the likelihood of a valuation taking a big hit before retiring the note. Such is today’s still-unsettled market for pre-owned aircraft.

The contrast is stark between now and only four years ago when business boomed- when lending assets were plentiful- when buyers were eager for new airplanes and planemakers produced ever-larger numbers of new business-turbine aircraft. Loan terms and condition required far less from the buyer but - as it turned out - lenders’ exposure levels were higher. The changed environment came about in the lending community’s need to find a stable- sane and financially less-risky approach to keep the doors open. To get an inside-the-lending- world view we sought out the new president of the National Aircraft Finance Association- Robert Howe.

With its 40th annual meeting recently past- NAFA shows a gain in membership from 2010- with more than 175 total members – among them more than 60 lender members all active in aviation finance- plus another 115 associate members.

The association continues to focus on its core mission- working hard to help members stay up-to-date and well-informed on regulatory and statutory requirements- as well as financial rules and regulations.

The economy remains a puzzlement with the stock market generally up- slow GDP growth and less than robust jobs creation. Sales of new business aircraft remain depressed- even as many businesses show solid- even record profits that have generated some of the largest cash reserves seen in years. Generally- analysts expect any return to pre-recession aircraft sales levels to occur over the long-term (certainly well into this decade).

It’s into this mix rich in challenges for the aircraft-finance community that a new NAFA president took the gavel earlier this year. Robert Howe took over as president of NAFA earlier this year- taking the hand-off from aircraft-finance veteran Mary Schwartz. Howe started his aviation-finance career in 1988 at Dorr Aviation Finance following a short stint with Keystone Financial Partners.

When the company made the decision to shift the primary focus from aircraft sales to financing- Howe helped Dorr develop and initiate a growth plan- transforming the small regional lender to a nationwide company with offices in Massachusetts- Texas- Minnesota and California.

In 2010- Howe and Dorr founder and partner Mel Dorr helped launch Dorr Aviation Recovery Services- a full-service repossession company specializing in general aviation aircraft.

Howe also knows the operating side of general aviation as a long-time private pilot. With our 10 questions in hand- World Aircraft Sales Magazine approached Howe in his capacity as President of NAFA.

WAS: Can you give us something of an overview of how well aviation-finance companies are fairing in today’s climate?

Howe: Overall- it is more difficult for borrowers to find a bank or finance company to fund their purchase- overhaul or upgrade. Several banks and finance companies have left the aircraft lending marketplace. That is not to say that there are not players in the market. The standards and restrictions of the remaining lenders are much higher and more numerous. With fewer aircraft changing hands- our portfolio of aircraft loans have remained relatively stable as mortgages stay on the books longer.

With fewer transactions driving pricing- the values have come down which in many cases mitigates the opportunities for borrowers to refinance their aircraft at what are historically low rates. Borrowers who are in many cases “upside down” (owing more than the current value) are unable to refinance as they do not have the liquidity necessary to pay the loan down to an acceptable ratio.

We are also finding that with less competition in the marketplace- we are able to maximize transactional spreads and our profitability. In short- business is slow but steady.

WAS: An executive with a small aircraft finance company recently told a reporter that one of today’s biggest competitors in aircraft financing is the flush bank accounts of companies and high-net-worth individuals capable of paying cash on a new or pre-owned business turbine aircraft. Is that an accurate observation?

Howe: It is an accurate statement and we are finding the same situation. Recently- I had an aircraft dealer tell me that a buyer was concerned with “the possibility of inflation” and felt that this particular King Air was about as “cheap” as he had ever seen relatively speaking. He felt that the market could not get any lower and this particular airplane was a “safer investment” than cash.

There certainly is a lot of liquidity being held on to by companies and individuals who are concerned with the near future. Many share the apprehension of acquiring new debt in the current economic climate.

WAS: From the perspective of NAFA members how much has changed in the level of loan-making since 2008?

Howe: I hear many different numbers floating around. Understandably- among competitors when sharing information of critical specific details of our businesses- the numbers are necessarily vague. It is safe to say that many of the lenders are off as much as 50% from their production highs of 2008.

WAS: Is there one thing that most-often keeps a note from being written for a new or pre-owned aircraft?

Howe: Yes- the credit criterion seems to be a moving target with many of the underwriters. As their portfolios recover or adjust from the downturn- credit managers are constantly tweaking their credit requirements. This can create problems with what would otherwise be considered highly qualified clients who today may not hold enough equity- have business concentration issues or demonstrate a whole myriad of other issues that two years ago would not have played a part in the approval process.

WAS: Aircraft sales people often comment to me that their biggest competitor for a sale is often the airplane the operator already owns. Similarly- several of the aircraft-finance executives I’ve visited recently noted that refinancing to upgrade the existing jet has provided a steady level of business in the past 18-24 months.

How big an impact on aircraft financing is an owners’ decisions to upgrade an existing airplane?

Howe: The large inventories are no doubt creating buying opportunities that many cash-flush companies are taking advantage of. However- it can be very cost-effective to improve an existing aircraft with upgraded engines and avionics. We are finding that this has been- and continues to be a good source of business for us.

WAS: Aircraft sales executives have noted for about 18 months that a split exists between the sales level of large-cabin and ultra-long-range jets (which have held well- so far) and for medium- and light-category business-turbine aircraft. Is there as much variation in the finance community’s ability to finance among the different cabin-size sectors- from Entry-Level to Ultra-Long-Range?

Howe: I do not believe that there is a variation in the finance community’s ability to finance among the different cabin size sectors- per say. I think that finance companies focus on different credit profiles and transaction-size based upon internal policies- banking regulations and needs.

Could a small regional bank finance the purchase of an Embraer Legacy at $29 million? Quite possibly- but that may not be the niche that that lender feels it possesses its expertise- and it may not fit into its risk profile. Many lenders prefer to focus a specific credit profile- i.e. high-net-worth individuals- public companies- private companies- domestic/foreign borrowers and/or some combination of these. My company- for example- specializes in financing of domestic use light category Jets – Turbines and Pistons.

WAS: Recently aviation organizations such as NBAA and AOPA have elevated their recognition of the importance of the so-called “light business aircraft” operators – predominantly the business owner/pilot flying piston singles and twins. Are there particular challenges for financing aircraft in this segment for such operators?

Howe: Generally speaking the challenges are the same: Finding a lender that understands the collateral and understands your finances is the trick. Many of these operators are small business owners/entrepreneurs and their financials can be very complex.

Many of the lenders in this market are small local and regional banks that may lack the experience in working with these complexities and the unique nature of aircraft transactions in general.

WAS: Have the changes in terms worked for- or against the lender community and aircraft sales in general?

Howe: I believe that the more-restrictive terms have had a detrimental effect on the aircraft dealers. In the past the ability to make small down-payments made buying an aircraft very attractive. If this ability was available today it would be an even greater driver of transaction activity given the lower price-points.

All-in-all- however- it is probably a good idea to have borrowers with a little more “skin in the game” and this helps insulate the underwriters from fluctuations in pricing.

WAS: Can you describe for us in general terms what type of aircraft are the least-attractive for finance providers?

Howe: Every lender has their own “sweet spot” of aircraft they like to see- but generally speaking no one wants to write paper on “old” airplanes. The question is: “what is old?”

Most lenders for the heavy equipment limit the age to 10-20 years- whereas a piston single as old as 40 years can be easily financed. A simple rule-of-thumb is that if the aircraft you are looking at is in high-demand- the chances are that it is finance-able.

WAS: Where do you expect this market to be five years from now?

Howe: In five years time- I would expect that the US and world economy will have recovered- and therefore the business aircraft market will have as well. The only obstacles that I see to this are the multitude of restrictive policies that the federal government seems so adept at placing in front of business owners and Business Aviation users.

More information from www.nafa.aero

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