{"id":128,"date":"2012-03-08T13:12:57","date_gmt":"2012-03-08T11:12:57","guid":{"rendered":"http:\/\/www.aviationadvocacy.aero\/blog\/?p=128"},"modified":"2019-07-23T11:50:55","modified_gmt":"2019-07-23T09:50:55","slug":"aircraft-finance-readily-acceptable-only-to-those-with-no-need","status":"publish","type":"post","link":"https:\/\/www.aviationadvocacy.aero\/blog\/?p=128","title":{"rendered":"Aircraft Finance \u2013 readily acceptable only to those with no need"},"content":{"rendered":"\r\n\r\nThere were 1290 aircraft units sold in the peak year of 2008, and just 644 in 2011. With double economic dip imminent, 2012 is no longer expected to provide the long forecast recovery for business aviation. There is now more than 20% of the global fleet for sale; in normal market conditions this should be closer to 5%. With a further 2.1% fall in prices in January, prices have reached their lowest levels since 1998.\r\n\r\nClearly demand for business jets has fallen off the rapid growth trend seen 2003-2008, but the need for general aviation is only going to increase, even in mature markets where, despite the recession, numbers of HNWI grow and corporate profits have prospered. The fact that sales are still so depressed is at least partly due to the inaccessibility of finance.\r\n\r\nThis is in stark contrast to the pre-recession boom in business aviation, when banks competed to lend even 100% to win new customers. They were betting on an unsustainable increase in asset pricing and paper-thin assurances of their clients\u2019 credit worthiness. Many got their fingers burnt.\r\n\r\nThese lenders were primarily the corporate jet and mega yacht finance divisions of large private banks. That label says it all; jets were and still are seen by traditional lenders as comparable to mega yachts, not just in terms of price bracket but because they are luxury lifestyle assets which should be the preserve of the ultra high net worth customer.\r\n\r\nThis thinking has convinced those banks still in the game to enforce rigorous discipline on the credit worthiness of the borrower. Full recourse lending is the norm, and most banks would prefer to integrate their customers within their private wealth management arm as security. \r\n\r\nUnsurprisingly, this has focused lenders\u2019 attention on the top end customers whose wealth is largely unaffected by the recession. But these buyers it seems would prefer to pay in cash than to jump through credit check hoops. Reportedly 80% of aircraft purchases in the last 12 months have been cash-only.\r\n\r\nThere was a \u2018corporate jet investor\u2019 conference in London this February. The corporate jets which light up bankers\u2019 eyes are those being snapped up by newly minted billionaires in BRIC markets. The business aviation trade, orientated around mainstream use of small jets as genuine business tools, is speaking a different language. For traditional lenders, the jet is a proxy for creditworthiness, not an operating asset.\r\n\r\nFor all that they may still be shell shocked by deals gone sour, and further lending restraints through Basel III, it shouldn\u2019t make sense that lenders are so restrictive on private jet lending. After all, lending to commercial aviation operators is relatively huge and still prospers. Yet this asset-based lending relies on the tiny and unpredictable margins of scheduled operations. \r\n\r\nBy contrast, a proper understanding the business jets are mostly used to facilitate doing business rather than lifestyle would emphasise that most customers with a genuine interest in owning a jet are likely to have a flourishing business with which to support its financing. Unlike their ailing scheduled operator counterparts, corporate jet operations do not fail for lack of load factor and passenger yield. And with less than 20% of the usage, corporate jet depreciations schedules are far kinder to the reseller.\r\n\r\nAll the same, the conference response from bankers emphasised the need for owners to be more aware of the aircraft\u2019s inherent value. Besides the roller-coaster effect of the last 3 years on asking prices (a 2006 Gulfstream V may have increased in price through 2008 but then fallen by 15% or more), lenders are now focused on the wide variation in value retention among different aircraft types and models. Where the purchase is pre-flown, specific pedigree is of paramount importance.\r\n\r\nIn addition, the risk of financing a business jet is complicated by relatively complex operating variables. To begin with, there are over 500 operators (just in Europe) an owner may choose to manage their asset. \r\n\r\nAnd over 50 active aircraft models have their own distinctive maintenance requirements. Beyond credit-worthiness, lenders in this market want to see their borrowers bring the right operator and maintenance provider to the negotiation table.\r\n\r\n The corporate jet investor conference may not have given the impression that traditional lenders have a way out of the corner into which they\u2019re boxed. But it did showcase a new breed of aircraft financier prepared to provide selective limited recourse funding to meet the latent demand for jet purchases. \r\n\r\nThese financiers have greater latitude to lend through sourcing equity rather than debt. This reflects a growing investor sentiment that corporate aviation provides a genuine business tool and can support asset-based lending. Milestone led the way with a $500m equity fund raised in 2010 and now supporting a dozen sale and lease back deals with helicopter operators.\r\n\r\nBut let\u2019s not get our hopes up. Non recourse lending is still very rare, and almost all jet financing is still reserved for large corporate aircraft for UHNWI. Emerging markets are not getting much financing support \u2013 if you except helicopters represent a distinctly better operating risk for lenders.\r\n\r\nIn the interim, official policy is helping, and not just from the mature markets. This year\u2019s Corporate Jet Investor transaction award went to Brazil\u2019s export credit agency, Banco Nacional de Desenvolvimento Econ\u00f4mico e Social (BNDES). They have lent $167m to Flight Options to purchase 20 Phenom 300s. The purpose is to support profitable charter operations. This is as close to airline financing that corporate aviation has got. Let\u2019s hope it\u2019s a sign of things to come.\r\n","protected":false},"excerpt":{"rendered":"<p>There were 1290 aircraft units sold in the peak year of 2008, and just 644 in 2011. With double economic dip imminent, 2012 is no longer expected to provide the long forecast recovery for business aviation. There is now more than 20% of the global fleet for sale; in normal market conditions this should be [&hellip;]<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[1],"tags":[],"class_list":["post-128","post","type-post","status-publish","format-standard","hentry","category-uncategorized"],"_links":{"self":[{"href":"https:\/\/www.aviationadvocacy.aero\/blog\/index.php?rest_route=\/wp\/v2\/posts\/128","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.aviationadvocacy.aero\/blog\/index.php?rest_route=\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.aviationadvocacy.aero\/blog\/index.php?rest_route=\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.aviationadvocacy.aero\/blog\/index.php?rest_route=\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/www.aviationadvocacy.aero\/blog\/index.php?rest_route=%2Fwp%2Fv2%2Fcomments&post=128"}],"version-history":[{"count":2,"href":"https:\/\/www.aviationadvocacy.aero\/blog\/index.php?rest_route=\/wp\/v2\/posts\/128\/revisions"}],"predecessor-version":[{"id":871,"href":"https:\/\/www.aviationadvocacy.aero\/blog\/index.php?rest_route=\/wp\/v2\/posts\/128\/revisions\/871"}],"wp:attachment":[{"href":"https:\/\/www.aviationadvocacy.aero\/blog\/index.php?rest_route=%2Fwp%2Fv2%2Fmedia&parent=128"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.aviationadvocacy.aero\/blog\/index.php?rest_route=%2Fwp%2Fv2%2Fcategories&post=128"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.aviationadvocacy.aero\/blog\/index.php?rest_route=%2Fwp%2Fv2%2Ftags&post=128"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}