Barely two years ago prospective business aircraft buyers in Europe were among the most sought-after clients for a banking industry attracted both to the high rates of growth in this market sector and to the exceptional strength of asset values, driven largely by soaring demand and long delivery backlogs. But then as the credit crunch crossed the Atlantic in 2008, the jet set found itself seemingly no more able to raise loans than the lowest of the low in America’s bankrupt home mortgage market.
For much of last year, the lack of available credit was identified as one of the biggest impediments to a recovery in demand for business aircraft, along with the perilous collapse in aircraft values. Overwhelmed by wider financial worries, many lenders simply deserted the market, but others such as Barclays (Booth No. 1452) and Banc of America Leasing (Booth No. 1452) did not and are playing their part in the recovery process.
“I believe, in terms of a new business aviation cycle, we are still waiting for the dust to settle, but are probably at or near the bottom of the cycle,” said Paul Fowkes, head of corporate aircraft finance at Barclays Capital. “However, we need to analyze the next two quarters to be sure by carefully looking at certain parameters and indicators such as GDP, corporate profitability, charter hours flown, etc. One positive is that charter hours within Europe are now beginning to recover.”
According to Fowkes, it is not the case that lending for aircraft transactions completely dried up, but it is certainly the case that the money has been available only on tighter terms. He told AIN that banks have been forced to be more careful about how they lend to protect both themselves and borrowers from falling or unstable aircraft values. “There are no winners if the client has to refinance or realize other assets to clear any indebtedness,” he said.
Barclays’s more prudent approach to lending has been to offer shorter-term facilities or ask for additional security against the aircraft. The UK-based bank also has more closely scrutinized clients’ finances.
“In some cases we have also increased our pricing to reflect the deteriorating credit quality of the counterparties and by having a strong guarantor at the back of the transaction,” explained Fowkes. “If we see that asset values are reducing, we may also ask for an acceleration of payments to rectify the situation.” Nonetheless, even over the past 12 months, Barclays has provided about $100 million in financing for jets.
There is now extremely good value to be had in both the new and pre-owned jet markets. “Values are probably at the bottom or near it, but we need to assess the current market values over the next two quarters,” Fowkes commented. “Older and smaller jets have been hit the hardest in terms of falling values; therefore; we prefer to target new and pre-owned midsize and upward.”
Cash Buying Increases
At Banc of America Leasing, Alex Badran, the newly appointed managing director and head of sales for its International Corporate Aircraft Finance division, acknowledged that the last couple of years have seen both a contraction in available funds and an increase in repossessions. Increasingly, he told AIN, buyers have been using cash to buy aircraft, with up to three quarters of deals being completed this way during the credit crunch.
“The drop in values for aircraft has meant that some borrowers and lessees were under water,” said Badran. “But the Banc of America portfolio is in good shape, with a very low impact from the recession because we have structured deals in the right way.”
Badran believes that the market is now bottoming out with aircraft values fairly stable. “In the last few months there has been improvement [in prices] for larger cabin aircraft, and 2011 and 2012 will show a return to a growth cycle,” he predicted.
The 2008 acquisition of Merrill Lynch by Banc of America Leasing’s parent, Bank of America, has greatly expanded its prospective customer base. Badran is now expanding his finance team to capitalize on new market opportunities in Europe and the Asia Pacific region.
In some respects, more restrained access to capital may actually be better for longer-term market stability because Badran believes that the easy availability of liquidity may have contributed to the inflated premium prices that aircraft buyers were paying before the downturn to secure delivery slots.
So, after a period in which aircraft values were in freefall, are banks now being more careful about how they lend? “It depends on the aircraft and the customer,” said Badran. “But it is fair to say that those [lenders] who are still financing aircraft are being more conservative. Loan-to-value covenants are now more the norm than the exception in deals.”
In addition to traditional debt-based products, Banc of America Leasing can take some of the residual risk over aircraft values as part of transactions. It also offers a variety of ways for customers to keep aircraft off their balance sheets.
“There is a need to provide finance in parts of the world where it doesn’t exist and more alternatives to [aircraft] ownership that will be more attractive given all the volatility,” Badran concluded.