A number of Swiss banks are financing business jets in the UAE, while others use wider private banking relationships to close financing from the canton, according to a lawyer active in the region.
Oliver Tebbit, partner at Watson Farley & Williams in Dubai, told AIN, “You’ve got the classic Swiss banks, some of whom have local branches, who are interested in financing business jets in order to support their private client relationships. As an adjunct of their wealth management activities, they will finance aircraft from Switzerland,” he said.
Swiss banks based in Dubai include Julius Baer and UBS. “Credit Suisse are perhaps the most active in the GCC, with UBS also very active,” added Tebbit. Deutsche Bank (DB), Citi and Bank of America Merrill Lynch were also involved from outside the region, through their private banking arms.
Global Jet Capital are active in the region, having also recently acquired GE Capital’s business jet portfolio. Their model does not rely on a private banking context. Until recently, CIT were also offering ‘non-recourse’ financing to business jet owners in the region, but they have now withdrawn from the market.”
With some of the UAE’s biggest businesses family-run, it is not uncommon for buyers to pay up front. “To be honest,” said Tebbit, “most owners in the Middle East pay cash, rather than taking bank finance. However, for some of them, it’s better to use $40 million to invest in their business, building hotels or real estate, than have it tied up in an aircraft that is also a business tool. They are often flying around in it to help grow their business, so it makes sense for them to leverage against a business asset,” he said.
From an economic perspective, there is little difference between a finance lease and loan mortgage, said Tebbit. From a credit risk perspective, it is better to have a lease, with the bank as owner. Islamic Ijarah leases help finance structures become Sharia’a-compliant.
There are banks out there which are keen to lend, often in the context of a wider private banking relationship. Some of these Swiss banks will say: ‘Yes, we’ll lend you the money, but as a condition of us doing so, we want you to put $20 million of assets under management,’” he said.
In some markets, they may even be willing to [work] without an existing collateral banking relationship. Requiring some wider relationship [with very wealthy clients], after the global financial crisis that started eight years ago, gives them more security and visibility on an individual’s financial standing.”
He said banks have preferences and limits in relation to the assets they would finance and the loan-to-value relationships they will tolerate. Typically, it is not possible to finance a 10-year-old aircraft. Some banks want aircraft they finance to be less than five years old, even if a relationship is already in place.
Most banks will finance pre-owned as well as new. I don’t think there’s too much of a stigma, as long as the aircraft has been well maintained,” said Tebbit. “For those banks that have been active in the region for a long time, they know what to expect, and they know their clients well.”
Some clients pay late and banks know they may have to push to get payments made on time. If they know their client well, they might not treat those late payments in the same way they do with other clients.
Obviously, as an ultimate sanction, banks can interrupt travel plans by arresting the aircraft. They do have leverage to get paid if they want to use it. But that will [damage] any broader banking relationship with the client fairly quickly. They have that ultimate security, and that’s the point of us putting mortgages on the aircraft or having a lease in place,” he said.
It would be difficult for the bank to act against an owner with an aircraft in Riyadh, for example, but, at some point, he is going to fly elsewhere. If he’s in financial trouble, he may leave it on the ground, and stop paying maintenance and other fees. Hopefully, at some point, his and the bank’s interests align, and he wants to get rid of the aircraft and realize the equity he has in the asset to support whatever else he has going on.”
Global 7000/8000 Dilemma
Tebbit refused to speculate on whether problems at Bombardier with the Global 7000 and 8000 programs had influenced Qatar Executive’s decision to order 30 Gulfstream aircraft.
The problems arise when you have a loyal Bombardier owner [who started] with a Global XRS, then put in an order for a 6000. He’s got the 6000, with three years of warranties on the aircraft, and the warranties start expiring around when he thought he was going to get a new Global 7000,” he said.
It makes his operational costs go up if the aircraft is no longer under warranty. When all Bombardier can offer is another 6000 to keep his aircraft within the warranty period, instead of the 7000 which was ordered a couple of years ago, that’s not necessarily an easy conversation.”
While warning that there was still overcapacity in the regional market, with the OEMs currently producing more long-range aircraft than it could easily absorb, Tebbit did point to a number of popular OEMs.
Gulfstream have got a fantastic new product that people like. If you are a frustrated Global 6000 owner, waiting for a 7000, then Gulfstream sales guys have an easier pitch to make. Obviously a lot of people [in the region] signed up for the 650 when it came out,” he said.
[Dassault] Falcon are going for bigger market share and their new products are [popular]. The Middle East market favors new products, and Dassault have been able to bring new aircraft to market relatively successfully. Also, their products are popular with pilots. Dassault have a very customer-focused marketing approach.”
Tebbit said there used to be operators in the region who owned aircraft and were chartering them, and trying to earn a profit at it, but that that business model had obviously struggled. “Most operators, the bigger ones, are managing aircraft for other people and trying to charter them to offset operating costs. There are reasons beyond pure business reasons to be a pure owner-operator,” he said.
The operators at the moment have fairly stagnant fleet numbers. For them, growth is probably driven mainly by trying to persuade owners to switch from one operator to another. It’s not an ideal market.”
He said credit analysts at financing institutions find it easy to see financing another Airbus for Emirates by studying the business plan, income stream and P&L. “If [they] then get asked to look at a $70 million Gulfstream, [they] might struggle to understand the asset. There is no direct income stream, aside, perhaps, from some charter revenue. The asset generally doesn’t withstand a normal credit analysis,” he said. “Unless you factor in the wealth of the individual using the aircraft, and perhaps the personal guarantee which they have provided, then financing business jets doesn’t add up.”
Tebbit doubts that Dubai can become a bizjet finance hub in the near future. “Realistically, business-jet finance is such a niche product that the global financial centers will always be the market leaders. There just isn’t the volume of finance required to support regional hubs,” he said. Since 2009, he added, there has been a general retrenchment in the corporate-jet finance market. “It’s sorted out the fair-weather financiers from the core market players.”
It’s significant to the jet finance segment that the line between business and family in the Middle East is much less distinct than in other regions, with most large businesses run as family concerns. “A lot of business travel is also leisure travel. An owner might fly to Paris, then to London; he’ll be taking calls all the time and having dinner with people he has business relationships with, as well as spending time visiting family. It’s not like the U.S., where I think business-related travel is likely to be more distinct from leisure travel,” he said.
I think that in this region, it’s more widely accepted that a sector of society will choose to benefit from the convenience, comfort and privacy of private air travel. To a degree, I think there is an expectation that these people will choose to travel in private aircraft.”