Although the Gulf region has a reputation for cash buyers, some owners are taking out aircraft loans in order to conserve cash for other purposes, while there have been more disposals of aircraft of late than in the recent past. According to Oliver Tebbit, a partner at law firm Watson, Farley and Williams, Dubai, the lender landscape in the region, and to a certain extent globally, has been compressed by the current market conditions.
“There has been a trend towards diversification of sources of finance," said Tebbit. "Pre-2008-2009, there was a lot of enthusiasm for lending to the market. All the private banks were there, but a lot of other banks were also there. That changed quite quickly when things went south. You were left with the core private banks. Now what I am seeing is that the core private banks have always been there, and they did very well on market share when everybody else pulled out.
“Although the climate has changed over time, there are some banks for whom this asset class is still not something that they are interested in supporting," he continued. "Obviously, the private banks are still very enthusiastic given synergies with their private banking activities. The gap that is left is being filled by other non-bank sources of finance; Global Jet Capital is an obvious example. Private equity and venture capital and so on are playing more of a role in filling the landscape for finance of private jets.”
Tebbit said that he is not sure how that trend will play out in the Gulf region. “Certainly, given that some of the financiers can arrange deals with less heavy KYC [know your customer] due diligence or less financial information requirements than a fully-fledged, heavily regulated bank, there should be some in the market for whom the potential to obtain finance is a bit more appealing."
The Gulf Cooperation Council still displays a good deal of potential, he believes. “There are plenty of opportunities. Traditional family businesses are becoming more sophisticated and corporatized in the way they deploy capital. As business practices evolve and people become more aware of the options they have in this region, I think they are happier about leveraging these sorts of assets. Occasional deals are being done by other [non-private] banks, some of which are based in the region.”
Swiss-based private-banking relationships still predominate, he explained. “It’s about understanding how the debt is going to be serviced, including business activities and personal use as well. Usually, If you are looking to the wider banking relationship and not just the asset as security for a debt, the broader relationship provides better visibility to the financier as to the financial condition of the credit,” he said.
“I am not saying you can’t have standalone deals in this sector. Certainly, some financiers are looking more closely at the assets and the residual values, and the loan-to-value ratio, than the value of the individual who is using that asset. Probably there is a bit of a price to pay in terms of the margin if you are relying on pure asset security, depending on the level of financial information an individual is able or willing to provide.”
Assessing the percentage of cash buyers versus transactions conducted through financing is a more difficult exercise than it might appear, said Stephen Chance, counsel at Clifford Chance, Abu Dhabi.
“It’s difficult to gain a picture of the overall figure. A purchaser may have the ability to purchase a jet with cash but are there other modes of finance available that will allow them to keep equity free or structure the transaction in ways that will allow the aircraft to be owned or registered in jurisdictions that are beneficial from a tax or registration perspective. We certainly see clients who would have the means to buy with cash but are electing to go down the finance route,” he told AIN.
The space the law firm operates in is somewhat bespoke. “Who you are carrying and the capacity consideration are always going to be determining factors for the choice of aircraft," he said, while adding that connectivity is "increasingly important" to business aviation users.
"The impression we get from the market is that there is a trend toward people looking to dispose of aircraft, more so than previously. In the short term, the situation may not be quite what the OEMs were forecasting, but the in the long term, they are positive.”
Tebbit said that for ultra-high-net-worth individuals (UHNWIs), the business jet is an increasingly important part of their lifestyle. “They need those aircraft and they are committed to operating and using them. Obviously, in the corporate jet space, it does become a different analysis [compared to the due diligence performed on commercial aircraft financing] because the market is much smaller and the aircraft can be highly customized. I think that’s why a lot of commercial lenders are not overly active in this space.”
Mike Davies, of UK-based Solva Air Capital, takes a more upbeat view of enthusiasm in the Middle East. “There is tremendous appetite for business aircraft," he said. "We have recently seen a number of aircraft available for sale in private transactions. There is financing for aircraft coming out of the region. In terms of finance going in, we do see opportunities, primarily on the smaller-type jets.
“On the larger BBJ and bigger types, we don’t see those aircraft obtaining financing in the market; they are often done either as discreet financings or as cash transactions. We do see movement in the market, in terms of private jets for family offices, in the $15 to 30 million range. There are opportunities in the middle market in the region. We are currently looking at a number of deals on Phenom 300s.”
Formerly known as Cello Air Finance, Solva is looking to capitalize on its market knowledge to stay ahead of the competition. “We do see opportunities," said Davies. "We see them more in the sense that a lot of people are not as proactive in the region as [we are]. We are happy to look at the Middle East. 2018 has been a pretty positive year. Some of the transactions we have seen have been sale-and-leasebacks, which are rewarding to us. It is paying dividends in getting our message out.
“Although the uptake in financings in the Middle East has been few and far between," he concluded, "this year has seen double the business that we have seen in the previous year.”