By James Careless | October 20, 2011 Estimated reading time 9 minutes, 57 seconds.
Although it not as easy to get financing for your aircraft as it once was, there is still money on the market if you meet the more stringent criteria that lenders have established.
Difficult, but improving: that how the experts describe the state of Canadian aircraft financing.
The banks are awash in cash, but afraid to lend money, said aviation law specialist Donald Bunker. A senior partner at Donald H. Bunker and Associates, counsel to Stikeman Elliott, and a professor of law at McGill University institute of air and space law, Bunker has represented both airlines and lenders during his 35-plus-year career. They [banks] only want to lend to safe, bona fide customers with solid credit, said Bunker, and they still prefer to wait until someone else does the lending first.
To make matters worse, the number of firms that specifically lend to Canadian aircraft buyers has dropped substantially. Before the recession hit, we had about eight other competitors on financing deals, said Mike Casey, president of the financial services arm of Flight Solutions & Services (FSS) Alliance, a Mississauga, Ont., based full service provider to the world of corporate aviation. After the recession hit, there were only a few of us left that were still putting together deals. Many U.S. banks and lenders who had offered funding either pulled out of Canada or shut down their aviation leasing/lending programs entirely.
Victims of Recession
The subprime mortgage crisis, which helped to fuel the current recession, was in large part driven by aggressive loan practices by banks and other lending institutions.
Aviation financing was part of this frenzy, said Phil Dziedzic, vice-president of corporate development at Morningstar Partners, an Edmonton, Alta., company that offers fractional jet ownership. Aircraft financing certainly got overheated, he said. During a period when business jets two or three years old were selling for more than new aircraft out of the factory simply due to demand lenders were aggressively financing 90 to 95 per cent of their purchase prices. Unfortunately, some of the companies who got loans didn’t have strong enough credit to justify these deals.
In hindsight, such practices may seem difficult to understand or justify. However, said Dziedzic, You have to remember that the aircraft manufacturers’ order books were backed up two to four years out. This gave lenders confidence that the demand would remain solid, and that the deals they were doing would hold up. But, it is amazing how fast order books can empty out when the economy goes bad and people can’t afford to pay for new aircraft. When this happens, demand drops, and so does the market value of used aircraft that are now mortgaged for more than they are worth.
A Nervous Marketplace
For Canadian aircraft buyers and lessors, the fallout is this: there are fewer firms loaning money either directly or through lease arrangements and those that are lending are extremely nervous. Canadian lenders have long memories, said Bunker. They still remember how badly they got burned by Air Canada, Canadian Airlines and Worldways, not to mention all the smaller aircraft operators who also defaulted on their payments. So, before they lend money today, they want to be sure that the borrower is truly robust enough to
pay his bills.
With fewer firms loaning money and those that are lending being extremely nervous, the result has been several differences in the way lending is structured and loans/leases are considered for approval.
The first difference is the down payment. You are now expected to cover at least 15 per cent of the aircraft purchase price through your down payment, said Dziedzic. You can also expect to be fully on the hook if something goes wrong financially. The old days when borrowers could negotiate a limited recourse clause where the lender would agree only to go after a certain part of the borrower other assets after a default are long gone.
The next consideration is your ability to pay. No longer will lending institutions accept the aircraft as a full loan guarantee; they’ve seen too many used aircraft unexpectedly drop in value. These days, we’re only looking at borrowers’ balance sheets and cash flow, said Casey. It used to be that you could get financing with a so-so balance sheet, but no longer. We now need to see that you will have the ability to service your debt, even if the market declines. If your balance sheet and cash flow don’t show this, then we can’t get you the loan.
Casey warning is echoed by Doug McKenzie, VP of sales at LiftCapital Corp., a commercial lending and leasing company based in Toronto, Ont. Current lending criteria include an ability to service the proposed loan debt, clean credit and a down payment to demonstrate skin in the game’, said McKenzie. Lenders discovered in this last down cycle that even the preferred hard asset’ classes are subject to devaluation when lots of the same equipment gets returned in a short time frame, so equity plays a more important role.
Finally, even if you have a 15 per cent down payment ready and a decent balance sheet/cash flow, you may still get passed over for financing if the bank doesn’t like your choice of aircraft. Lenders don’t want to back older aircraft with higher fuel burn rates when there are newer, more fuel efficient aircraft available to buyers, noted Casey. Again, the reason for this stance is pragmatic: if the lender has to repossess your aircraft, it doesn’t want to end up with an aging gas-guzzler that will be hard to sell.
Deals Are Still Possible
Clearly, it is difficult to get aircraft financing these days, but it is not impossible. Said Casey: In fact, our company, FSS Alliance, has been on a bit of a crusade, telling lenders that there are good opportunities out there to be had. And this is true: there are borrowers who have the capital and cash flow to be good risks, and to provide lenders with a better return than they can make on bonds.
Okay, so who are the actual lenders?
GE Capital has been around for many years and they are still lending, said Dziedzic. Bank of America also does a reasonable amount of volume, although their loans all come out of the States. Other lenders are now only servicing their own bank customers [those with accounts at their banks], rather than loaning against aircraft.
Said Bunker: International Lease Finance Corp. is an option for [those] companies wanting to lease rather than buy outright. Aviation Capital Group is another option. It is owned by the Pacific Life Insurance Co. and is self-funding, so it got deep pockets.
What about the future?
Times are slowly improving, said Dziedzic. But, I don’t see aggressive lending coming back in 2011, or even 2012.
Simply put, the good news is that there still is money available for aircraft funding. The bad news is that it is tougher to get these days, but not impossible. Borrowers in good financial shape and who have the capital for a down payment can obtain aircraft financing, but even they should be prepared for the process to be longer and tougher. Lenders are scrutinizing loan applications a lot more, said Dziedzic, and they are taking a lot more time before giving their approval.
James Careless writes on aerospace issues for Vertical, Rotorhub and Aviation Maintenance magazines. He is a two-time winner of the PBI Media Award for Editorial Excellence.
