““CEOs go to their vacation homes just after companies report favorable news, and CEOs return to headquarters right before subsequent news is released. More good news is released when CEOs are back at work, and CEOs appear not to leave headquarters at all if a firm has adverse news to disclose. When CEOs are away from the office, stock prices behave quietly with sharply lower volatility. Volatility increases immediately when CEOs return to work.” —David Yermack, a New York University finance professor, whose recently released study shows a correlation between when CEOs take their private jets on vacation and movements in their companies’ stock price ”
Let's Make a Deal
Business jet finance has settled into a predictable—and more sustainable—groove after the mad scramble of 2007 and the deafening silence of 2009. Here are eight realities of today’s market that you need to understand:
1. Banks still want to finance business jets. Though they aren’t giving away the store anymore, loans for business jet acquisitions remain available and financial institutions want to provide them. As an example, Goldman Sachs recently entered the market and, like Chase and Citibank, is seeking to finance jet acquisitions for its banking clients. In part, this demonstrates the durability of some core attractions of business jet finance: the ability to make a significant loan (Goldman is generally looking to loan $10 million and up) secured by good collateral with the credit backing of high- and ultra-high-net-worth borrowers.
2. The competition is cash. In this economy, an abundance of cash is waiting to be put to work. I recently asked an executive at a company buying a jet if it intended to finance the purchase, and the reply went something like this: “With $900 million of cash on our balance sheet, why would we borrow money?” Indeed, industry pundits estimate that cash accounted for approximately 65 percent of business jet buying power this past year. Of the remaining 35 percent, debt finance accounted for about two-thirds and leases for the balance.
3. Interest rates remain low. Rates have inched up and down lately (depending partly on whether the federal government is shut down), but on the whole, business jet finance is cheap, and today’s low rates provide an incentive for aircraft buyers to lock in the cheap money while they can. Rates in the neighborhood of 2 to 3 percent for floating-rate deals (and a little more for fixed-rate deals) are pretty attractive, and no one expects them to trend downward. With the possibility of rates going up, aircraft owners are also reportedly showing more interest in refinancing existing loans.
4. Down payments are the norm. Is 100 percent financing available? Yes, but much less so than in 2007. Depending on the financial institution, as an opening bid, jet buyers should expect to be asked to put down 10 to 20 percent. Years ago that would have seemed like a great burden, but many borrowers today have so much cash they aren’t fazed by down payments. There are signs that banks are loosening up. Greg Marks at First National Capital Corporation reports, for example, that his institution is showing greater flexibility in terms of down payments required and the length of the amortization period.
5. Shorter terms may yield lower rates. Regulatory changes [see “The Changing Face of Aircraft Lending,” February/March 2013] will require banks to keep more capital on hand for longer-term loans (more than three years) rather than shorter-term ones. That provides an incentive for them to charge more for a seven-year note than for a three-year note, since the former ties up more capital.
6. Lenders are picky about collateral. As manufacturers deliver new aircraft, the old ones don’t just disappear. The sabre-tooth cat may be extinct, but the 1969 Sabreliner 60 remains available for purchase, as do such 1960s-vintage jets as the Gulfstream GII, Falcon 20-5 and Lear 23. Don’t expect your bank to help you acquire them, though. Banks typically want to finance relatively new aircraft, especially jets that are 10 years old or newer.
Ironically, it’s not because the value of a GII could plummet tomorrow; on the contrary, relatively new aircraft like a G550 can shed $1 million or more in value each year, while values of GIIs from the late 1960s are holding steady. But the G550 is popular, whereas the average time to sell a GII during the last four years has been more than 400 days. No bank wants to have to foreclose on an aircraft like that, let alone lease it to a customer.
In fact, many lenders (private banks, for example) won’t do leases at all, and those that do generally want the aircraft to be no older than 20 or 25 years at the expiration of the lease. That doesn’t mean you’re out of luck if you want to finance an older aircraft; it means you have to find the institutions that are willing to take on those projects.
7. Lenders are picky about customers. Changes in banking regulations will only further underscore the importance of the credit quality of borrowers. Banks will need to keep greater credit reserves to make aircraft loans to lesser credits, rendering those financings more expensive. The best aircraft deals will go to investment-grade credits with a longstanding relationship to the lender, assuming the lender doesn’t have too much credit exposure to the borrower already. That’s one reason it usually makes sense to start your search for aircraft finance by contacting your existing bank. Indeed, some banks are basically open for aircraft business only for their existing clients. Conversely, some financial institutions actively seek to syndicate their aircraft loans by selling pieces of them to other institutions.
8. Financing will take time to close. That banks are pickier about collateral and customers goes hand-in-hand with another feature of contemporary aircraft finance: it can take a while to close the deal. Aircraft purchase contracts rarely have a buyer-financing contingency, so if the financing doesn’t come through in time, the buyer can find himself in an embarrassing situation.
In a recent transaction, after months of document negotiations, the bank called the customer shortly before the aircraft was ready for delivery to explain that its outside counsel working on the deal had exceeded the cap on attorneys’ fees in the commitment letter by 300 percent. The bank refused to stand behind the cap, and (notwithstanding the bank’s contractual commitment) the customer had to pay most of the overage just to close the purchase. The outcome might have been different if the buyer had shopped for financing after acquiring the aircraft, when a lender can no longer say “you need my money to close.”
Jeff Wieand is a senior vice president at Boston JetSearch and a member of the National Business Aviation Association’s Tax Committee.