Aircraft Finance 2009
By Jeff Wieand - February 1, 2009
The worldwide financial malaise that arose out of the subprime mortgage mess has finally infected business aviation. The industry initially appeared immune to the tightening of the credit markets, which seemed to encourage a “flight to quality” by lenders, straight to the nearest general aviation airport. Lenders should be delighted to finance the purchase of business jets, as the aircraft make excellent collateral and the buyers tend to have excellent credit.
And for a while, they were. But trends that we saw a few years ago have been reversed. Instead of “rate compression,” caused by lenders fiercely competing for business jet finance business, we have rising interest rates and expanding spreads caused by the high cost of funds and a lack of available capital. Instead of aircraft buyers seeking out financing to avoid tying up capital, we have aircraft lenders eschewing aircraft financing to avoid doing the same thing. Instead of banks competing with each other to write aircraft loans, we have banks quietly sitting by, hoping no one will notice they don’t especially want to do any deals.
The credit situation has become so bad at many institutions that they simply don’t have funds to lend. “Balance sheet dollars are precious at many banks,” said Key Equipment Finance’s Bill Dougherty, “and the banks need to think how best to deploy them to maximize benefits for the shareholders.” Some banks and other financial institutions that were formerly in voracious pursuit of business jet financings from whatever source have now shut the door to all but existing clients (so-called relationship-based financings), are focusing on overseas financings or are reportedly out of the business altogether.
Some banks that are nominally still lending for corporate aircraft deals are re-marketing most or all of those deals to other lenders, along with portions of their existing aircraft loan portfolios. The sale (or “syndication”) by banks of their aircraft financings can have unattractive consequences for the borrowers. Generally, the bank writing the loan will continue to “bill and collect” the deal, and the sale of all or part of a financing may accordingly be nearly invisible to the borrower, at least until a problem arises. When the borrower has trouble making payments or complying with covenants or simply desires relief from a restriction in the loan documents, he may find that the financial institution calling the shots is entirely different from the one that originated the financing.
The selloff doesn’t stop with syndications, however. Some institutions are unloading their entire portfolios of aircraft and other equipment finance deals. Almost the entire portfolio of Merrill Lynch Capital was acquired in early 2008 by GE Capital, which went on to purchase most of Citigroup’s North American consumer leasing and equipment finance business last summer. Both of these deals included some business jet financings.
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