Financing a Business Jet in Today’s Market
Yes, it's a new world out there, but you can still get a loan
By Jeff Wieand - August 1, 2009
You may have heard that is almost impossible to secure business jet financing these days, but to paraphrase Mark Twain, rumors of its demise are greatly exaggerated. Though the feeding frenzy among aircraft lenders is over, you can still find financing if you know where to look.
Since the stock market started falling, the business jet industry has been in disarray. Flight departments have closed and fleets of business aircraft have appeared on the market overnight, giving rise to unprecedented opportunities for buyers and, one would have thought, financiers.
But lenders that took on lots of risky loans a year or so ago are now behaving like, well, banks. It’s hard not to see the irony in this. When jet values were at all-time highs and lenders should have been cautious about collateral values and buyer creditworthiness, those lenders fought hard for lending and leasing business, financing 100 percent of acquisition costs at often incredibly low spreads over LIBOR for nearly all comers. Today, when values have sunk to levels that recently seemed inconceivable, and some aircraft may even have the long-term potential to appreciate in value, enthusiasm among lenders to do deals has waned. Lenders are now often over-cautious about values and reluctant to finance 100 percent of acquisition cost for creditworthy buyers at interest rate spreads that would formerly have seemed enormous.
Capital is still tight, and banks will remain careful about whom they lend it to. As one lender told me, “We aren’t going to be everyone’s aircraft lender anymore.” Consequently, if you’re looking for financing, you can expect greater due diligence about your credit position.
But lenders aren’t pickier these days only about their customers; they’re also pickier about the airplanes themselves. Many business jets have a current fair market value that is substantially less than the amount of the loans they secure, and banks don’t want to see that happen again, so they’re now deploying the care and caution regarding asset values that they should have in years past. For this reason, you’ll find it harder today to get an unofficial commitment on financing terms until the lender knows exactly what aircraft you’re acquiring and at what price.
Financing Terms
What will those terms be like? Needless to say, spreads of 80 basis points over 30-day LIBOR (which today would yield an interest rate of slightly more than 1 percent) are no longer feasible. Expect dramatically higher spreads than that. But no doubt the single biggest issue today is ready financing of 100 percent of the aircraft’s purchase price. For some banks, lending guidelines effectively prohibit 100 percent financing, while others strongly prefer an 80- to 90-percent loan-to-value ratio. “About 90 percent is probably where the market is now,” said one lender.
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