Financing in a changed market
What today’s business jet buyers must know
By Jeff Wieand - February 1, 2010
The business jet finance field is unique because business jets are unique. For one thing, they move around–fast. A Gulfstream G550 that’s in Zurich this morning could be in Tehran tonight. That poses challenges for naturally risk-adverse bankers concerned about their collateral–challenges that helped facilitate the creation of the burdensome and arguably unnecessary International Registry of Mobile Assets. For another thing, business jets aren’t always “all business all the time.” Many fly personal trips as well, or are leased to charter companies for use in their businesses. A lender may worry not only about where the aircraft is, but what it’s doing there. And whatever the jet is doing, its operation will be subject to a daunting array of some of the most complex safety and economic regulations you’ll find anywhere. In part, that’s because aircraft have the capacity for causing catastrophic damage when not used properly.
So far, as loan collateral a business jet sounds only slightly more appealing than a mobile dynamite factory driven by a five-year-old. But there are compensating advantages. Jets are expensive, which means that lenders can put out lots of capital on a single asset–a big plus administratively, but less attractive when capital is tight, as it is today. Business jets also offer lenders an entrée to high-net-worth individuals and strong-performing companies. That generally means excellent credit (every lender’s dream: borrowers who don’t really need the money) and opportunities for the financial institution to cross-sell other services to the client.
Though some lenders lump business jet finance with their general equipment finance products (like financing for cranes and trucks), the uniqueness of business jets has led more and more institutions to employ a dedicated specialist or group to service aviation clients.
After the financial eltdown in 2008, aircraft owners began, with alarming frequency, to default on loans and give back the keys to lessors (instead of buying the aircraft) when financing leases came to term. As a result, some financial institutions found themselves holding a swollen inventory of as many as 50 business jets. Many of these repossessed aircraft won’t sell anytime soon, and what’s worse, the institution’s investment in them can often exceed their current fair market value. Given the large number of available aircraft and the dramatically low prices in the current market, lenders and other jet owners often try to find people willing to lease the airplanes for a couple of years to allow time for values to recover.
Today’s lender is thus extraordinarily cautious–probably too cautious–about aircraft values. This caution is exemplified by a marked increase in the amount of due diligence that financial institutions require to make sure the aircraft they finance are worth the prices clients are paying. But taking prudent steps in acquiring a jet, such as retaining a reputable acquisition consultant and conducting a thorough pre-purchase inspection of the aircraft, can help to dispel a lender’s anxieties about values.
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