Financing Your Business Jet
By Jeff Wieand - July 1, 2010
Business jet finance probably hit bottom in early 2009. Loans have become much more available since then, but we’ve yet to return to the halcyon days of 2007, when you could readily arrange 100 percent financing for aircraft at purchase prices that today seem grossly inflated. As Bank of America’s Michael Amalfitano pointed out, “The days of aggressive deals at thin pricing are over.”
Nevertheless, things are looking up, and financial institutions are returning to the market. First Republic Bank’s Jim Simpson reported that he hasn’t been this busy in 18 months. And PNC Bank had its best year ever in terms of the dollars of aircraft financing, said the bank’s aircraft lending chief, Wayne Starling.
A key factor in aircraft finance since 2008 has been the backlog of repossessed airplanes. When borrowers began to default on loans and walk away from leased aircraft in 2008 and 2009, financial institutions found themselves with a swollen inventory of repossessed jets, which have been hard to sell at anywhere near the amount of the institution’s investment in them. Given the many available aircraft and today’s lower prices, lenders and other jet owners often look for people willing to lease the airplanes for a few years to allow time for values to recover or at least let the owner postpone recognizing a loss.
Suitably chastened, lenders are extremely cautious– probably too cautious–about aircraft values. This caution is exemplified by an increase in the amount of due diligence financial institutions require to make sure the airplanes they finance are worth the prices clients are paying.
Concern about values has also affected lenders’ appetites for certain models and vintages. As jet values fell over the last 18 months and more aircraft were listed for sale, the lower end of the market–older business jets and models–took an especial beating. As one lender told me, “We want to stay with aircraft in the five- to 10-year-old range or newer, if possible.” This is particularly true when the financial institution is buying the jet to lease it back to the customer. An airplane that’s 10 years old today may be 20 years old when the lease ends, and no lender wants to own an aged and potentially unsellable business jet.
The good news about the decline in aircraft prices is that it has encouraged buyers who were waiting in the wings to come forward. Thus, for some aircraft models, especially large and long-range jets, prices have actually started recovering, though they have yet to return to pre-2008 levels. Even so, lenders are likely to require a careful look at the value of the airplane being acquired.
Lenders are also doing their homework on buyers. As one industry pundit noted, while a buyer with “pristine credit” will engender a “feeding frenzy” among lenders, other buyers are unlikely to encounter similar enthusiasm. Those coming from a troubled industry, like real estate, may face special scrutiny. Lenders are also taking a hard look at their own previous experience with the potential borrower. Has the borrower over-extended itself in the past or missed payments on other credit facilities? What changes have occurred in its financial position over the life of the relationship? Lenders are interested, too, in whether the buyer has another aircraft it will be trying to sell after taking delivery of the new jet–not only with regard to the buyer’s ability to bear the financial burden of two airplanes, but also because the lender may already have credit exposure on the first one.
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