Adobe Stock /Montage: John A. Manfredo
Adobe Stock /Montage: John A. Manfredo

Financing Your Business Jet

Volatile times present new challenges for borrowers.

Because of COVID-19, prospects for both the economy and aircraft values are uncertain. In the 2007–2009 recession, business jet prices fell dramatically, but the impact of the pandemic on airplane values is much more difficult to gauge. Buyers expecting to find desperate sellers offering deep discounts have been disappointed. The number of large business jets for sale has not appreciably changed from a year ago even though sales are down, and bankers are having trouble figuring out whether the pandemic has had any significant impact on values. 

Moreover, the presidential election season created waves of uncertainty among jet buyers and sellers and financial institutions, and some people put their aircraft transactions on hold until after November 3. As one experienced jet financier said to me recently, “Buying is always down before a presidential election, but the faucet will turn on again shortly afterwards.”

Given all the uncertainty, many aircraft lenders are pickier about whom they lend to and about what aircraft purchases they are willing to finance. Some banks are so choosy in the current environment that they are suspected of not really even being in the aircraft finance business anymore. And needless to say, the pandemic is not a time to expect institutions to be offering new aircraft finance products.

For financiers, uncertainty about aircraft values probably has the greatest impact on lease financing. When a bank takes title to an aircraft and leases it to its customer, it’s forced to make a judgment about the residual value of that aircraft, which it will need to sell when the lease ends. Banks are inherently conservative to begin with, so their estimates of residual value are likely to be especially low in uncertain times like the present. Prior to the pandemic, those assumptions were already low. (One banker I spoke with estimated that his institution’s residual-value assumptions had declined by 50 percent since the 2009 recession; another said he assumes 9 percent depreciation per annum.)

Lower residual values mean higher lease rates, as the lessor bank seeks to be compensated for the aircraft’s anticipated decline in value over time. Consequently, prospective lessees may find aircraft lease pricing to be less attractive at the moment. Many banks would just as soon avoid aircraft leases anyway; they are riskier and require deeper due diligence than loans. 

On the other hand, Steve Day at Global Jet Capital reports continued leasing activity for both new and preowned aircraft, including lease extension requests from existing customers. Many jet buyers remain interested in leasing because they share the banks’ concerns about residual values, but other good reasons to lease can include a buyer’s inability to use tax depreciation on the aircraft, a desire to minimize upfront sales taxes on a purchase, or the reluctance to put ownership of a new business jet on the books of a company—especially one that is laying off employees in the pandemic. 

Tax depreciation, however, can be a powerful incentive to buy rather than lease. Current law allows you to write off up to 100 percent of the purchase price for tax purposes in the year you acquire an aircraft. For aircraft buyers who can fully use the tax benefit of 100 percent bonus treatment,” says Don Synborski at Citizens Bank, “in the current residual environment, a loan or synthetic lease is a better economic solution on an after-tax basis than a tax lease.”

Uncertainty also has an impact on loan financing, especially amortization. The same residual-value assumptions that leases require figure in scheduling the repayment of the principal amount of aircraft loans. Twenty-year (or even longer) amortization schedules used to be common, but banks are leery of offering such schedules today, especially on large and long-range aircraft; 12 to 15 years is more common. Neither the borrower nor the lender is happy when the borrower needs to write a big check to the bank when the aircraft is sold because the loan balance at that time exceeds the jet’s fair market value.

Most aircraft lenders I spoke with said they have received few requests to finance factory-new business jets since the onset of the pandemic. The stoic attitude of some manufacturers has not resulted in the COVID-related discounts that many buyers think they should be offering. The preowned market is where the jet finance action is at the moment, especially with regard to super-midsize and smaller jets, though Jim Simpson at First Republic Bank reports lots of interest in financing large and long-range aircraft as well. Financiers speculate that there are relatively few buyers for large and long-range aircraft because worldwide COVID-related travel restrictions have decreased the usefulness of such aircraft—which could mean it is a good time to buy one.

Accordingly, financings for smaller aircraft acquired to fly around in the U.S. have been on the rise in the last few months. Lenders used to helping customers buy large jets are now providing cash for people buying models like the Pilatus PC-12, Cessna CJ4, and HondaJet Elite. Lenders report financing more owner-flown aircraft, and they are also being contacted by buyers new to business aviation. 

People who previously flew charter or first class and want to avoid getting on other people’s aircraft or find the airlines no longer serving their routes are calling us about financing light, medium, and super-midsize jets,” says Keith Hayes at PNC. Avoiding crowds is also a major objective. As one buyer told his lender, “I will never take my family back to a commercial airport.” Being new to business aviation, these buyers are often looking for smaller, older, cheaper aircraft than their financial position would justify.

Interest rates remain attractive. A year ago, three-month LIBOR was over 200 basis points; as of this writing, it’s only 25 basis points. But don’t think the collapse of LIBOR has led to rock-bottom interest rates. The pandemic has reportedly caused a drain on capital, with bank clients drawing down on lines of credit and opening new lines, which in turn causes lenders to allocate higher reserves for losses, pushing interest-rate spreads and borrowing rates back up. A floating- rate spread that was 100 basis points a year ago can be more than double that today. In addition, many lenders now have a “LIBOR floor”; if the floor is 100 basis points, for example, and (as is now the case) LIBOR goes below that, the lender ignores LIBOR and adds the interest-rate spread to the floor instead. Ten-year lease factors seem to be in the neighborhood of 0.8 to 0.85 percent, and more for shorter-term leases.

Most lenders report that their customers are all choosing fixed-rate financing for their aircraft purchases. As Jim Crowley at City National Capital Finance observes, LIBOR is "only going up," so he sees little interest of late in floating-rate financings. On the other hand, Ford von Weise at Citi Private Bank says most of its aircraft financings these days are floating-rate deals. “People with excellent credits can borrow at rates lower than they have ever been due to historically low base-rate indices,” says Ford. “They have the option to convert to fixed rates if they think rates are going up.” 

Fixed rates today are between about 2.5 and 3.5 percent, depending on the credit, the aircraft, and the lender’s desire to keep an important client happy. Lenders continue to want to finance only 90 percent or less of a business jet’s value, and some are seeking a 25 percent down payment, but 100 percent financing is still available for the right clients buying the right aircraft. If you are willing to put down a higher percentage of an aircraft’s value, PNC’s non-recourse, no-financial-disclosure, asset-based jet financing may prove attractive. Continued low rates have led many aircraft owners to refinance their existing loans. Banks are also seeing customers coming back to finance business jet upgrades.

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Should you finance your business jet purchase? It makes sense to give the option careful consideration. People who can afford to own and operate a business jet generally have something better to do with their money than invest it in an airplane. Further, some buyers who say they are “paying cash” are actually borrowing on credit lines backed by securities at their bank. Those loans are likely to be based on a lower loan-to-value ratio, whereas, as just noted, aircraft finance can provide a loan of up to 100 percent of the aircraft’s value, with additional credit available for improvements. Further, if the stock market drops, credit lines backed by securities may require posting additional collateral or a loan payoff. It makes sense to save your credit line for something else.

Nevertheless, your own bank is a good place to start the aircraft finance conversation. Banks are especially keen these days to maintain good customer relations and are incentivized to provide financing to existing clients. That said, it always makes sense to obtain proposals from other aircraft lenders; often their aviation expertise will produce better terms than are available from your own bank. Different institutions also offer finance products (like non-recourse financing or synthetic leases) that may not be available at your bank, and you may have more luck obtaining an aircraft lease from a finance company than a private bank. 

For a loan, your private bank may easily provide the best rate, but finance companies will often have more flexibility in structuring aircraft financings to meet your objectives on issues like loan term, loan-to-value ratio, and principal amortization. A listing of banks and finance companies offering aviation loans is readily available in the company directory on this website.