How Long Will the Good Times Last for Business Jet Financing?

The answer's unclear, but one thing's certain: buyers today need help if they want to buy the right aircraft at the right price—or any aircraft.

Many banks expected 2020 to be a quiet year for business jet finance, but it turned out to be something of a roller coaster. For a while it was quiet; financings almost ground to a halt in the spring as the pandemic developed and transactions were adversely affected by uncertainties about where aircraft values were headed. The pace picked up as the year went on, though. And as soon as the vaccines arrived and (as one banker put it) people could see the light at the end of the COVID tunnel, interest in buying jets skyrocketed. For many jet financiers, 2020 ended with the busiest—and craziest—fourth quarter and December anyone can remember.

Several banks reported better-than-ever years for aircraft finance in 2020, with earnings 35 percent over budget at one and a record number of closings for jet financings at another. One banker told me his institution made an amount equal to its entire 2020 budget in the fourth quarter alone. 

But not all the deals got done by year end. Closings held over from 2020 helped make the first quarter of 2021 very busy for many banks, and several aircraft finance departments reported record results for the first three months of 2021 as well. Overall, however, the lively pace at the end of 2020 has not carried into 2021, though banks and other business jet financers continue to be busy. They just wonder how long it will continue. 

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Key factors likely to have an impact are not hard to identify. First, though some bankers report that modest inflation has raised concerns among aircraft buyers, financing rates remain incredibly low and fixed-rate financings continue to rule the roost. As of this writing, at least, LIBOR is actually lower than it was a year ago. It is scheduled to go away in 2023, which will require banks to use a new index, and that in turn could cause floating rates to rise and necessitate new documents and add new transaction costs for existing floating-rate loans. 

Recent aircraft financings, however, have already provided a LIBOR replacement plan in many cases. Meanwhile, floating rates are well below 2 percent. Some lenders continue to use a “LIBOR floor” to ensure that floating-rate loans stay at an acceptable level.

Fixed rates, on the other hand, generally remain in the mid 2 percent range (mid 3 percent for less-than-stellar credits). Lenders still want to finance only 90 percent (or less) of an aircraft’s value, but 100 percent financing continues to be available at some banks for the right clients buying the right aircraft. Most lenders require a creditworthy borrower for the jet financings they provide, but for those who are willing to put down a higher percentage of an aircraft’s value, PNC’s asset-based jet financing may be appealing. Half of PNC's jet financings involve non- or limited-recourse loans with no financial disclosure, estimates Keith Hayes, senior vice president and national sales manager of its Aviation Finance division. 

Prepayment Penalties Are Higher

Even though rates are unlikely to be headed down, banks (especially those whose jet loans are made by equipment finance divisions) are perhaps more insistent these days on higher and longer-lasting prepayment penalties, and some banks are now asking for prepayment penalties for the first four years, instead of the standard three. High-net-worth individuals financing a jet purchase through their private bank are less likely to encounter prepayment penalties because such banks are more focused on maintaining good relations with their clients than, as one banker put it, “maintaining an earning asset.”

A second factor sometimes mentioned as having an impact on jet finance is that the presidential election is over. Anxiety about where the country is headed in advance of a presidential election traditionally has a negative effect on the purchase of business jets, which abates once the election is over. This is borne out by the tidal wave of business jet transactions at the end of 2020. 

A related factor is the continued availability of 100 percent bonus depreciation—the ability to write off the entire price of a jet in the year it is purchased and “placed in service” in the taxpayer’s business. This is easier to accomplish if you acquire the jet at year-end when you need only a few business flights to capture the 100 percent deduction, at least for the moment. Concerns that the Biden administration might seek to cut back or even eliminate bonus depreciation also helped fuel the aircraft buying frenzy in late 2020. So far, these fears have proven unjustified, and 100 percent bonus depreciation remains fully available through the end of 2022 (2023 for “longer-production-period property” and “certain aircraft”).

As Steve Altman at Citizens Bank points out, how successful business jet finance will be this year depends on whether buyers can find an aircraft they want to buy.” Manufacturers of new aircraft seem to have recovered from the slowdown in 2020, and the preowned markets for many business jet models have historically low availability. Unlike houses, where the market is also tight, business jets generally decline in value, as they are operated over a relatively short life span. Nevertheless, for some models, the lack of available aircraft has actually caused prices to go up. 

More than ever, in this market, buyers need professional advice and assistance if they want to buy the right aircraft at the right price—or any aircraft at all. Some buyers are so desperate to acquire a preowned aircraft that they are foregoing a prepurchase inspection, which may well prevent them from obtaining financing for the jet.

Expect Shorter Amortization Periods

Any tightness in jet markets today is unlikely to affect assumptions by banks about depreciation over time or residual values. Bankers I’ve spoken to are assuming that business jets will depreciate between 6 and 9 percent per annum, depending on age and model. These assumptions directly affect loan amortization. Bankers today are more conservative, and the days of 20-year amortization are mostly over. Jet buyers can now expect loans to amortize over 10 to 15 years, which if nothing else helps prevent them from having to make a balloon payment at the end of the term that exceeds the aircraft’s value. 

Non-bank financial institutions have more leverage. Rob Polichetti at First National Capital says his institution can still offer 20-year amortization depending on the age of the aircraft, annual usage, and the loan-to-value ratio.

It remains to be seen whether the pandemic will have any significant long-range impact on business aviation. In 2020, lenders reported financing an unusual number of small jets like the Cessna CJ4 and HondaJet Elite for first-time buyers seeking to avoid the airlines or chartering other people’s aircraft. To some extent, the influx of first-time buyers has continued. On the other hand, corporations have learned a great deal in the pandemic about working remotely and about the ease of attending virtual meetings instead of in-person ones that require traveling long distances. 

As Jim Crowley at Bci Capital (City National Bank Florida) Finance says, “there’s still a huge amount of pent-up cash available that discourages financing jet purchases.” It’s hard for me to understand why. Most companies and individuals who can afford a business jet have better things to do with their money than invest it in an airplane. This is especially true given the low cost of borrowing today. 

The major downside of financing a jet purchase is that, if you decide to sell it during the first few years, you may have to pay that prepayment penalty mentioned earlier. In any case, many buyers who are supposedly “paying cash” are actually borrowing on credit lines backed by securities at their private bank—securities that can decline in value and require posting additional collateral. Such loans may also be based on a lower loan-to-value ratio than the aircraft finance that is available (up to 90 or even 100 percent of the aircraft’s value). Under these circumstances, it certainly makes sense to consider a loan.

Concerns about aircraft values have continued to steer some banks away from lease financing. Leases depend on residual-value assumptions; when the lease is over, the lessor still owns the aircraft, so if the lessor overestimated what its fair market value would be at the end of the lease, it may be in trouble. Many banks that purchased and then leased business jets found themselves in that position as a result of the 2009 recession and have been wary of leases ever since, and the uncertainties about aircraft values during the pandemic haven’t helped the situation. 

Consider Leasing from Institutions Other than Banks

Banks thus have an incentive to be very conservative about residual values, and that tendency drives up the monthly lease rates and discourages jet leases. Alternatively, banks may just decide to stop writing leases altogether. For this reason, if you’re interested in a lease, it often makes sense to go to a financial institution that isn’t a bank, which may be less risk-averse and more willing to consider a lease. 

But why lease an aircraft? A common rationale is that you don’t want to take the risk of owning a depreciating asset. Leasing may limit that risk, but it is worth remembering that, after having been burned in the past, bank lessors these days do their best to offer a lease rate and terms that are conservative enough to ensure that they don’t lose money.

Another rationale for leasing is a desire to keep the aircraft off the company balance sheet. This may work for private companies, but as a result of changes in accounting rules, information about the lease will still appear in public company filings. 

A major concern about leases (as opposed to loans) is that it’s hard to get out. A seven-year lease, for example, might have an early-buyout option in year three or five, but otherwise, the lessee’s only choice may be to stay in for the full term. You may be able to negotiate a lease termination with the lessor, but it’s likely to be costly unless you plan to replace the leased aircraft with one that will be financed by the lessor. You could also try to negotiate a right to terminate the lease in any month (usually after a blackout period of two or three years) at agreed-upon prices that are set forth on a monthly schedule in the lease.

In the end, the decision to borrow instead of lease often comes down to a desire to take advantage of 100 percent bonus depreciation, which would not be available for a lessee. Buyers who take a 100 percent tax deduction in the year the aircraft is placed in service should consult their aviation tax advisers regarding what must be done to preserve that deduction in future years.

Loan or lease, the key word is “shop.” Get proposals from several financial institutions, including banks that you have a relationship with. A listing of banks and finance companies offering business jet loans is readily available in BJT's company directory.

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