Prepare for Paperwork

Feb 24, 2015 - 5:15 PM

Financing an aircraft means wading through fine print. Here’s how to deal with it—and nab the best loan.

As the economic recovery continues, the business jet finance market is caught in a bind. On the one hand, more institutions are vying for aircraft-loan customers these days. On the other hand, buyers still have loads of cash, and an estimated 60 percent of jet acquisitions now involve no loans. The upshot is that more lenders are chasing a relatively small number of deals, with banks frequently fighting hard to win the business, resulting in extremely attractive financing terms. Under the circumstances, even cash-swamped aircraft buyers would be wise to consider borrowing. 

Before a bank will lend you money to purchase an airplane, of course, it must approve the loan. The process may conjure up images of a “credit committee” meeting in a smoke-filled conference room, but the reality today is much different. The approval is more likely to come via email signoffs from the relevant bank officials. And it is unlikely to take the form of anything like a “commitment letter.” 

Aircraft lenders document their willingness to finance an airplane purchase at roughly four levels. The lowest level is a one-page statement of what the bank might be willing to do, usually in response to the would-be buyer’s request. Following the lingo used by one aircraft lender, let’s call this a “discussion sheet.” 

Often, the buyer requests this simply to get a quick read on whether the lender will be likely to finance the acquisition of a given aircraft at a given price; but a discussion sheet could be requested even before a potential buyer begins shopping if he wants to test the waters about the financing terms likely to be available for his purchase of, say, a late-model Challenger 604. The discussion sheet will probably be based on minimal or no due diligence by the bank on either the buyer or the aircraft beyond what it already knows about both.

The next level is a formal, three- to four-page proposal. For this the lender will invariably require financial due diligence on the buyer if he isn’t already a customer. Accordingly, a request for a proposal may be met by a counter-request from the bank for financial statements, tax returns and other materials. This doesn’t mean that the proposal is binding on the bank. On the contrary, the bank will bend over backwards to make clear that it “is not intended to be a binding legal obligation.” That said, banks are usually confident enough that they can do the deal when issuing a proposal letter that backpedaling later on is rare.

If certainty is what you want, you have to request a “commitment letter.” Though even that document will have “outs” for the bank, it does what the name suggests: it makes a commitment to provide the financing. To issue one of these, the bank really has to do its homework on both customer and aircraft, a time-consuming process for the buyer that can make cashing in some Treasury bills an appealing alternative. No wonder one industry pundit estimates that commitment letters are now issued for less than half of all business jet financings, and my own informal survey indicates that they may be downright rare in today’s market. 

"Once we have a signed proposal,” says Tom Taormina at PNC Aviation Finance, “we usually start working on the financing documents and the rest of the due diligence simultaneously.” Thus, for some lenders, traditional commitment letters are more likely to play a role when closing an aircraft purchase is expected to take a while and the borrower wants to make sure the bank will be there with the money when he needs it. 

In sum, for many aircraft financings, the “commitment” comes when the bank actually finances the purchase, as reflected in the documentation—the fourth level I referred to. Aircraft financing involves some of the most tedious documents you’ll ever encounter: loan agreements, leases, promissory notes, guarantees, security agreements, the assembled bulk of which can be several inches thick. Both borrower and lender need experienced aviation counsel to scrutinize these documents to deal with issues such as charter operations, overflight restrictions, lease return conditions and responsibility for maintenance. 

Meanwhile, the bank will have to finish the additional due diligence required for true commitment: background checks on the borrower for tax liens, judgments, bankruptcy filings, an appraisal of the aircraft, a review of the prepurchase report and the like. All of that takes time, and once again, any delay in obtaining financing is reason enough for many buyers to pay cash. They still have the option, after all, of financing the aircraft after they buy it.

The key document that sets the terms of the financing, then, is most likely the proposal. It’s based on enough information to have teeth even if it falls short of representing a commitment from the lender. The proposal should obviously set out the key financial terms, including aircraft model and loan amount, term, rate and amortization. But it should also set the parties’ expectations on issues such as how much the borrower might have to pay for the bank’s legal fees (see below). Aircraft buyers should solicit proposals from several institutions and consider requesting proposals for both loan and lease financings to best compare the options. 

Buyers should be careful in requesting financing proposals (and discussion sheets), however. When you are about to sign, or have just signed, a letter of intent to buy an aircraft, you don’t want other potential buyers trying to shoot down your deal. Though bankers are supposed to know how to keep their mouths shut about pending deals, it’s worth taking precautions before launching an RFP for an aircraft loan, such as confirming that the bank will treat the deal as confidential. The bank expects as much from you regarding its proposed financing terms. 

Interest rates remain shockingly low, especially in a competitive environment like business jet finance, so you can still lock in a highly attractive fixed rate. Alternatively, you can consider a floating-rate loan with an option to switch to a fixed rate if you get nervous about rising interest rates. If the plan is to pay off the loan when interest rates rise to a level that makes the financing unattractive, avoid deals with lengthy blackout periods and prepayment penalties. 

Buyers should also consider a lease. Lease payments can be fixed or floating, just like loan payments, and even the most well-heeled companies often elect to lease an aircraft rather than buy it. One reason, as many lessees discovered circa 2009, is that when the aircraft’s value plummets by the time the lease ends, it’s the lessor’s problem. (The flip side of this, though, is that you may have to stay in a lease longer than you would like to obtain this benefit.) 

Moreover, aviation CPA Glenn Hediger estimates that proposed lease accounting changes (see my column in the February/March 2012 BJT) won’t take effect before 2017, so in the meantime leases still provide off-balance-sheet treatment for companies that don’t want to highlight their possession of a business jet. A lease also has the potential, for buyers who can’t use the tax depreciation benefits of an aircraft purchase, of passing those benefits to the lessee in the form of lower financing costs.

Recent regulatory changes haven’t made business aviation finance sleeker, faster or more nimble. But they have made it more reasonable and predictable. With today’s interest rates offering almost free money to strong credits, aircraft buyers should carefully consider the advantages of financing.

Key Questions About Bank Proposals

• Must the engines be enrolled in a maintenance program?

• Is financing also available for planned improvements?

• Will guarantees be required?

• Will legal expenses be capped?

• Can the loan be prepaid at any time?

• Can the bank syndicate the loan?

• Are there limits on annual flight hours or landings?

• Is a bank-approved management company required?

• Will the borrower be required to maintain a loan-to-value ratio?

• Is the loan cross-collateralized with other facilities? 

• Banc of America Leasing—Global Corporate Aircraft Finance, Addison, Texas

Michael T. Amalfitano (972) 455-5855

• BB&T Equipment Finance—Towson, Md.

Steve Olson (303) 242-3284

• BMO Harris Equipment Finance—Corporate Aircraft Finance, Westlake, Ohio

Joseph DiLallo (440) 385-4433

• Cessna Finance Corporation—Wichita, Kan.

Danny Maldonado (316) 660-1207

• Commerce Bank—CBI Leasing, Inc., Aircraft Finance, Commerce Bank N.A., Lake Forest, Ill.

Sean K. Patrick (847) 295-4601

• Chase Equipment Finance, Inc.—Tampa, Fla.

Chad E. Colby (813) 483-8246

• CIT Bank—CIT Aerospace Business Aircraft, Plantation, Fla.

Michael J. Kahmann (954) 359-4646

• Citi Private Bank—Global Aircraft Finance, New York

Ford von Weise (212) 559-1444

• Citizens Asset Finance—Manchester, N.H.

Donald A. Synborski (603) 634-7522

• Deutsche Bank Private Wealth Management—Private Aviation Finance, Chicago

David W. Rodin (312) 537-1510

• Export-Import Bank of the United States—Transportation Division, Washington, D.C.

Robert F. X. Roy, Jr. (202) 565-3557

• Fifth Third Equipment Finance Company—Boston

Matt McNamara (617) 513-2925

• First American Equipment Finance—New York

John Unchester (917) 558-8460

• First National Capital Corporation—Aviation and Specialty Finance Group, Foothill Ranch, Calif.

Rob Polichetti (949) 614-1626

• First Republic Bank—Aviation/Marine Finance, San Francisco

James F. Simpson (415) 296-5783

• First Source Bank—Laird Professional Building, Downingtown, Pa.

Jeffrey Lindstadt (610) 269-1683

• GE Capital Corp.—Corporate Aircraft Finance, Danbury, Conn.

Brent P. Godfred (203) 749-6657

• Guggenheim Partners, LLC—Business Aviation Investments, New York

Donald Walsh (714) 552-5067

• Key Equipment Finance—Cleveland

Peter Bullen (216) 689-8579

• Northern Trust—Miami

Glenda G. Pedroso (305) 789-1554

• PNC Aviation Finance—Boise, Idaho

Wayne Starling (888) 339-2834 

• SunTrust Equipment Finance & Leasing Corp.—Corporate Aircraft Finance, Baltimore

Joe Hines (410) 307-6642

• U.S. Bank Equipment Finance—Capital Equipment Group–Corporate Aircraft, Denver

Pete J. Georgelas (303) 585-4036

• Wells Fargo Equipment Finance, Inc.—Corporate Aircraft Division, Los Angeles

Robert C. Lebano (310) 789-5036

Jeff Wieand is a senior vice president at Boston JetSearch and a member of the National Business Aviation Association’s Tax Committee.