Even though roughly three of every four buyers of business aircraft purchased their most recent airplanes with cash rather than securing traditional loan financing, there is a role for aviation finance experts.
There are two main reasons for this.
First, some companies and individuals do not want to show weighty assets such as owned airplanes on their balance sheets, which they can avoid through operating leases. The second reason is that after recently going through an economic downturn, in which aircraft values depreciated significantly, some owners are hesitant to commit to either a cash outlay or a loan.
With an operating lease, lessees typically have an option to purchase the aircraft from the lessor at the end of the agreement, or just walk away. In the airline industry, a significant amount of the fleets are leased; There is commonality in why airlines and business jet owners prefer to lease airplanes rather than commit to full ownership. On average, business jet owners keep their airplanes for 5 to 7 years and then move on to new ones. Using leasing as an option allows them to transition into newer and more modern equipment more easily.
Balance Sheet Cash
There are other reasons for financing aircraft. Companies and high-worth individuals have a lot of cash on their balance sheets that they have not chosen to invest in other parts of their businesses or lives. They have been somewhat indifferent to using financing to acquire the airplane rather than to use the cash on their balance sheets.
Because they have so much liquidity, some have been nearly agnostic when it comes to financing but time could change that as they mull over their cash positions. Uniquely, rates have remained at all-time lows. One can borrow money very easily in the LIBOR (London InterBank Offered Rate.) plus 3 percent range, plus/minus.
Such cheap financing enables someone to use the equity in their airplane to invest in other parts of their business showing better returns. As investors become more at ease with the evolving market and are able to find investments where they are more comfortable locking in their money, there could be more financed aircraft that were originally paid for in cash.
Investors – real estate investors and private equity investors – who purchased airplanes with cash within the past couple of years are now looking to unlock their equity with financing options.
Some companies and individuals purchased airplanes with cash because they were looking for a quicker closing process, then soon after acquisition sought out banks to refinance their aircraft. That way they could seek financing bids on their own timing and terms, shopping for deals that fit them best without a transaction deadline.
Creative Aircraft Finance Experts
Those looking for a lending institution should consider engaging with a bank that specializes specifically in aircraft financing, where experienced experts can unlock the maximum amount of aircraft value. Aircraft finance specialists follow the market and understand aircraft assets inside and out, unlike a generalist, who, for a great variety of equipment types, may merely rely on ‘fair’ party sources or published valuations. By understanding the asset, experts can provide a better quality loan and, from a structural standpoint, more flexibility.
For a customer buying an airplane and doing upgrades, aviation financing specialists understand precisely the value of an airplane before and after upgrades. Many are also able to be more creative than a run-of-the-mill bank. For example, a typical loan is a “full recourse” transaction where the guarantor behind the loan is fully recoursed to the bank to make payments and maintain the airplane. Some individuals frequently leverage their balance sheet so they are attracted to non-recoursed loans and specialist banks can be more comfortable with having aircraft as the only collateral.
Banks with global reach can structure deals around the world. This is important to multinational companies that locate airplane assets in different countries. Specialist banks may be able to structure creative financing in order to meet an owner’s aversion to full disclosure. For a variety of reasons, a buyer may not want to disclose all the information about themselves or their company.
Banks that are familiar with such aircraft transactions are oftentimes able to find an even ground. Buyers can disclose a little bit less than they would have to with another lender and the economics can be adjusted accordingly.
About NARA – NARAaircraft.com
NARA is a professional trade association comprised of selected aircraft sales and brokerage businesses that are NARA Certified, and aircraft product/services companies that adhere to the highest professional standards. Promoting the growth and public understanding of the aircraft resale industry, NARA’s members abide by an elite 14-point Code of Ethics that provides standards of business conduct regarding aircraft transactions.