What are the Aircraft Financing Trends in 2019? see more
NAFA members Martin Ormon, President of Aircraft Finance Corporation, and Dave Labrozzi, Chief Operating Officer of Global Jet Capital, talk with freelance writer Rohit Jaggi about the condition of the aircraft financing market.
What's the condition of the aircraft financing market?
Who is seeking aircraft financing in 2019, and how are they obtaining it? Have the financing trends changed - and what's the outlook going forwards? Rohit Jaggi gets insights from financiers Dave Labrozzi and Martin Ormon.
Business jet sales tend to follow the money. And the US economy performed unexpectedly well in the early months of 2019. Yet Business Aviation growth is slowing, in the US and the rest of the world, and business jet sales are being hit by a number of factors.
Sales of new and used jets saw an uptick in 2018 as US tax cuts and changes in the rules on accounting for airplanes took effect. Increasing demand and steadier prices for used jets also signalled the return of some big banks and financiers to the sector, after having their fingers burnt following the financial crisis of 2008.
But does that mean financing private jets is becoming easier for buyers? And are specialist lenders being frozen out by competition from the big players? Two companies that play to their strengths in different parts of the business jet financing market illustrated the challenges.
Dave Labrozzi is chief operating officer of Global Jet Capital, which focuses on aircraft aged 15 years and younger. He says that the big finance corporations are focusing on their high-net-worth clients and the biggest corporate names, but their interest flags when it comes to complicated deals, or anything other than loans secured on the value of the aircraft.
Martin Ormon, whose Aircraft Finance Corporation services a US market for older aircraft with loans of $1m to $7m, is more scathing. “[The big bank lenders] believe their model is the best model – and it puts a noose around the customer’s neck.
“They still want to make it an asset-based loan. An aircraft is not an asset – it depreciates from the second you step in the door and fire the engines up. Far more so than an automobile.”
Playing to Strengths
Ormon’s niche is credit-based, 20-year loans that keep the cost of payments down and are based on the customer’s ability to pay. Offering the example of a customer for whom he refinanced a loan on a Bombardier Challenger 605, Ormon reveals the customer had been paying a bank $70k a month.
“With us that became $29k a month,” he illustrates. “Who is going to default first? A guy with a $29k monthly payment, or a guy with a $70k monthly payment?”
It’s also true that those who don’t really need to borrow can do so more easily. “The high-net-worth individuals we do business with can dig into their pockets for the $50m-$60m cost of a jet,” says Labrozzi.
“But they don’t – they prefer to put their money into their business and get double-digit returns.” The leasing deals Global Jet Capital can put together allow them to do that and have a jet.
What’s Different About Today’s Aircraft Financing Market?
Labrozzi is confident that there is not too much froth in the market. That was part of what happened after the financial crisis where lenders were spooked by falling asset prices into calling in their loans.
That helped produce a cycle of further price deterioration and an increasing number of repossessions. “I don’t see that perfect storm,” says Labrozzi. “What is different this time is that the major manufacturers are building significantly fewer airplanes.” And that should help maintain values.
But another factor helps here: A shortage of high-quality used/pre-owned jets. “Low-hour, clean airplanes are hard to find,” Ormon notes. “In the pre-owned jet market the products are not as high-quality as they were just a couple of years ago. The really great airplanes are out there, but they’re hard to find.”
Was the US Tax Cuts Impact on Aircraft Sales Limited?
A natural question is whether the effects of the US tax cuts and accounting changes, signed into law at the end of 2017, have already fed through?
“The tax law change did give the industry a shot in the arm,” says Labrozzi. But it wasn’t the benefit that many thought: “People bought a jet before the end of the tax year, but then found it was a lot more difficult to deploy the tax benefits.”
As a result Global Jet Capital has done a lot of sale and leaseback deals, because, as a leasing specialist that turns over a lot of aircraft, it can utilise the full tax benefits. “The bottom line is that it’s helped our business,” Labrozzi says.
According to Ormon the buying ability of his customers and potential customers has not been significantly dented.
“These guys are buying Hawker 850 for $16k a month. They’re putting $400k down. Sure, you could pay first class for $16k a month, probably non-stop around the world, but that’s not their mentality. Our clients have the cashflow, they’ve got the cash, and that’s what they want to do.
“So – with $200k a year in payments and another $700k a year to maintain the airplane and fly it (pilots and everything) – that’s less than $1m a year to own a Hawker.”
Looking Ahead for Aircraft Financing
Global Jet Capital’s Q1 2019 market briefing points to trade tensions and fears of market volatility, but sees demand for new business aircraft rising at the same time as a shortage of high-quality used jets impacts the number of used aircraft sales.
Labrozzi expects a steady market over the next couple of years. His customers are responding to economic and trade uncertainty by putting the tools in place they need to do business (including private aircraft).
He also believes that the sector is in a trade-up replacement cycle. “A lot of my customers are getting ready to take delivery of an airplane they ordered two years ago and it’s time to move their existing airplane,” he says.
Moreover, some highly desirable airplanes (such as the Dassault Falcon 7X) were undervalued recently when there were a lot on the market. Now the market is absorbing them quickly, Labrozzi says – they are likely to be on the market for only an average of six months.
Ormon paints a slightly different picture. “I’d say that lending is down 15%. The aircraft sales are there – there are a lot of people paying cash for $2m and $3m airplanes, because interest rates have been low for a while and companies have just received a tax cut. Companies are awash with cash that they are not necessarily putting back into the business.”
So the number of deals Ormon is doing is down. “Our biggest year, 2017, was 56 deals, with an average value of about $3.2m,” he says. “Our 2018 average was $2.9m, and today we’re probably doing around 35-40 deals a year. I don’t see anything changing unless we have a major financial crisis. I think this is the new norm.
“The outlook for my sort of financing is good,” Ormon concludes. “The Hawker 800 is becoming a thing of the past and now we’re getting [better-quality] Hawker 850s and 900s that are in that price range.”
Labrozzi is also optimistic. “There’s always plenty of business to go around,” he concludes. “I just want to get my unfair share of it…”
More information from www.aircraftbanker.com or www.globaljetcapital.com
This article was originally published by freelance writer Rohit Jaggi in AvBuyer on June 5, 2019.
Financing Your Business Aircraft: Reaping Ownership Benefits, While Avoiding Leasing Pitfalls see more
NAFA member Martin Ormon, President and Founder of Aircraft Finance Corporation, compares the benefits of buying versus leasing your business aircraft.
With the new year comes the first full-year's tax filing under the Tax Cuts and Jobs Act of 2017. If your accountant or Chief Financial Officer (CFO) works like most, you'll have already engaged in a couple of briefings on the charges - on adapting to the law's new language - and you probably have another meeting planned to lay out for you the impact of those changes on this year's numbers.
For those looking to buy or lease a business aircraft after holding-off a while to weigh up the impact of the 2017 tax changes, now would be an excellent time to answer a recurring question asked before companies make a major decision on a big-dollar equipment outlay.
Should you buy or should you lease?
Each approach brings its own benefits and limitations, just as leases themselves vary in type to meet the differing needs of the operator.
But Martin Ormon of Aircraft Finance Corporation questions why so many operators are choosing to lease older aircraft, knowing that to keep it at the end of the lease means coming up with a buyout amount for the leasing company. "Otherwise, they walk away with nothing but their receipts," Ormon notes.
While Ormon acknowledges that for later-model business aircraft lease terms may benefit an operator's cash flow picture, "for many of the older aircraft (7 years and up), buying it with today's more attractive finance terms can make more sense for cash flow - and at the end of the term leave the owner with an asset, paid off and wholly owned," he elaborates.
"A lease structure and the supply of good aircraft and low financing costs for 20 years makes more sense financially than leasing."
But then, financing aircraft sales is Martin Ormon's business. He owns and operates Aircraft Finance Corporation, a rare lending operation with regular terms as long as 20 years for older business-turbine aircraft.
Aircraft Finance Corp: The Backdrop
When we last spoke with Martin Ormon in 2016, the topic focused on understanding the benefits to clients from dealing with Aircraft Finance Corp. versus more traditional banks and finance companies, particularly when financing business aircraft aged 10 and older.
Since then Ormon's business has continued to thrive, so we sought his input on the lay of the land in light of a small renewed 'boom' of recent months. Some credit the boom to the 2017 tax-reform law signed into law 13 months ago. Others credit the resurgent economy and strong market growth - a more tentative view recently.
Still others cite both of the above and a resurgence in market demand after a lengthy period in which many buyers held back. Against the backdrop of the Great Recession and the crash in business-aircraft sales, the resurgence, for whatever cause, is welcome among companies servicing business-aircraft transactions.
What hasn't changed is the availability of good finance terms, according to Ormon. "You get the deals from the secondary (market) guys; you don't get the deals from the guys who make the business."
That means operators looking to buy an older jet still face tougher terms than operators who are able to shop for new or near-new aircraft. "Leasing terms aren't what they once were," Ormon claims. "The guys in the leasing business today are struggling more because of the nightmare hit on residual values.
"And the residual value on some of these aircraft has gone beyond hitting bottom - and they're still getting a resurgence in market value because of increased demand."
Aircraft Finance Corporation continues to do a banner business because of its combination of competitive interest rates, competitive down-payment terms and loan terms as long as 20 years.
"The one thing that i've learned , "Ormon offers, "is that interest rates do not dictate demand for aircraft purchases - while it may effect some who don't have the credit history others do."
Used Aircraft Competing Against New
Ormon cites a number of loans recently written by Aircraft Finance Corporation, loans which took advantage of depressed prices of some older aircraft with loan terms more competitive than lease terms.
"With values where they are today, why would anyone buy a new aircraft?" he asked. "With our 20-year amortization system we can make an aircraft less expensive than leasing."
One example Ormon offers is for a Bombardier Challenger 605. The owner's situation had changed and they needed some relief from the cash-flow pressures. "We refinanced that Challenger 605, which ahd payments exceeding $70,000/month on a seven-year amortization. We did it for 20 (years) and their payment came down to about $20,000/month, solving the owner's problem."
Ormon says that many of the finance outfits don't want people to know that 20-year loan terms are available.
Lease Versus Buy
"At the end of the day, that 20-year term gives a lot of people more financial freedom and flexibility," Ormon highlights.
Todday's terms available from financing firms like Martin Ormon's make financing more attractive than leasing. "You'd still have to buy out the residual value to own that aircraft at the end of the lease. That or accept never owning the airplane."
Weighed against a lease structure with today's supply of good aircraft, the low financing costs for a 20-year term makes borrowing to buy more financially sensible than leasing, Ormon stresses, adding that Aircraft Finance Corporation underwrites its own financing, which makes dealing with the company more streamlined.
This different approach works for the buyers Ormon finances, for the sellers he helps sell their old aircraft, and for Aircraft Finance Corporation of a business.
Ormon's small aircraft finance bank began operations in August 2000, and he let it make money for him while he continued in his own business. "I didn't think much more about the small amount of business we were doing ... until the downturn," he recalls.
"Now, it's going great, because we help people and they come back again for their next deal."
It's good for Business Aviation - and what's good for Business Aviation is good for the aviation economy.
This article was originally published in the February issue of AvBuyer Magazine.
Lessons Learned in Aviation Financing see more
NAFA member, Martin Ormon, founder of Aircraft Finance Corporation, has been financing new and pre-owned aircraft for over twenty years in a niche business that has proven to be successful.
It all started with a deal back in the spring of 1998, during Ormon’s private banking days, when he was the co-owner of a hedge fund in the Northeast. Martin was tasked with assist- ing a client of his – an automobile dealer based Southern California – with a short term bridge loan to make an immediate acquisition of a partially constructed auto dealership. The client had a commitment from a local bank in the area, however due to the timing and urgency of the deal, Ormon stepped in and facilitated the loan. In exchange, the collateral for the deal was a 1996 Hawker 800xp. Within eighteen months, the deal went sour and Ormon ended up with the 1996 Hawker 800xp in his hedge fund portfolio. Ormon, being the ‘smartest guy in the room’ was challenged by his partners, “Okay, smart guy, what are we going to do now?” Ormon replied, “Well, Gentleman, it looks like we’re going into the aviation financing business.” Ormon immediately leased the aircraft to a pharmaceutical company for three years. “That’s when I discovered an attractive quality of ‘mature’ aircraft,” he explains, “even after they have been fully depreciated, their residual value can be impressive. Maintenance programs are a key factor in our credit decisions, how- ever not every aircraft we finance requires one, we do our own appraisals and verify the aircraft maintenance history, Where traditional banks shy away from aircraft aged fifteen years and older, AFC finances aircraft up to 30 years old, with loans from $500,000 to $20,000,000 Dollars.
So, how do they do it? In most cases, Aircraft Finance Corporation partners with regional banks that are federally chartered and then guarantees the loans through a percentage of term of the loan. Ormon explains, “[Our work is] really not that difficult to do. We have skin in the game and that makes a very big difference with regard to rate and term.” It is important to note, that in addition to their experience in the aircraft financing world, their work does require extensive knowledge of their customer. More than 85% of Aircraft Finance Corporation’s loans are made in house, as they under- write, service and portfolio their own loans. Furthermore, the customer’s loans do not get sold to the secondary market. On average, Aircraft Finance Corporation’s customers will keep their aircraft for 42 months. With this type of client loyalty, Aircraft Finance Corporation prides itself on 90+% customer retention. In fact, in 2017 Ormon and his employees closed 56 transactions with an average loan size of 3.2 million dollars.
“We base our amortization on 20 years. It’s our benchmark and it works. It adds to the bottom line of our customers cash flow. Aircraft Finance Corporation offers a vast range of loan programs from 3 years all the way up to 10 years, based all on 20 year amortization and up to 85% of the aircraft valuation. With regard to aviation finance brokers who very seldom have any skin in the game, this quickly becomes very frustrating to them when trying to compete with Aircraft Finance Corporation.”
After the financial crisis in 2008, the ‘big banks’ altered the way in which loans were made on aircraft transactions. With significantly shorter terms and stricter age requirements, they were no longer offering clients, what Aircraft Finance Corporation considers, really great deals. Loans on aircraft aged more than ten years requires a significantly higher down payment, comes with shorter terms and commands higher interest rates. The bar raises even higher for aircraft aged more than twenty years. Overall, resources to finance aircraft that was anything other than factory-new was scarce. Ormon recalls, “Everybody was leaving the market, with thousands of aircraft out there and available. I saw it as a great time to aggressively take market share.”
Ormon ramped up Aircraft Finance Corporation, taking an approach near completely opposite to the conventional banks. “So many aviation lenders dislike an older aircraft on their balance sheet,” Ormon reflects. “In fact, many of the big banks today frequently call Aircraft Finance Corporation to take older aircraft out of their portfolio, which we gladly do.” When it comes to new aircraft, Aircraft Finance Corporation consistently beats the ‘big banks’ who generally want to offer LIBOR-based rate programs. LIBOR-based rate programs can often leave the customer to become stuck with an escalating monthly payment shortly there after the aircraft loan is closed. Ormon believes, “Generally speaking, the ‘big banks’ do not want you to have any options; what you see is what you get.” “Earlier this year, we refi- nanced a Challenger 605 for a Texas business owner. The client had previously financed the aircraft with one of the ‘big banks’ with a monthly payment of $70,169 on a seven year term. With our 20-year term, his payment became $29,515 per month, allowing his business to utilize their new found cash flow. This is why a great percentage of our transactions are with repeat clients. Our clients range from Fortune 500 companies, to golf professionals, to manufacturing companies, etc...”
This article was originally published in BusinessAir, 2018 Vol. 28, No.10. Photo credit: Jay Davis.