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.
Private Aviation Finance - Why Cash Isn't Always King When It Comes to Acquiring a Private Jet see more
ARC & CO. IN CONVERSATION WITH ELIT'AVIA
The world of financing can seem a complex arena to navigate to get the best deal and, as such, the majority of private aircraft transactions are in cash. There are a number of reasons for this, including that aviation finance is often seen as too much of a hassle, too expensive, restrictive, invasive, complicated, not transparent or all of the above. It’s true that putting a finance deal together is a complex undertaking. But there is a key benefit
that makes finance worth considering:
YOUR CASH ISN’T TIED UP IN A DEPRECIATING ASSET
Having such a large capital investment in an asset that depreciates in value over time makes financing an attractive option. Linking financing to the different tax regulations and exemptions makes it an even more approachable option when maximising the value of retaining capital for investment in other areas.
Of course, there are always exceptions to this depreciating-asset rule: sometimes the market dynamics can be such that specific aircraft types and models become particularly sought after and appreciate
in value as a result (e.g. the Gulfstream G550). But these are exceptions, with limited durability of demand and the dynamics are volatile: value bumps are often unpredictable, sudden and short-lived.
Speculative buyers looking to buy low and sell high need to know what they’re doing, have a high risk tolerance and be willing to
go through the complexities of the buying and selling process at a moment’s notice in order to capitalise. Whether you’re buying the aircraft for use or speculation (or both), accessing finance preserves your cash – allowing you to invest it elsewhere.
Click here to read the full article.
Preparing For An Aircraft Purchase see more
NAFA member, Amanda Applegate, Partner with Aerlex Law Group, discusses how to become the most prepared and qualified buyer when purchasing an aircraft.
As the supply for quality pre-owned aircraft inventory has begun to shrink (especially in certain large cabin models), I see more buyers devoting time to advance preparations to ensure that they are perceived by sellers as the most qualified, attractive buyer. If you are in the market for an aircraft and want to expedite your purchase and closing, consider taking the following steps prior to making your first offer.
BUILD YOUR ACQUISITION TEAM EARLY & PRIOR TO THE FIRST OFFER
Aircraft Broker/Consultant – Select a consultant or broker who knows the global market for the aircraft type you are purchasing. The broker/consultant must also be respected among his peers. There are certainly instances when an offer is not taken as seriously if the broker representing the buyer lacks experience with the particular category of aircraft being sought or has had previous conflicts with the broker on the other side.
Aviation Counsel – Retain counsel in advance so she is ready to jump into a deal once the aircraft is selected. This will save valuable time later. Including a provision in the Letter of Intent (“LOI”) that the buyer will have an initial purchase agreement to the seller within three days of signing of the LOI will be very appealing to a seller. But this can only happen if aviation counsel has already been identified, retained, and is up-to-speed on the specifics of the deal.
Technical Representative – Hire the right technical expert so that he is ready to start immediately once the aircraft is identified. The technical representative will review aircraft maintenance records and identify any inspection items that must be rectified. The technical representative can also help determine which aircraft is the best aircraft to make an offer on, based on aircraft pedigree.
Lender – As in all transactions, sellers prefer cash deals. But if the aircraft is going to be financed, contact lenders and select a lending partner before a specific aircraft is chosen so that lenders are able to close quickly once the aircraft is identified.
Management Company – Is the aircraft going to be managed by a third-party provider? Will charter be allowed on the aircraft when not being used by the aircraft owner? Selection of a management company early in the process means you will have the management company acting as your advocate throughout the acquisition. Many management companies don’t start charging management fees until the aircraft is acquired, so there is valuable advice available at little cost by selecting early.
Insurance Broker – Decide if the insurance will be procured through the management company or if you need an insurance broker to provide the comprehensive coverage to diminish liability concerns.
Escrow Agent – Identify your escrow agent and obtain their wire instructions so you are ready to send a deposit as soon as you have an accepted LOI. This demonstrates to the seller that you are a committed buyer.
ESTABLISH YOUR OWNERSHIP STRUCTURE
Your aviation counsel can help you determine the following: What entity will own the aircraft? Does the proposed structure make the most sense, based on the intended use of the aircraft and the potential tax implications for those who will use the aircraft? Is the ownership structure legal under the Federal Aviation Regulations?
Retain a qualified aviation tax attorney and CPA who can review the ownership structure to make sure it is the best tax plan available. What are the sales and use tax consequences of the ownership structure?
Are there adequate liability protections under the ownership structure or at least adequate insurance for all parties involved in the ownership structure?
DON’T SWEAT THE SMALL STUFF
There are a number of miscellaneous items that often get negotiated in the LOI and purchase agreement. These items comprise a small amount of the overall transaction cost, and having flexibility on them may make your offer stand out. Understanding the cost of these items and your position on them before the LOI may allow your offer to appear more competitive than another offer. One approach is to have the seller pay all of these costs and then adjust the purchase price higher since that is the number the seller will most likely focus on. Some of the small items are Escrow Fees, Aircraft Movement Costs, Customs and Registration Change Fees (if applicable), and registration number change fees.
Spending time and effort at the beginning of the aircraft acquisition process to prepare as much as possible, can lower the naturally-occurring stressors related to aircraft transactions.
Please contact Amanda Applegate at 310-392-5200 or firstname.lastname@example.org.
This article was originally published by Aerlex on January 30, 2019.
Lending Associates joins National Aircraft Finance Association see more
FOR IMMEDIATE RELEASE
FORT LAUDERDALE, Fla. – September 1, 2018 - National Aircraft Finance Association (NAFA) is pleased to announce that Lending Associates has recently joined its professional network of aviation lenders. “NAFA members proudly finance - support or enable the financing of - general and business aviation aircraft throughout the world, and we’re happy to add Lending Associates to our association,” said Ford von Weise, President of NAFA.
Lending Associates is a provider of financing solutions for recreational and commercial aircraft acquisitions, working with a large network of quality lenders to ensure the most competitive loan rates. With years of experience, their team of experts are available to answer client questions throughout the process, helping consumers and industry professionals alike navigate today’s complex financing process.
Lending Associates matches the best lender to their clients’ specific financing needs, maintaining the utmost privacy and confidentiality. Their loan specialists work to design a financing program to best meet each unique situation. From the initial consultation to loan closing and ongoing servicing of the loan, the company is committed to the needs and goals of the client.
"Lending Associates is proud to join NAFA in its efforts to support private aviation. From what I have seen, the members of this association have a passion for aviation and a history of moving the industry forward from all aspects, not just finance," stated Grant Smalling, President of Lending Associates.
Much like NAFA, Lending Associates is dedicated to fostering quality, professional service throughout the aviation finance industry. Lending Associates and NAFA promote excellence in aircraft finance through their commitment to the consumer’s goals.
For more information about Lending Associates, visit https://www.lending-associates.com/.
The National Aircraft Finance Association (NAFA) is a non-profit corporation dedicated to promoting the general welfare of individuals and organizations providing aircraft financing and loans secured by aircraft; to improving the industry's service to the public; and to providing our members with a forum for education and the sharing of information and knowledge to encourage the financing, leasing and insuring of general aviation aircraft. For more information about NAFA, visit www.NAFA.aero.
YYZlaw Joins National Aircraft Finance Association see more
FOR IMMEDIATE RELEASE
FORT LAUDERDALE, Fla. – Feb. 5, 2019 – National Aircraft Finance Association (NAFA) is pleased to announce that YYZlaw has recently joined its professional network of aviation lenders. “NAFA members proudly finance - support or enable the financing of - general and business aviation aircraft throughout the world, and we’re happy to add YYZlaw to our association,” said Ford von Weise, President of NAFA.
YYZlaw (formerly Clark & Company) is a corporate and regulatory law practice with an emphasis on the aviation and travel industries. Their main clients are scheduled and charter international airlines flying into Canada, domestic air carriers, Canadian aerospace companies, aviation and travel trade associations, tour operators, aircraft lessors, financial institutions and a variety of other organizations and professionals related to the aviation and travel industries.“With our decades of experience serving the regulatory and transactional needs of business aircraft financiers and their clients, YYZlaw is excited to continue to further the growth of our industry by supporting NAFA’s mandate,” said Bill Clark, Managing Partner at YYZlaw.
The company provides legal counsel services to foreign and domestic corporations conducting aviation and travel businesses under the laws of Canada, including: regulatory advice on all aviation matters, the travel and tour operator industries; commercial and transactional advice on aircraft leasing, acquisitions and financing; commercial advice to aviation and travel companies in regard to laws of general application relating to labor, immigration, real estate and taxation; andadvice regarding the Cape Town Convention, including assistance with forming and maintaining accounts on the International Registry. “We pride ourselves on providing cost-effective, timely and sensible legal advice because we understand the real-life demands present in the business aviation sector,” said Ehsan Monfared, Legal Counsel at YYZlaw.
Much like NAFA, YYZlaw fosters strong client and business relationships with their expanding network of specialized professionals. YYZlaw and NAFA provide the knowledge and dedication necessary for continued development in the aviation industry.
For more information about YYZlaw, visit www.yyzlaw.com.
The National Aircraft Finance Association (NAFA) is a non-profit corporation dedicated to promoting the general welfare of individuals and organizations providing aircraft financing and loans secured by aircraft; to improving the industry's service to the public; and to providing our members with a forum for education and the sharing of information and knowledge to encourage the financing, leasing and insuring of general aviation aircraft. For more information about NAFA, visit www.NAFA.aero.
Aviation Finance Report 2018 see more
2018 marks one decade since the global economic downturn brought an abrupt end to the prosperity the business aviation industry had been experiencing. OEMs had been riding a bubble of exuberant prosperity that saw a record 1,317 business jet deliveries in 2008, but that changed swiftly.
At NBAA’s annual convention in October of that year, the usually bustling show floor took on the atmosphere of a funeral home lobby, with small groups discussing in hushed tones the latest financial market casualties. Before the crash, the super-heated business jet market had some models of used large-cabin jets selling at a premium, above new list price, to those who felt they couldn’t wait for their slot in the production backlog. That dynamic had many industry financiers scrambling to make deals as fast as they could, in many cases requiring borrowers to put forward little to no down payments, leaving the lenders shielded by only the seemingly unassailable value of the jets themselves. In the words of one industry veteran, “If you had a phone, you got a loan.”
That frenzy might have lulled some experienced lenders into a false sense of security, which manifested itself in their relaxing loan criteria. It also attracted many inexperienced lenders to the market, drawn by the seemingly depreciation-proof aircraft assets. “Before the crisis, business aviation was essentially a perpetually growing industry,” explained Donald Walsh, senior vice president for business aviation with Stonebriar Commercial Finance, adding that aircraft values had to that point proved resilient across economic cycles. “The corresponding sense of safety was reflected in investment decisions, [and] in the quest for growth, many finance providers, banks and non-banks, stretched and expanded into each other’s space. For a while, overheated capital and aircraft markets camouflaged the risks. But once the crisis hit, the industry was suddenly retrenching, capital seized, and prices fell at unprecedented levels.”
Many aircraft buyers during those frothy times soon found themselves underwater as private jet values tumbled in the aftermath of the recession. What was once so coveted became easily available, as owners looked to unload their aircraft for a variety of reasons, ranging from personal or corporate financial distress, to the resulting decline in flying hours as companies looked to conserve cash.
The percentage of business jets for sale worldwide hit a high-water mark of 17.67 percent of the fleet in July of 2009, according to statistics from industry data provider JetNet. Many finance providers suddenly found their lending portfolios cratered with aircraft that were in some cases worth half of their previous value.
“Throughout the period, lessors experienced residual write downs on their lease portfolios, lenders were forced to write off losses in their loan portfolio, and others either exited aviation financing or cut back substantially,” said Rudy Tenore, president of V2 Aviation Consultants. “The larger and more established lenders weathered the crisis and continued to provide financing alternatives.”
With their aircraft worth less than what was owed on them, some borrowers simply parked their jets and walked away, leaving the lenders to clean up the mess. “The crisis and its ensuing impact on the business aviation market reminded everyone that business aircraft are depreciating assets that do, in fact, lose value over time, ” said Ford Von Weise, director and head of global aircraft finance at Citi Private Bank. “Business aircraft values experienced a huge asset price bubble that the crisis quickly deflated and taught everyone that business aircraft values are just as volatile as [those of] other financial asset classes.”
With an abundance of used aircraft flooding the market, the airframers slashed production accordingly, with the total annual deliveries of new business jets not exceeding 874 in any year since that banner 2008 output.
Even a decade later, the effects on the aviation finance industry have not entirely faded. “There are a few financiers who are still living with the multi-year transactions that were booked in the run-up to the financial crisis,” explained Michael Kahmann, principal at Kahmann Consulting. “For lessors, this is seen in residual positions that exceed fair market value and an attendant requirement to re-lease aircraft rather than sell and immediately recognize the residual loss.” For loans, he noted the equivalent would be balloons that are greater than fair market value and therefore require “re-writes” to bleed down the banks’ book position over time.
A DIFFERENT TIME, A DIFFERENT MARKET
Today, the business aviation landscape is much different. That swollen preowned inventory has dropped nearly in half, to less than 9 percent, according to JetNet. Prevailing wisdom has long demarcated 10 percent as the dividing line between a seller’s and a buyer’s market. Indeed, those plentiful young, used bargains that were present in the market just a few years ago are now gone. That has led to the long hoped-for stabilization in prices. “That’s really where we see the recovery today,” said Paul Cardarelli, JetNet’s vice president of sales, at NBAA’s annual convention in October. “It’s trending to be an increasingly strengthening seller’s market.”
Used aircraft inventory, along with economic factors such as gross domestic product, corporate profits, and wealth creation, have long been tied to the health of the industry. Business jet deliveries have historically been tied to leading economic indicators such as the U.S. GDP and the Dow Jones Industrial Average, and using that metric, new aircraft deliveries are lagging. The U.S. has now had 35 consecutive quarters of GDP growth, while the Dow reached 26,000 for the first time in January, and saw a peak of 26,828 in early October. The Standard and Poor’s 500 hit the 2,900 mark for the first time this past summer. The U.S. unemployment rate, which hit 10 percent in October 2009, has steadily declined since then, reaching a nearly 50-year low of 3.7 percent in September. “We are finally beginning to see a sustained recovery in business aviation aircraft values that is reflective of the overall very strong economy,” said Citi’s Von Weise. “While some in the industry believed that the old metrics used to assess the health of the industry were no longer relevant, aircraft values did not increase in lockstep with the GDP, equity markets, and other historically linked indices.”
While those once-strong correlations may have frayed somewhat over the past decade, they can’t yet be disregarded entirely, according to Kirsten Bartok, managing partner of AirFinance. “They do still apply; however, what we now see is the industry is truly global,” she told AIN, adding that while the U.S. currently accounts for more than half of the overall business aircraft market, it can’t support the industry alone. “If one economy stumbles, that can impact global unit sales, especially for new aircraft. While the U.S. economy can be strong, if the Russian economy stumbles, if we see an Asian economic flu, or the commodities tumble, that does impact sales.”
CASH IS KING
Cash remains the preferred method for purchases of jets in the U.S. According to JetNet data, of the more than 2,350 FAA-recorded business jet transactions over the past year, little more than one-fifth involved financing, down considerably from the 40 percent-plus seen in the years before the economic downturn. After that point, aviation financing became more restrictive as lenders tightened their loan criteria. “During this period, buyers found themselves having a very hard time finding financing, which pushed them to use cash,” said Wayne Starling, the former senior vice president and national sales manager for PNC Aviation Finance, who was recently named as executive director of the International Aircraft Dealers Association (IADA). “That moved the cash buyers to the highest percentage of all times. Today, if you take enough time, you can find a financing program to assist you to buy almost any type and age aircraft you want.”
“Many business jet buyers pay cash because even though aircraft are expensive acquisitions, the price is still insignificant to their profile,” said Stonebriar’s Walsh. “It also simplifies the closing process and potentially adds negotiating power. For the ones that do consider financing but don’t need to finance, whether pre- or post-closing, the decision usually comes down to an optimal use of cash analysis.”
The trend of using cash for aircraft purchases accelerated in the aftermath of the economic downturn. “With interest rates at historic lows over the past 10 years, cash acquisitions were running as high as 75 percent,” explained Tenore, an industry veteran with more than a quarter century of experience. “Currently in a rising interest rate environment and a strong equity market, cash is being redirected into investment opportunities and other capital expenditures.” As result he added, there has been an increasing level of demand for financing and refinancing requests of late.” Another trend that is increasing, according to many in the aircraft finance industry, is customers closing the deal in cash, and then seeking financing at their leisure.
For those qualified customers, there are still plenty of eager lenders. “Financing is coming back in vogue as business people realize there is plenty of financing available,” noted Sam Harris, president of Jetloan Capital, who sees the pendulum swinging to the point where it may once again reach the 50-50 balance between cash and financing, last seen in the fourth quarter of 2004.
Liquidity is present in the market and funding is readily available from a variety of sources including the traditional major lending banks, smaller regional banks, and new companies that have carved out a niche specializing in aviation finance. “Many of the larger banks tend to view aviation finance as a means to attract and retain high-net-worth clients, explained David Labrozzi, chief operating officer with Global Jet Capital, which entered the market in 2014 and acquired GE Capital’s Americas business aircraft portfolio the following year. “Although there continues to be substantial liquidity in the market, when it comes to business aviation finance, banks have continued to adjust their business models to focus on relationship banking through corporate and ultra-high-net-worth clients,” he told AIN. “In some ways liquidity is more focused in this regard and allows a benefit and credibility to aviation-focused non-bank lenders.”
While some long-time major financiers such as GE, CIT, and Element have left aviation finance, some new players are entering the arena, attracted by the recent rebound in sales activity and prices. “It’s only in the past 18 to 24 months we have seen new lenders previously not in the aircraft finance space start to explore the market,” said Marc Yahr, vice president with L&L International, an aircraft brokerage that also provides financing through a partnership with CMG Capital.
“There are several new lenders in the industry as financial institutions continue to search for ways to diversify their balance sheets,” agreed Robert Kent, president of Scope Aircraft Finance, adding that barriers to entry are high for a bank that does not have the requisite expertise. “Borrowers are justifiably leery of putting their faith in an inexperienced provider.”
“Occasionally we see a smaller regional bank tiptoe into the small-to-midsize space, but there hasn’t been a new [major] entrant since Global Jet Capital,” said Bartok. “With the exit of CIT, Element, and GE, the overall effect is we still have fewer lenders.” She attributes the hesitancy of some lenders to enter the market to new capital requirements and the need to show regulators evidence of liquidity.
As an example of a smaller lender, there is Seacoast National, a Florida-based community bank with nearly a century of history. It moved into the aircraft finance arena fairly recently, expanding its marine and recreational vehicle loan division due to customer demand in the mid-2000 boom years. The company, which just joined the National Aircraft Finance Association (NAFA), survived the downturn and remains active in the aviation finance market.
“Our typical customers are high-net-worth business owners or professionals and small-to-medium-size corporations who are looking to purchase these assets,” explained Phillip Bartholomew, the bank’s yacht and aircraft finance specialist. “Our loans are typically up to about $9 million, which encompasses a huge percentage of the aircraft sales market.” He said the company manages to compete against the major aircraft financiers in the mid-Atlantic, the Northeast, and Europe by understanding the market for the collateralized asset and the customer’s needs.
“We don’t have a one-size-fits-all loan program,” Bartholomew noted. “Instead we spend a great deal of time earlier in the conversation trying to decide what’s going to work best for the customer and then crafting a solution for them.”
THE CURRENT CLIMATE
While long term loans and little-to-no down payments that were hallmarks of the pre-downturn era have largely disappeared in the years following, very secure borrowers can still find virtually any terms they want. “Since the crisis, the average term seems to have settled in around five years,” Walsh told AIN. “Before the crisis, seven to ten years was common.”
He noted that down payments and amortization periods can vary quite a bit depending on the transaction merits. “As a ballpark, 90 percent-plus advance, with a 20-year amortization is possible for a superior credit profile, and a 75 percent-plus advance with a 10 year-plus amortization could be expected for an asset-based structure,” which involves confidence in the asset (aircraft) value, the aircraft manager, and the structure of the deal as the primary form of repayment or exit strategy, rather than the wealth of the client, which is how banks generally underwrite.
In the Federal Reserve Bank’s most recent quarterly survey of senior loan officers, more than 17 percent of the respondents noted that they had somewhat eased their commercial and industrial loan standards for large and middle market firms (those with annual sales totaling $50 million or more) over the past three months, as compared to the just 1.4 percent that reported they had somewhat tightened their standards.
For smaller firms with sales of under $50 million, 3 percent of the lenders said they tightened their loan application standards, as opposed to the more than 10 percent, which indicated they had eased their criteria. In terms of the spread of loan rates over their institution’s cost of funds, for loans to large and midsize firms, 42 percent of the bank officials said they had narrowed the gap somewhat, making the lending terms more attractive to potential borrowers, while 10 percent reported increasing the spread.
“The financing market has once again become very competitive with many lenders reducing loan covenant requirements and offering extremely competitive interest rate spreads, combined with very high loan to value [ratios],” stated Von Weise, who is also the president of NAFA.
Another change from the pre-downturn era is that the time it takes to arrange financing has generally lengthened as lenders face much more scrutiny of their deals. What was once a matter of days has increased now to several weeks in most cases, to even months, as the lenders satisfy their anti-money-laundering and know-your-client (KYC) guidelines. For lenders, the regulatory penalties for making a mistake on a client’s trustworthiness can be severe.
While it is not a regulated bank, Global Jet Capital, which specializes in operating leases, still must adhere to those regulatory standards, especially because half its clients are outside the U.S. The company uses a network of third-party researchers to investigate the finances of potential clients abroad. “It gets a little dicey, but the work has got to be done,” Labrozzi told the audience at the JetNet iQ Summit in June.
Keith Hayes, senior vice president and national sales manager for PNC Aviation Finance, speaking at the annual JetNet iQ Summit this past summer, described how some customers will work with a broker for months to locate a suitable airplane, sign a pre-buy letter of intent, and go through the pre-buy inspections before thinking closely about how they will pay for it. “Then they come to us and say can we get financing on it, we need to close in two weeks,” he said. “Quite often, especially with our asset-based product, we can do that. But under a fully underwritten transaction, it’s very difficult.”
With the level of financial scrutiny now required, most lenders wish to be involved sooner rather than later in the process, which will contribute to a more trouble-free closing. “We add the most value when we’re engaged early,” said Joseph DiLallo, head of corporate aircraft finance and leasing with BMO Harris Equipment Finance. “Once we have the borrower’s financial statements and details on the jet, we can typically propose within a week and close within a month.”
For all lenders, the elephant in the room remains residual values. “Anyone who says they can predict long-term residual values with any level of certainty is not being truthful,” said Tenore. “All of the industry experts badly missed their targets during the last economic downturn.” He explained that the variables that can influence residual values are numerous and beyond the industry’s control. “Obviously, the longer you project out, the less the accuracy in the forecast. Add in geopolitical risk, economic downturns, new technologies, a restrictive regulatory environment, and an unprecedented event such as a major OEM bankruptcy, and residual value forecasting becomes very difficult,” he told AIN.
The past decade was marked by precipitous depreciation of aircraft residual values, the curve for which, at least for some models, has finally begun to flatten. “There are recent developments to suggest we are entering a more stable atmosphere,” said Walsh, noting that over the past 12 to 18 months the preowned market has rebounded as international buyers have become educated about the value of used aircraft and U.S. buyers are more willing to consider purchasing a previously foreign-operated aircraft.
PNC’s Hayes agreed that while the depreciation spiral has slowed on some aircraft (large-cabin, young, and U.S.-registered), he isn’t ready to make any blanket assumptions of residual values. “I think you truly have to look at every single deal, every single plane, every single age of the plane and make the determination based on that asset.” He told AIN that 2018 is shaping up to be a banner year for the company, which has closed more transactions annually since 2009 than any other aviation finance company in the U.S. and that this year’s activity is as high as its ever been in period since the downturn.
“People are concerned about what is going to happen in 2019,” Hayes said. “As the used market drops down to single-digit inventory levels and you get past the U.S.-registered fleet to aircraft with less desirable pedigrees, and as used prices begin to rise in some cabin sizes, at some point used aircraft buyers will take a more serious look at buying new aircraft.”
As the pool of young, pre-owned aircraft continues to dwindle, the criteria of what constitutes an “old” aircraft has not changed in the minds of many lenders. “From my perspective, age is a guideline but should not be viewed as a redline for lending or not,” said Kahmann. “To me, an old business jet is and always has been primarily one that will be difficult to remarket if repossession is required.”
While most prefer to lend on jets 15 years old or younger, there are always exceptions. “There’s more to it than just age,” said DiLallo. “While our guideline keeps us focused on zero- to 15-year-old jets, there are some five- or 10-year-old jets we won’t finance, and certain 16- to 18-year-old jets that we may be comfortable with, based on the specifics of a particular jet and the specifics of the particular borrower.” Buyers may feel that such aircraft are bargains in the current market and in many cases won’t seek financing, but should they do so, lenders will make sure they are properly insulated.
“Financing risk levels increase on older aircraft for a number of reasons, including but not limited to higher maintenance costs, regulatory restrictions, and new and more efficient replacement models,” said Allen Qualey, senior advisor and president emeritus of 1st Source Bank’s specialty finance group. “In cases when they are financed, terms of the financing are less attractive.”
Another looming concern for older aircraft is the U.S. mandate for ADS-B equipage, which will take place at the end of 2019. According to MRO provider Duncan Aviation, as of the beginning of October, only 52 percent of the U.S.-registered business jet fleet had been upgraded to ADS-B compliance, while only 30 percent of turboprops had been so equipped.
“I think this is an issue that perhaps has not been fully appreciated by financial institutions, either with respect to lending requirements on new deals or with respect to managing transactions in those institution’s portfolios,” said Bartok. “The growing realization seems to be that there may not be enough maintenance slots remaining over the next 15 months to accommodate all of the planes that need these technical upgrades, and as a result, a lot of planes will either be grounded or operated in a suboptimal fashion after the deadline passes.”
Given those options, experienced lenders are taking proactive steps. “We closely monitor every jet, and every borrower in our portfolio,” said DiLallo. “For every jet we have financed, or consider financing, the jet is either already NextGen-compliant or there is an agreed-upon plan and timing to become compliant.”
Once again, as new lenders move back into the periphery of the market, some see old habits beginning to creep back in. “I don’t think as an industry we have learned much, as memories fade and newcomers who have no experience jump in with both feet without doing their homework,” Qualey told AIN.
“Some lenders have begun to go back to the same inappropriate long amortizations and light down payments that caused problems after 2001 and again after 2008,” said Kent. “Each cycle, as the market heats up, lenders begin to make concessions as they chase loan volume.”
IADA’s Starling offered a warning to potential lenders: “Do not get caught up in trying to win business by out-structuring a deal outside what your guidelines are,” he said. “If losing one deal is going to create a major problem for you, then you probably already have a problem.”
APPRECIATION FOR DEPRECIATION?
At the end of December 2017, the Tax Cuts and Jobs Act went into effect, and in addition to slashing the tax rate for corporations, it increased and extended bonus depreciation for business aircraft through 2026, and expanded its benefits to include used aircraft that meet the appropriate criteria.
Aircraft placed in service after September 27, 2017 could be eligible for 100 percent expensing, according to Troy Rolf, an attorney with GKG Law. He notes that for qualified aircraft placed in service on or after January 1, 2023, the bonus depreciation rate under the Act will be reduced and phased out over a number of years according to the following schedule:
• 80 percent for qualified property placed in service after December 31, 2022 and before January 1, 2024
• 60 percent after December 31, 2023 and before January 1, 2025
• 40 percent after December 31, 2024 and before January 1, 2026
• 20 percent after December 31, 2025 and before January 1, 2027
• and 0 percent (bonus expires) for aircraft placed in service after December 31, 2026.
Some have attributed this act to helping spur the recent preowned boom. “The IRS rule changes, namely the ability for a 100 percent write-off against earnings for new and preowned aircraft purchases, has provided a further boost and is contributing to the sustainability of the recovery,” said Walsh.
Others believe the results are yet to be seen. “If someone could use the [depreciation] tax benefits before, they can use them now, and if they couldn’t use them before, they can’t use them now,” said Keith Hayes, senior vice president and national sales manager for PNC Aviation Finance. “We have had a lot of discussions and think there will be a lot of activity in the fourth quarter, driven by the requirements of bonus depreciation and the longer time it has taken this year to do the tax analysis, driven by the changes in the law that accompanies the purchasing decision.”
Before making their decision on depreciation, buyers have some important factors to consider, according to Nel Stubbs, vice president at industry research and data-provider Conklin & de Decker. “While this may sound like a good tax break to an aircraft buyer, the question remains, can I take this 100 percent deduction on my tax return?” she said. “Some things that should be considered when asking this question are, is the aircraft ordinary and necessary and can the buyer meet the 50 percent qualified business use of the aircraft for subsequent years?” Stubbs added that there may be heightened IRS attention on the business’s tax return that could trigger an audit as well. “Remember: just because the 100 percent bonus depreciation is available, this large of a write-off in one year may not be for everyone and the modified accelerated cost recovery system (MACRS) depreciation schedule may be the better option for the buyer.”
This report was originally published on AINonline on November 21, 2018.
Is a Business Jet Lease Right for You? see more
NAFA member, Keith Hayes with PNC Aviation Finance discusses business jet leases.
Has the aircraft lease market changed since the Great Recession? What are the popular lease types available to business jet owners? AvBuyer spoke with PNC’s Keith Hayes to discuss how leases can benefit certain companies and individuals.
Keith Hayes began a lengthy career in the finance sector with GE Capital in 1985, having joined straight out of college. Starting as an internal auditor, he held several roles within the company transitioning into a credit role and then into a sales/finance role covering a multitude of asset types.
In 2004 he joined the GE Corporate Aircraft group as the National Sales Manager and has been in the aviation finance sector ever since. Today as the National Sales Manager for PNC Aviation Finance, he is well placed to offer insights into the Business Aviation finance market. He is based at the company’s Boise, Idaho offices.
AvBuyer spoke with Keith to discuss the types of leases commonly available to prospective business jet owners; trends in the aircraft lease market; and advice to buyers considering lease as an option for their next business jet purchase.
AvBuyer: How has the aircraft lease market developed/changed over the past few years? Do you foresee further change in the short- to medium-term?
Hayes: The biggest changes have taken place post-recession. Prior to the recession, a lot of aircraft were leased under 10- to 12-year leases with flexibility for the lessee to terminate early within years 4-6 of the lease.
Following the recession, when aircraft values began to plummet, lessees generally found they were ‘under water’ in their leases. Many had no choice but to continue to lease the airplanes until the end of the lease term before returning them to the lessor (the bank).
This was not a positive experience for the lessee or the lessor. Due to the challenges associated with selling the returned aircraft, many lessors stopped offering lease products altogether. Others, PNC Aviation Finance included, continued to offer the product and, now that aircraft values are stabilizing (along with the recent changes in the tax laws), lessors are seeing an uptick in lease activity.
Looking ahead, there are changes taking place in certain accounting rules coming into effect in 2019 and 2020 that will cause leasing to not be as advantageous for financial reporting purposes.
Among the changes is a requirement from the Financial Accounting Standards Board for organizations that lease assets to recognize on the balance sheet the assets and liabilities for the rights and obligations created by those leases, and to provide disclosures to help investors and other financial statement users better understand the amount, timing and uncertainty of cash flows arising from leases.
However, we believe aircraft leasing will continue to be a value-added structure for certain owners.
AvBuyer: We’re hearing various forecasts of continued growth in the new and used aircraft sales marketplace during 2019. Would you expect to see aircraft leasing influence the aircraft sales trends over the coming year? If so, how?
Hayes: I have always said that financing does not drive the behaviour of aircraft owner. The average aircraft owner changes their airplane every four-to-five years regardless of whether they paid cash, financed or leased their airplane.
Some would argue that when banking ‘became tight’ during the last recession, aircraft sales were impacted, but I question if this was truly a factor. Cash has been, and continues to be, the number one method of paying for an airplane.
But as the global economy continues to thrive, I anticipate our industry will continue to grow; as companies and wealthy individuals continue to have opportunities to deploy cash into high-return assets, they will elect to finance or lease as opposed to paying cash for a ‘non-earning’ asset. Meanwhile, the lease versus finance question typically is driven by the owner’s tax appetite or financial reporting needs, not simply the drive to buy or not buy.
AvBuyer: For those weighing-up whether a lease is right for them, what are the common lease options, and what type of aircraft owner is each tailored to?
Hayes: In short, there are two types of leases: A tax-oriented operating lease (in which the lessor owns the airplane for Federal Income Tax purposes); and a synthetic lease (in which the lessee owns the plane for Federal Income Tax purposes).
Typically, an owner may enter a synthetic lease for a variety of reasons, including deferral of state sales tax and/or financial reporting and off-balance sheet treatment. Under a synthetic lease, the lessee would have full availability of all tax benefits for Federal Income Tax purposes.
Meanwhile, an owner may enter a tax-oriented operating lease for the same benefits realized in a synthetic lease but, most likely, they would do so because they cannot fully utilize the tax benefits.
There are a number of reasons why this would be the case including their level of personal use, passive versus active income, carrying forward of net operating losses, and more. Under a tax-oriented operating lease, the tax benefits are ‘passed’ to the lessor, and the lessor in return offers a lower cost of funds to the lessee.
Commonly, these tax-oriented leases are structured with eight- to ten-year terms with early buy-out options at a point determined by the lessee.
AvBuyer: For those considering whether an aircraft lease is the route they want to take into aircraft ownership, what are the most important things for them to understand?
Hayes: There are a number of variables an owner would want to keep in the front of their minds when leasing an aircraft.
While the documentation process for a lease (versus that for a loan) is not overly complicated, there are certain conditions you want to make sure are ‘market’ ones, including the return provisions, usage provisions and reporting requirements.
Additionally, the inclusion of an early buyout in the lease is an option the lessor may or may not offer. It is up to the individual lessee and their specific requirements to decide if this option is important.
Also worth considering, some lessors have a tax appetite while others do not. The lessee should recognize a lower cost of funds which can be analysed through the early buy-out in exchange for passing the tax benefits to the lessor. If it appears the rate of return is equivalent to debt financing, it could mean the lessor has no tax appetite.
Lastly, in many states, sales tax is paid on the rentals via use tax (as opposed to upfront payment). This can result in a significant deferral and, in some cases, avoidance of sales tax altogether (i.e. if the lease is terminated at an early buyout point and the airplane is then sold, the use tax on the remaining rental is potentially avoided).
This article was originally published on AvBuyer on January 7, 2019.
Have specific aviation finance questions, ask Adam! see more
NAFA member, Adam Meredith, president of AOPA Aviation Finance Company, is an aircraft finance professional with more than 15 years lending, small business management and customer service experience. Adam is a commercial pilot with multi-engine and instrument ratings. Ask Adam!
KARL: I have a loan with Bank of America at over 6%. This originated in 2008. Is the interest rate better now & what are my chances of getting a lower rate & would it be feasible (worthwhile)? It is a 20 year loan.
ADAM: Rates are going to be dependent on the loan amount and term of the refinance you are considering. We have a number of options that could potentially lower your rate below 6% and keeping it financed over 15-20 years. For example, a loan balance between $50,000 and $75,000, typical structures are 5.5% amortized over 15 years. If your current balance is over $75,000 then we can fix the rate over a 20 year amortization. Currently we are seeing fixed rates as low as 4.65%. The specific age and type of aircraft may also factor in to the final loan structure. Our regional account executives would be happy to discuss the best course of action to refinance your aircraft.
Example: Assuming you financed $125k in 2008 (20 yr term and 6%), your current payment should be $895/mth and you should still owe approximately $91k. If you were to refinance that loan today, your interest rate would be 1.2% less and your payment would drop to $595/mth!
KAREN: When I am ready to take the plunge, what documentation would I need to provide in order to apply for an aircraft loan from AOPA? I assume the usual stuff like bank docs?
ADAM: Aircraft lending is a bit different than most other loan products you are likely used to. The process and documentation is similar to that of a mortgage. Along with our signed credit application, our lenders require two years of personal tax returns and W2s. A current paystub would also be required. If you are self-employed or a business owner, additional business financials will be needed. A comprehensive list of required documentation based on your income situation can be found on our website.
Have questions for Adam? He is happy to answer them. Submit your questions here.
Great rates. Great terms. Helpful and responsive reps. Three good reasons to turn to AOPA Aviation Finance when you are buying an airplane. If you need a dependable source of financing with people who are on your side, just call 800.62.PLANE (75263) or click here to request a quote.
Have a specific aviation finance question you would like to see in future articles? Submit it here, and it may be highlighted in an upcoming content piece.
The five things you need to tell your finance broker to save you money see more
NAFA member and President of AOPA Aviation Finance Company, Adam Meredith, shares what you need to tell your finance broker to save you money.
Our goal is to save you as much money in interest rate and loan fees as possible. In order to best do that we need answers to the following 5 questions.
How will you own it?
Who is going to own the plane? Is it going to be a sole-purpose limited liability company you establish? That information is needed in advance to correctly fill out the loan documentation. Are you going to have multiple co-owners? Some lenders won’t even deal with an aircraft that has multiple partners, others limit how many partners they’ll accept. We don’t want to waste our time or yours by contacting lenders who could be eliminated in advance.
How will you use it?
If the aircraft is going to be used to generate revenue, there are specialized lenders that prefer these types of loans and are more willing to lend money. Revenue generating aircraft are often referred to as “essential use” aircraft. Some of these include aircraft used in charter operations, helicopter tours, pipeline patrol, and parachute jumping. In general, if your plans entail essential use on your aircraft, there may be fewer lenders willing to give you a loan. Tell us right away if that is what you intend. Likewise, if you want to use the aircraft for flight training, in a Flying Club or on leaseback, these all also fall into the “essential-use” category and thus require specialized options.
How long will you keep it?
How long do you plan to keep it? Most of our customers have their aircraft less than 4-5 years. If that is your intent, you may want to consider an adjustable-rate loan or vs. a fixed-rate loan. An adjustable rate loan can save you money. Here’s an example: let’s say you want a $500,000 loan. If you went with an adjustable-rate loan (fixed for the first five years, then adjusting annually) you could save nearly $14,000 in interest over the course of those five years compared to a 20-year fixed-rate loan.
Any past problems?
Tell us up front if there have been any past credit issues. Were there past disputes or bankruptcies? Insurance companies using heavy-handed tactics? Don’t just hope it won’t be uncovered during the course of the loan application, because it will eventually be uncovered. You’re far better off having the discussion of any past problems at the start of the application process rather than explaining after the fact.
How do you make your money?
We need to be able to explain to a lender what your cash flow looks like. The end-of-year results may be good, but did the cash come in lumps? Is it dependent on the seasons, or whenever you happen to buy and sell a company? Do you get paid a commission only when you make a sale? Do you plan to retire? Many of our members are small-business owners who may have irregular cash flow but high annual income. It’s helpful if we know in advance so we can make the best possible case to a lender.
Considering aircraft ownership? AOPA Aviation Finance will make your purchase experience as smooth as possible. For information about aircraft financing, please visit www.aopafinance.com or call 1-800-62-PLANE (75263).
This article was originally published in AOPA Finance on August 1, 2018.