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Why We’re In A Golden Age Of Aircraft Financing

Why We’re In A Golden Age Of Aircraft Financing

Over the course of the past year, there has been an uptick in first-time aircraft buyers, as well as entities who may have owned an aircraft 15-20 years ago and are now returning — a large percentage of whom are financing their purchases. Due to the potential cash crunch created by COVID, many are also refinancing. 

And with 50 years of experience under our belt, we here at NAFA can say with confidence that there’s never been a better time to do just this. Here’s why financing is in a “golden age.”  

It allows you to preserve liquidity while maintaining your cash reserves.  

Readily available cash and marketable assets are “liquid”, whereas retirement assets (which you cannot convert to cash if under the retirement age), collections, and investments in volatile and/or niche markets are not.   

Liquidity is “an indication of financial responsibility,” writes Adam Meredith, president of AOPA Finance Company. “Extra cash reserves are an indication—to borrow a phrase from popular culture—that the borrower understands the inevitable ‘winter is coming,’ and has planned for it. ‘Winter’ could just be a job loss, loss of an aircraft partner, or a pandemic.”  

Use cash for assets/investments that increase in value over time and use leverage/borrowing to finance assets that decrease in value, making sure the loan amortization follows the expected future value of the asset. 

We’re experiencing historically low interest rates.  

Meredith, citing the latest economic projections, posits that the current economic situation is likely to last between 18 months and two years.  

As a result, some lenders — such as First Republic Bank — favor equities over bonds and cash on a 12-month horizon, as the former is likely to continue benefiting from low interest rates (as well as an improving economic backdrop and higher corporate earnings).  

With falling rates, some may wonder if they’re better off with a floating rate. According to Meredith, it depends.  

“If your time horizon to hold an aircraft is less than a couple of years, then yes, absolutely, this is a great time to look at floating rates. [However,] if your hold time is greater than two or three years, you risk becoming exposed to interest rates floating higher when the economy starts picking up steam. It’s likely that the Fed may increase rates in order to stave off inflation. That’ll increase the cost of your loan.”  

Interested in financing? 

Keep in mind that aviation financing is specialized and should be entrusted to those with the expertise to meet your unique needs and goals. That’s where NAFA comes in. Our member organization is comprised of 140+ companies who work together to finance general and business aviation, including large and niche lenders, title/escrow firms, brokers, dealers, tax specialists, attorneys, and certified appraisers.   

This article was originally published in Business Air, 2021, Vol. 31, No. 5.