“"Not everything can fly. We will not install a swimming pool or a fireplace. That is not possible."”
The new rules of business aircraft financing
The good news about business aircraft financing today is that the money is back. One of the first consequences of the 2008 Wall Street meltdown was that capital disappeared faster than free beer. Many aircraft lenders still proclaimed that they were "ready to do deals," but often they lacked the financial horsepower to deliver on that promise.
Today, that's all changed. Banks have plenty of money to lend. But now there's a general lack of enthusiasm for loaning it to anyone who could really use it to buy an aircraft. Instead, as bankers have variously noted, there's a "flight to quality" and a "feeding frenzy for the best credits." A representative of one bank I spoke to recently put it this way: his bank wants to lend only to corporations, not wealthy individuals; and only to companies that have first-rate credit and that will use the aircraft mostly in a trade or business, not for executives' personal travel. To sum up: ask not what you can do for your borrower; ask what your borrower can do for you. Not surprisingly, aircraft buyers today often have to look harder for the right financing deal.
In fairness, borrowers are no more bullish than the banks. "We are lending as fast as the deals come in," said Sean Patrick at Commerce Bank's CBI Leasing, "but only the extremely well-heeled are buying jets right now." Many nervous high-net-worth individuals are reportedly keeping an unusually high percentage of their investments in cash or cash equivalents, indicating less-than-exuberant expectations for the so-called economic recovery, which is creeping along like a sleepy turtle. Similarly, many companies are reluctant to purchase assets like business jets at a time of so much economic uncertainty. Supposed stimulants for asset purchases based on tax breaks often have little effect simply because taxpayers aren't generating the income to make the breaks attractive. The resulting wait-and-see climate is leaving many prospective aircraft buyers standing on the sidelines.
That's a shame, because prices for lots of business jet models remain low and financing is still cheap. Buyers with outstanding credit (investment-grade credits and ultra-high-net-worth individuals) can expect to borrow in the neighborhood of 200 basis points over the 30-day LIBOR rate or even less, while mere mortals with excellent credit may pay about 300 basis points. Given how low LIBOR is today, though, some banks are introducing a minimum rate for loans floating on LIBOR. Thus, if the floor is 300 basis points, a loan at "LIBOR plus 190 basis points" would actually start at 3 percent.
Fixed financing rates, which are keyed to the rate at which floating rates swap for fixed, will be somewhat higher, with the percentage inching up as the term lengthens. "Liquidity premiums" may also drive up the rate for longer-term financings. For this reason, borrowers are generally better off with a term that more closely corresponds to how long they will keep the aircraft-five years, say, instead of 10. Similarly, the era of 20- and 25-year loan amortization is over; look today for loans to amortize in 15 years or less.
An advance rate of 100 percent of the airplane's value is still possible. "For the right clients," said Jim Simpson at First Republic Bank, "we will lend 100 percent of an aircraft's value on an interest-only basis." But buyers today tend to accept that lenders want them to invest enough of their own money in the deal to provide some cushion against the possibility of dramatically falling aircraft values, and in the last couple of years, borrowers have generally come to tolerate a down payment of at least 10 percent.
At the National Business Aviation Association's Tax, Regulatory and Risk Management Conference last fall, attorney Alvaro Pascotto estimated that roughly 50 percent of aircraft purchases are being financed with cash, with the balance split about equally between operating leases and loans/capital leases. Some lenders estimate that as many as 70 or 80 percent of aircraft buyers in 2010 paid cash.
Who is likely to pay cash? As noted earlier, high-net-worth individuals (and companies performing well) have lots of cash on hand. Many such buyers would prefer to take that cash out from under the mattress rather than borrow it from a bank. Moreover, purchasers of older aircraft often pay cash simply because the airplane represents relatively unattractive collateral and can be difficult to finance. As of this writing, 25 percent of Gulfstream IIIs, 16 percent of GIVs, 8 percent of GIV-SPs and 4 percent of GVs are for sale. The message to banks is clear: find the GV buyer. The GV has a second advantage for a lender: its higher purchase price. For the same amount of work (both in making and administering the loan), a financial institution can loan many more dollars. This can be a big plus unless the institution puts a limit on loan amounts that the financing exceeds or already has too much credit exposure with the customer.
Though many aircraft buyers are paying cash, some still have better things to do with their money than tie it up in an airplane and find the low cost of financing attractive. For the same reason, many buyers choose fixed-rate financing over floating. "People want to lock in today's low cost of money," said U.S. Bank's Pete Georgelas. "The majority of our 2010 aircraft financings were fixed-rate transactions." Still, in many ways, floating rates are even more attractive now, so buyers with a short time horizon-and buyers who think they will save more money in the near term than they will lose when rates go up later-may choose rates that float.
Not every financial institution is fixated on arranging aircraft loans with ultra-high-net-worth individuals and Fortune 100 companies. Some institutions actually cultivate a niche in below-investment-grade credits. The mission of other lenders is sometimes based on the aircraft. The focus at Cessna Aircraft Finance is on financing the purchase of new or preowned Cessna models and the emphasis at the U.S. Export-Import Bank is on financing the purchase by foreign buyers of aircraft manufactured in the U.S. PNC Bank has made a market in asset-based and non-recourse business jet financing. Assuming you can make at least a 40 percent down payment on the aircraft, PNC will require no financial statements or tax returns and will impose no financial covenants. If a default occurs, PNC's recourse is the aircraft itself.
The alternative to paying cash or borrowing to buy an aircraft is a lease. In a "true" or operating lease, the lessor takes title to the aircraft and leases it back to the buyer. This has several advantages for the buyer. First, if the buyer isn't making any money, has plenty of loss carry forwards or isn't planning to operate the aircraft in a trade or business, it can't benefit from taking tax depreciation. So the financial institution purchases the airplane instead and leases it back to the "buyer," in theory passing on the benefit of the aircraft tax write-off in its leasing business to the lessee in the form of a lower lease rate. Second, the "buyer" can walk away from the airplane at the end of the lease if aircraft values have fallen dramatically.
Proposed changes in accounting rules, however, would undercut another significant benefit of leasing. Under current rules, an operating lease isn't booked as an asset or liability on the lessee's balance sheet; instead, lease payments show up as expenses on the income statement. The net effect, referred to as "off-balance-sheet treatment," is to make it hard for investors in the lessee company to figure out that it has acquired an aircraft. Such leases are accordingly popular with public companies that aren't eager to advertise that they own a business jet.
Under the proposed accounting standards, on the other hand, the lessee would treat the obligation to make lease payments as a liability (essentially, the present value of expected lease payments), with a matching asset corresponding to the right to use the aircraft. This has the potential to be a significant blow to financial institutions like GE Capital and Bank of America that have earned a reputation for expertise in writing aircraft leases.
Back in the days of the feeding frenzy for business jet financings, loans often went from proposal to signed documents in a week. These days, business aviation attorney Stewart Pearl tells his clients who are new to a bank to allow up to eight weeks to get a loan finalized.
One reason is that banks are doing a lot more due diligence on prospective clients, and the credit approval process can drag on longer. Another reason is that banks are a taking a harder look at the aircraft. Even though almost all financial institutions are making credit-based rather than asset-based aircraft loans, they still want the asset value to be there in case (as happened in 2008-09), they get stuck with an inventory of repossessed and off-lease aircraft with painfully depressed values. Similarly, financing is much easier to obtain for newer and large-cabin/long-range aircraft, where values have held up better than they have for older and smaller jets.
The borrowers themselves can stretch out the process. One lender told me that aircraft buyers are fussier today about financing terms and recalled that a customer requested 24 separate proposals for the same financing. While such diligence is often commendable, devoting too much time to the financing may not only kill the loan deal; it may kill the aircraft deal altogether. A purchase can fall apart if the buyer doesn't have his financing on tap when the aircraft is ready for closing, so Pearl advises clients to plan ahead. "When a client wants financing for an aircraft purchase," he said, "I often suggest that he get in touch with the banks as soon as possible. Even if there is no specific aircraft purchase to evaluate, just providing financial information to the bank can save time."
As many bankers will acknowledge, the changes to business aviation finance in the last few years have been positive. The super-heated atmosphere of 2007 has given way to a more normal and healthier finance market. Financing for your business jet purchase is likely to be available, though it may take a little extra effort to find the best loan for you.
Aircraft Financial Institutions Private and Commercial Banks and Affiliates
Global Corporate Aircraft Finance
15301 Dallas Parkway, Suite 830
Addison, TX 75001
Michael T. Amalfitano
CBI Leasing, Inc.
Commerce Bank N.A.
Lake Forest, IL 60045
Sean K. Patrick
Chase Equipment Finance, Inc.
Chase Business Aircraft Finance
1650 Market St.
Philadelphia, PA 19103
Mark J. Schrieber
The Citigroup Private Bank
Global Aircraft Finance
666 Fifth Ave., Fifth Floor
New York, NY 10103
Mary T. Schwartz