All About the Bizjet Financing Landscape

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Banks enjoyed another exceptional period of financing business jets in 2022. Ford von Weise at Citi Private Bank, for example, reports that last year was one of its strongest for aircraft finance. But so far, not surprisingly, the banks say that 2023 has been downright slow. 

For many reasons, the ravenous appetite for business jets in the past few years is now somewhat satiated. The COVID pandemic has finally diminished, so travelers appear more comfortable flying commercially, even if airline service has frequently proved disappointing. Talk of a possible recession persists, and bonus depreciation—a major incentive for buying or upgrading a business jet since Congress passed the Tax Cuts and Jobs Act in 2017—is finally on the way out. Because of inflation, interest rates have steadily increased, making business jet loans and leases more expensive. 

The results are evident in the jet market. Fewer aircraft are available for purchase today and, despite an expectation that prices will decline, those that are for sale still have high price tags, a reflection of the surge in values over the past few years. Aircraft for sale remain on the market longer. Some lenders I spoke to say that their clients have adopted a wait-and-see attitude toward buying a new jet. 

Banks have their own issues, and some have put the brakes on aircraft financing altogether. Bank deposits have plummeted as customers have moved funds to other investments like Treasuries, causing the ratio of loans to deposits to suffer and making financing more expensive for banks. Together with the fear that the Federal Reserve may increase capital requirements, this has caused banks to be much more selective about where they deploy their capital. Further, the Basel Committee on Banking Supervision regards jets as relatively risky assets requiring more capital to be held against them. Not surprisingly, banks are frequently limiting their funding for aircraft purchases to existing clients who maintain significant deposits with them.

Thus, Steve Altman, now at Wintrust, notes a flight to quality by banks seeking to improve jet loan profit margins. That said, larger, more expensive aircraft financings may come under greater scrutiny given the higher cost of deposits, and some banks are now choosing to focus more on light, midsize, and super-midsize jets. Refinancings of jet loans, which were popular in 2021, have virtually disappeared since most existing loans are at lower rates than are available today.

Preowned Market Concerns

Preowned aircraft are especially problematic. As Craig Hannon, director of aviation finance at Truist, points out, the rise in the cost of preowned aircraft in the last few years has caused many buyers to sign up to buy factory-new jets. Most of the purchase price of such aircraft is payable to the manufacturer far in advance of delivery, which works out well for banks with an abundance of business jet finance experience like Truist that can finance the progress payments for their clients. 

Nevertheless, the preowned jet market may be starting to come back. For some aircraft models, especially ones that are no longer manufactured, available aircraft for sale are on the increase. Some of these are being sold by owners who learned the hard way that they couldn’t pay for a jet by chartering it out. Corporations, which often got by on virtual meetings during the pandemic, are reportedly returning to business aviation. Steve Day at Global Jet Capital, for example, finds more interest of late among corporate clients for operating leases, and Craig Hannon at Truist reports having more conversations with large corporate owners that are evaluating their replacement plans.

The debt-ceiling crisis was averted, and in mid-June, the Federal Reserve declined to raise its key interest rate for the first time in over a year (though the Fed threatens to raise it again soon). Many believe that inflation is close to peaking, and while rates will continue to be higher than they were a few years ago, some bankers report a greater acceptance of higher rates among jet buyers. And many buyers who have been waiting for a while are simply tired of sitting on the sidelines.

But once again, bonus depreciation is causing some potential jet buyers to wait until later in the year to start the acquisition process for preowned aircraft. Purchasers of “certain aircraft” can still benefit from 100 percent bonus depreciation this year, assuming all flights in 2023 constitute qualified business use. So, buyers are once again hoping to place a new aircraft in service close to the end of the year when it is easier to resist temptation and avoid non-business flights to maximize the deduction. 

Allow Plenty of Time

Unfortunately, service centers are extremely busy, and prebuy slots are less readily available, so additional time is required to arrange for due diligence on aircraft being purchased. As one banker suggested, buyers interested in maximizing bonus depreciation this year should begin the acquisition process this summer instead of waiting until fall. 

An alternative is to save time by forgoing a prebuy inspection, but in addition to being inadvisable, this will be unacceptable to most banks. Extra time may be required for financing as well. One lender recently said it would need as much as two months to provide financing on a preowned business jet, though most lenders can offer funding in a few weeks, especially for existing clients. 

Though rates have climbed steadily this year, one banker suggested that they remain low relative to the last 30 years. As of this writing, both the 30-day Secured Overnight Financing Rate (SOFR), the popular alternative to LIBOR, and the U.S. Treasury yield curve are just over 5 percent, resulting in jet financing interest rates in the 7 or even 8 percent range, with floating rates about 100 basis points higher than fixed. As a result, most jet buyers today are focused on locking in a fixed rate. Nevertheless, there are hopes that rates will not rise further and may soon fall. Though business jet lenders are generally looking for a 15 to 25 percent deposit and a 75 to 85 percent advance, 100 percent financing remains available for buyers with outstanding credits and good banking relationships. 

Most lenders are taking a relatively conservative approach to loan amortization and the principal repayment schedule. Years ago, a repayment schedule based on 18- to 20-year amortization was not unusual, but today, with aircraft values seemingly poised to fall, unless the principal is repaid more rapidly, the sale of the jet in five or 10 years may not generate sufficient cash to pay off the loan balance—never a popular situation for the borrower (or the bank).

Consequently, most banks today are looking for 10- to 15-year amortization, with the age of the aircraft and the percentage of the acquisition cost financed by the bank being key factors in determining the rate of principal repayment. On the other hand, though lenders these days often want to see the principal repaid more quickly, they continue to require prepayment penalties for the first few years of the loan term. They may also require loan-to-value covenants that can necessitate one or more partial prepayments during the loan period if the aircraft’s value declines rapidly.

Lenders Frequently Specialize

Business jet lenders often look to specialize. PNC Aviation Finance, which was incredibly active last year, continues as the leader in asset-based business jet financing while offering traditional credit-based financing to clients as well. Veteran aircraft financier James Crowley, now at Florida’s Cogent Bank, has been cultivating a reputation for financing older aircraft—jets dating back to the late 1990s and early 2000s—a market many banks avoid. 

Cogent offers six- to 12-month bridge loans on aircraft and is also working on a model for short-term (e.g., one-year) leases, an often-ignored segment of the lease market. Meanwhile, Global Jet Capital continues to specialize in leases, most of which are in the seven- to 10-year range. Not being a bank, Global Jet is able to take more aggressive residual positions and has considerable flexibility in creating lease structures to address the special needs of lessees. 

One of the main advantages of lease financing for the lessee is the ability to walk away from the aircraft when the lease terminates. For buyers who are concerned about paying too much or about the aircraft’s value holding up, a lease may be an attractive solution. Lease rate factors may be relatively high these days, but if nothing else, lease financing can protect the lessee from a catastrophic loss of capital when the aircraft is sold. The same concerns, however, have caused many banks to stop leasing business jets altogether.

Leases raise another interesting issue: the willingness of banks to warrant title when they eventually sell the aircraft. Business jets are generally delivered on an “as is” basis, which is why comprehensive due diligence prior to buying an aircraft is so important. An exception, however, is the warranty of title; even though they won’t guarantee the aircraft’s condition when sold, it is standard for sellers to provide a warranty of good title, free of liens and encumbrances, the terms of which are set forth in a “warranty bill of sale” provided to the buyer at closing in addition to the FAA bill of sale filed for recording on the FAA registry. 

That’s often not the case, however, when a jet comes off a lease by a bank or financial institution. Unlike the typical seller, the bank/lessor did not have possession of the aircraft for the last five to 10 years and is often unwilling to warrant the title, even if it obtains a similar warranty from the former lessee. Buyers interested in acquiring an aircraft coming off a bank lease should be prepared to purchase title insurance, if necessary.

As always, but especially today, buyers looking to finance a business jet purchase should reach out to banks with which they already have a relationship. As Donald Synborski, Avpro’s director of finance, points out, to finance a business jet, the bank may expect you to make deposits and become your primary lender. It is always prudent to obtain proposals from several banks, including ones that specialize in jet finance. It’s also important to seek professional acquisition assistance to help you buy the right aircraft at the best price.

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A list of banks and finance companies offering business aircraft loans is available here.