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ACTIONABLE INTELLIGENCE FOR FINANCE
INCLUDING... • What’s the Real Cost of Business Aircraft Finance? • Ownership vs Lease: What are the Pros and Cons? • Buying a Jet? Defining Cash, Finance and Lease
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3 Guest Editor Jim Blessing, NAFA What’s the Real Cost of Business Aircraft Finance?
4 Ownership vs Lease: What are the Pros and Cons?
Buying a Jet? Defining Cash, Finance and Lease
EDITORIAL Commissioning Editor Matthew Harris +44 (0)20 8939 7722 firstname.lastname@example.org Editorial Contributor (USA Office) Dave Higdon email@example.com Consulting Editor Sean O’Farrell +44 (0)20 8255 4000 firstname.lastname@example.org ADVERTISING Steve Champness - Publisher Americas 770 769 6872 Steve@avbuyer.com Lee McLoughlin - Account Director US Aircraft & Services Sales Freephone from USA: +1- 855 425 7638 email@example.com Matt Chappell - Account Manager US & Canada Aircraft & Services Sales Freephone from USA: +1- 855 425 7638 MattC@avbuyer.com Lise Margin - Account Manager US Aircraft Sales +1- 703 818 1024 firstname.lastname@example.org Maria Brabec - Account Manager EMEA & APAC Aircraft & Services Sales +420 604 224 828 email@example.com UK Head Office +44 (0)208 549 9508 STUDIO/PRODUCTION Helen Cavalli / Mark Williams +44 (0)20 8939 7726 firstname.lastname@example.org email@example.com
What are the Top Myths and Facts About Aircraft Operating Leases
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How to Choose the Right Aircraft Finance Lender
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How does Business Aircraft Finance Work?
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Guest Editor’s VIEWPOINT
Jim Blessing, NAFA
Aircraft Financing in the Pandemic Market o much is different to a few weeks ago. The aircraft finance market, like every other, is unsettled as the COVID-19 pandemic continues. It’s hard to put a stake in the ground as to where we’ll be when this column appears in print – hopefully there’s more stability than at the time of writing. To better understand where we are, and where we might be in a couple of months, I polled the Board of Directors of the National Aircraft Finance Association (NAFA). The organization is an important partner to global aviation, reflecting that with a diverse membership and board. The NAFA Board includes small, medium and large banks, leasing professionals, aviation attorneys, title and escrow professionals and aircraft manufacturers, among others. Collectively we identified key changes and considerations within aviation finance right now. There are big issues that everyone is addressing – standards in lending, business activity, financing priorities and FAA changes. These are all evolving. And no one can say when we will shift back to “normal” with a “recovering economy”. Until then, this is what we’re working with.
On the Positive Side
Financial institutions are open for business, and interest rates have lowered across capital markets. There have also been significant draw-downs on credit facilities by clients to ensure they have the liquidity to endure at this time. Liquidity is not unlimited though, and banks must also have a rate “floor” to operate with. Virtually all financial institutions are taking the stance of supporting clients first, but they’re also funding new loans. Some are restricting lending to certain industries, including commercial aviation lending, reflecting a lack of near or long-term macroeconomic clarity. Additional factors (like the impacts of COVID-19) are reviewed on a client by client basis, weighing industry or new risk concentrations. This may determine different structures in some cases. The main question, for new loans or loan modifications, is how the business has been affected and the impact of further shutdowns. However, changes to underwriting
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standards are not under consideration at this point since the shutdown is viewed as temporary.
A Large Part of the Solution
The consensus is that this appears to just be a ‘pause’. OEMs are seeing interest in new aircraft and remain focused on keeping production rolling, albeit at a slower pace. In addition, where the finance sector was the root of the 2018-2019 crisis, the finance industry now is a large part of the solution, as many of the stimulus packages are funded through the finance sector. It does however take longer to close a loan. For example, the FAA’s procedural changes quarantine physically submitted documents for 72 hours, which may be risky to lenders and priority of loans (with processing times for filing and recording delayed). FAA acceptance of digital signatures and electronic notary services is helping, but everyone is trying to navigate the potential bottleneck at the point of closing.
BizAv to Accelerate Ahead of Recovery?
It’s still too early to tell how much new business has been impacted. Some clients are delaying purchases until there’s long-term economic clarity. However, there’s a growing outlook, as evidenced by most recent activity, that business aviation may accelerate ahead of a recovery. And while OEM activity may decrease, we’re still seeing first-time buyer activity, and projected increases in charter, fractional and pre-owned sales as clients seek alternatives to airlines. On the bright side, stores can now deliver wine with food, and maybe that’s one thing we hope does not return to ‘normal’. In the meantime, consider using the services of our diverse NAFA membership, contact your financial institution for up-to-date information on your situation, and stay safe. More information from www.nafa.aero
Jim Blessing is President of the National Aircraft Finance Association (NAFA) and Vice President of AirFleet Capital. He has spent his entire career working in the field of aviation, and is an experienced private pilot dedicated to helping others finance their own aircraft.
BUSINESS AVIATION FINANCE
AVBUYER MAGAZINE Vol 24 Issue 5 2020
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Whatâ€™s the Real Cost of Business Aircraft Finance?
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Gerrard Cowan is a freelance journalist who focuses on aerospace, defense and finance. He can be found on Twitter @GerrardCowan
In today’s environment of low interest
rates, borrowing to finance a business jet acquisition could be attractive for businesses and wealthy individuals. There are several factors to bear in
mind, though, according to industry experts. Gerard Cowan explores.
here are numerous ways to fund an aircraft today beyond traditional loans, according to Greg Holst, aircraft division president emeritus, 1st Source Bank (a US aircraft financing specialist). These include various types of leases or fractional ownership. Other buyers acquire their aircraft with cash. But despite the expansion of options, a significant proportion of buyers still opt for more traditional loan financing, where they borrow against their ownership of the aircraft as collateral, Holst notes. Tax benefits can play a role here, with aircraft owners in the US able to reduce their tax payments through ‘Bonus Depreciation’ rules in many cases, effectively deducting much of the initial cost of the aircraft.
When Does Borrowing Make Sense?
Finance-savvy companies and individuals can use debt to their business advantage, says Adam Meredith, president of AOPA Finance (a finance broker that focuses on aviation). In today’s environment of extremely low interest rates, aircraft owners might decide that borrowing makes more sense than using cash, allowing them to use their money to generate higher returns in their business. For example, if a loan costs 3% or less in annual interest payments, but the borrower makes an annual rate of return of 10% or more on their business, it makes sense to free up the cash to invest in their own endeavours, Meredith says. Ownership of an aircraft – whether through cash or borrowing – can generate returns in its own right, Holst adds. Chief executives and other senior personnel have a finite amount of time to see clients and do business, so “an aircraft is the closest thing we have to a time machine in terms of taking that resource, which we can’t duplicate or expand, finding ways to get more done in the hours we have each day”. www.AVBUYER.com
What Factors Affect the Terms of a Loan?
Of course, the terms of a financing loan can differ from one borrower to another. AOPA highlights five major areas for borrowers to bear in mind that can affect the terms offered. These include: 1)
Usage: A financing company wants to know that an aircraft acquisition is appropriate to the owner’s needs, and how it will be used. The more an airplane is used, the more it depreciates, and the more wear and tear it suffers. As the lender is effectively the aircraft’s co-owner, it’s important that their asset retains its value well. Age, Make & Model: The older an airplane, the fewer the financing options. Lenders will also consider the condition of the aircraft’s onboard equipment (notably its avionics). History: Borrowers must know all the specifications of their airplane, be able to supply photos, and show its maintenance and damage history (if any). Down Payment: This is required and will commonly be between 15-20%. In general the, higher the down payment, the longer the term of the loan, depending on the borrower’s wishes. Loan Amount: The borrower should think about the amount they want to borrow. For smaller amounts, buyers should be aware that the loan typically will require larger deposits and shorter payment terms, as well as demanding a higher interest rate. On the other hand, the higher the amount borrowed, the more options become available.
Meredith suggests borrowers consider securing pre-approval on a loan before bidding. “The market for in-demand models is incredibly hot right now,” he says. “Sellers know this, and they’re going to favour an offer from somebody who’s at least pre-approved to purchase something, much like when you’re purchasing a home.”
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“Sellers [are]...going to favor an offer from somebody who's at least pre-approved to purchase something." How to Succeed with an Aircraft Finance Lender
Holst says the key to success with a lender is ensuring “they fully understand your success as a businessperson”. That means it is essential to provide between three and five years of financial history. Given the typical size of aircraft loans, these statements should be audited or reviewed by an external, Certified Public Accountant (CPA) whenever practical. “That makes the numbers more reliable and trustworthy for a bank,” Holst explains, adding that it also may be worthwhile consulting with lawyers and other technical experts with aviation expertise to ensure compliance with US federal regulations and avoid other surprises at or post closing.
Safeguarding Against Surprises
When considering finance terms, borrowers must insist on simplicity, says Vivek Kaushal, president and COO, Global Jet Capital, which provides a range of leasing and lending solutions in Business Aviation. They must be able to determine the total cost of their financing at a glance, confirming there are no additional fees that the provider intends to charge. Additionally, if the financing is indexed to a benchmark rate – like the London Inter-Bank
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Offered Rate (LIBOR) – a change in those rates could also affect the financing cost. “Most importantly, retain experienced tax advisors, as different types of financing can have differing tax implications,” Kaushal adds. If a borrower works with an experienced and trusted provider, there should not be unexpected changes to financing costs along the way, he says. However, it’s best to stay in close touch with the financing provider to keep abreast of any new developments. Holst points to a number of “eleventh hour glitches” he’s seen, though he notes that these would probably be avoided through thorough preparation. For example, if an aircraft has not been properly inspected ahead of buying, there could end up being future maintenance costs that were not factored in to the original loan arrangement. Additionally, insurance is not always a given, he notes. While it should be a relatively easy process, particularly for those who’ve already owned aircraft, new owners are finding insurance coverage more difficult and costly to acquire, particularly for owner/pilots. This could add unexpected costs. “This is where an aircraft expert, someone who's been loaning money on aircraft and does it as a specialty, should be able to help guide you and give you some support,” Holst concludes. T
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Ownership vs Lease: What are the Pros and Cons? To lease or to buy? That is a very, very big question.
Rohit Jaggi speaks to the industry’s experts to find the pros and cons to each option and find out which is best suited to whom?
hether you ultimately choose to lease or buy, both will achieve the same short-term goal of placing you in your next aircraft. But they’re hugely different – including in a couple of ways that might be surprising. In a world where car ‘ownership’ is routinely by personal contract plans that have transformed access to expensive vehicles, ownership might seem a touch old-fashioned. But taking that route still has some compelling reasons. Choosing between buying and leasing largely comes down to liquidity and opportunity cost. But it can be even more complicated than it appears. As Gary Crichlow, director of aviation finance at London-based finance brokerage and advisory firm Arc & Co, points out, those two options can be subdivided to make four main ways to own your next business aircraft.
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• • •
The first is outright ownership (cash). Second is to own via debt financing, with the airplane as security for the mortgage. Third is leasing via a finance lease or hire purchase, which, like debt financing will probably involve an initial deposit, monthly payments and possibly a final lump sum ‘balloon’ payment. Unlike debt financing, the lender will keep legal ownership of the airplane until the loan is paid off. Fourth is an operating lease, which is more like renting the aircraft. The lessor owns it throughout. A deposit is usually a security deposit that is repaid, all being well, when the airplane is handed back at the end of the term.
As Crichlow says, “All of these options are complex, but option one is generally the simplest www.AVBUYER.com
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Rohit Jaggi holds airplane and helicopter licenses and frequently conducts flight tests of airplanes and helicopters for print and video. He held a number of news editing and reporting posts with the Financial Times before becoming a freelance writer. Find out more via firstname.lastname@example.org
because it's essentially two parties – you and your team of experts, and the seller and their team. The other options introduce a third party the financier - with its own team of experts, and its own requirements.”
Complex Doesn’t Equal Disadvantage
But while they are more complex, Crichlow adds, all the options apart from self-funded outright ownership have a significant advantage. “Rather than locking the client's own cash into a fundamentally depreciating asset, financing frees up that cash to earn a return instead, such as investing in the client's business or in other assets. “Certainly, with base rates at their current lows, there are some attractive opportunities to finance at the moment.” And here it depends what else you might do with that cash… A company that generates returns of 5% or more on investments might be best advised to use any cash doing exactly that, rather than sinking it into an asset that loses value. “In my opinion,” Crichlow offers, “the decision to lease, own with financing or own outright, comes down to your comfort level with three considerations: depreciation, liquidation and title security.” www.AVBUYER.com
Consideration 1: Aircraft Depreciation
“When talking about aircraft depreciation,” Crichlow continues, “there's depreciation from an accounting point of view and a ‘real market’ depreciation of value. If, based on expert tax advice, there are significant enough advantages to you from the former, and/or you're not bothered about the latter, then ownership could make sense.” Tax changes in the US at the start of the present administration allow an immediate tax deduction of 100% of the cost of new and pre-owned aircraft – a change that spurred several purchases. But gone (at least for the foreseeable future, as the world battles a viral pandemic and a contagion in lack of confidence) are the days when early buyers of new models might be able to count on a higher value for their aircraft than they paid. That era, which now seems a long time ago, essentially ended with the global financial crash in 2008, although it took a while for everyone to cotton on to the new reality. Despite the tax change in the US, prices of used jets have not recovered significantly.
Consideration 2: Liquidation
Liquidation can also be a big issue. “If you own the aircraft, then getting your cash back out of it by
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selling it will never be a simple exercise,” says Crichlow. “Nor will it be without costs such as broker fees, rectification of issues found by the buyer's prepurchase inspection, and legal and technical representation fees. “Furthermore, the value of your aircraft is volatile, subject to market forces well outside your control.” Even at the best of times, it can take months to sell a business jet or turboprop, so any business that relies on tight cashflow into which the sale of the jet has been inserted is optimistically playing with fire. “A key advantage of an operating lease is that it transfers the hassle of liquidation and the asset value risk from you onto the lessor,” Crichlow points out. “All you have to do at the end of the lease term is hand back the aircraft and walk away.”
Consideration 3: Title Security
Title security is a thorny one that “has both a legal and an emotional component,” says Crichlow. “If you own title to the aircraft, it confers certain advantages in terms of control, but it also imposes certain responsibilities. In leasing an aircraft, these advantages and responsibilities are the lessor’s. “If your aircraft is financed and you get into financial difficulty, for example, the financier generally has an easier legal basis on which to intervene if they own title as a lessor, than if you own title and their security is via a mortgage. “Furthermore, many owners simply enjoy the emotional fulfilment of owning title, and this fulfilment can - and often does - trump all other considerations,” he adds. On the other side of the fence, for several reasons (some of them regulatory), financiers are being quite picky about who they work with. The number of lenders willing to lend you a few tens of million dollars, secured by a mortgage on the jet, is not huge. But the number of finance institutions willing to 10 Vol 24 Issue 5 2020 AVBUYER MAGAZINE
take on the risks of actual ownership by granting you an operating lease is even smaller. One of those is Global Jet Capital, which has built up its specialist expertise to the point where it is might even lease you an airplane that you have chosen but few other financiers would touch. The USbased company, which has $2.6bn in assets under management, prides itself on detailed knowledge of the costs and risks involved – and it charges a bit more to make up for the higher risk. As Vivek Kaushal, president and COO of Global Jet Capital says, “you have to understand the asset.”
Don’t Decide Without Full Knowledge
It will pay to avoid being seduced into too swift a decision on whether to purchase or lease. Crichlow shares, “In my experience, when comparing an operating lease structure to a mortgage for the same aircraft, the headline monthly payment is often higher for the operating lease. This often leads people to dismiss operating leases. “However, I always advise my clients to consider as well the non-refundable down-payment and balloon payment that many mortgages require, as well as the value of removing the risk and hassle of liquidating the asset, and to determine the financing structure cash flow and risk profile that works most advantageously for their situation.”
The latest plunge in the cost of borrowing, with base rates that have dipped to zero, might sway a decision on whether to own or lease, especially if you need to own your aircraft outright to be able to talk about it as yours. But if you don’t have the granular knowledge that Global Jet Capital has, or the cash flow to wait out a dip in the market that comes just when you want to sell, then leasing may be a good option. T www.AVBUYER.com
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FINANCE With a focused approach on global excellence and creativity, Andre Fodor has managed flight operations for the U.N. and Flight Options as well as being a senior demonstration pilot and instructor for Embraer Aircraft. He is the Aviation Director for his current employer.
Buying a Jet? Defining Cash, Finance and Lease What are the methods available to those wanting a full business aircraft ownership experience? Andre Fodor reviews the options, with a particular focus on traditional and operating leases… he secret to a successful business transaction is to aim to satisfy both parties. This will trigger a relationship based on goodwill and mutual interests, lasting far beyond any one-off transaction. When your counterpart understands your commitment to do ‘good business’, they, too, become stewards of your best interests. As an example, a well-respected aircraft broker once stepped out of a major sale he could make when he realized the airplane he represented was poorly suited to our mission needs. Seeing our commitment to doing good business, the broker refused to let us have anything less than what would provide us with an excellent ownership experience. In turn, his action was rewarded with our trust, several referrals to our peers, and the opportunity to participate in future deals over the years that have ensued. Recently, I utilized these same principals to advise a new client on the best way to acquire his
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first airplane. Until recently, all aircraft transactions which I’d participated in were cash transactions or financed. Cash Transactions: These are relatively straightforward. A purchase price is agreed, money exchanges hands between buyer and seller, and title transfers prior to the physical delivery of the asset. Financed Transactions: These are modified cash transactions that include a third party; a creditor. Here the buyer secures financing, either through a fixed-value loan or line of credit and uses it for the aircraft’s acquisition. The buyer is responsible for paying up a percentage of the purchase price (which may vary depending on the aircraft type, year, rate of devaluation and several other metrics). The asset’s title is held as collateral and, at times, the lender will be required to provide additional collateral security, especially if the www.AVBUYER.com
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aircraft is to be operated or based in a location considered less stable or riskier for repossession purposes.
The Third Option: Aircraft Lease
A third, newer option in aircraft acquisition is the lease transaction. This has gained more traction as the financial institutions have been seeking new opportunities to lend money during a period of low interest rates. Traditional Lease Arrangements: These focus on newer aircraft that are under warranty and tend to include restrictions on the allowable number of flight hours and cycles per year and over the lease contract. This is designed to protect the leased asset from over-use and an accelerated depreciation. In a lease contract, there may be several requirements relating to how the asset should be maintained. The engines are likely to be required to be enrolled on specific hourly maintenance www.AVBUYER.com
programs, and periodic conditional inspections may be required to confirm that the aircraft is being well-maintained. The return of the aircraft at the contract’s end will include a formal inspection and compliance with any upcoming maintenance or Service Bulletins. Cosmetic repairs or fresh tires may also be required, depending on the contractual obligations. Ultimately, a traditional lease may provide operators with: • • •
An opportunity to take advantage of progressive depreciation at the rate that the asset becomes your property. A chance to buy the asset at the end of the lease contract at a pre-determined price (which may be above or below market). Less out-of-pocket up-front investment, freeing capital for other business investments and a reduction in your tax bracket due to lower taxable income.
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Operating Lease Arrangements: To further increase the attractiveness of their lease products, the leading providers have developed new products designed to attract more people to lease aircraft. The Operating Lease is one such product. In layman’s terms, it works similarly to a rental agreement that has a defined beginning and end, requiring the return of the aircraft to the lessor. In this case, however, these transactions can include: • •
Newer aircraft purchased by the leasing company and then leased, or Pre-owned aircraft that the leasing company either purchased or received back from a previous lease.
The leasing company receives the benefits of depreciation and a volume discount through buying aircraft from the OEM which it then sells for retail price. The lessee, meanwhile, is free from the onus of a large capital outlay and only has to make an initial negotiated buy-in lease payment followed by monthly payments. At the end of the lease, the lessee can either return the asset and move into another aircraft or extend the lease. Per the traditional lease, the lessor will limit and
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review the operation of the aircraft to prevent accelerated depreciation, and may require intermediate inspections. The risk lies with the lessor who must assure that the sum of the lease payments, residual value post-lease and depreciation benefits still generate transactional profit.
What Does an Aircraft Lease Cost?
Monthly lease payments typically equal 0.8% of the aircraft’s value. Terms typically vary between five and 10 years, and lessees needn’t concern themselves with residual value. While leasing companies have traditionally tended towards assets valued over $10m and newer than eight years, as more lenders have sought to provide solutions to the market, some are offering leases designed for different requirements.
So, are there any tips worth prospective lessees noting? I’ve found that if the leasing company already owns an aircraft that’s suited for your needs in its inventory, a better deal can be negotiated. As with any business transaction, negotiation is central to buying an aircraft, ensuring the deal is right for both parties. Ultimately, a lease can be a valuable tool for less complex operators, and especially for those who are making a first foray into aircraft ownership. T
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What are the Top Myths and Facts About Aircraft Operating Leases The Operating Lease is viable for many business aircraft users, yet there are several areas of misunderstanding about this financing option. Here we aim to examine the myths and discover the realities. uying a business aircraft represents a substantial investment. Depending on the size, age, and type of aircraft, potential operators could easily spend tens of millions of dollars on their purchase. As a prospective aircraft owner, this makes the due diligence process essential. Part of that requires consideration of the most suitable ownership method to satisfy individual mission needs. This can be easier said than done â€“ particularly where misunderstanding can be rife, as is often the case with the Operating Lease structure. Below we explore and clarify some of the common misconceptions about the Operating Lease.
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Myth #1: Operating Leases are restrictive
Some of the confusion regarding the restrictiveness of an Operating Lease emanates from inaccurate comparisons with the fractional ownership model. There are in fact significant differences between the two. Under an Operating Lease, ownership of the aircraft is not shared with anybody else. Similar to a car lease, passengers leave their personal effects on board and access the same aircraft for the entirety of the term of the lease, as if it was their own jet, but often without high capital outlay. Throughout the lifetime of the lease, owners can put the business capital to better use elsewhere. www.AVBUYER.com
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allow a lessee to up-or down- size the aircraft as their mission requirements change. It is also possible to extend the term of the lease or terminate it prematurely. The ability to be flexible will depend on the lease provider you choose. Remember, a well-tailored Operating Lease can be crafted to adapt to changing business needs which regularly evolve.
Myth #3: Operating Leases are only suited to newer aircraft
Prospective owners might be pleasantly surprised by the relatively few limitations regarding the types of aircraft they can lease. Whether the aircraft is new or pre-owned, even slightly older, there are providers in the market who will offer Operating Leases. That’s because specialists in Business Aviation financing, such as Global Jet Capital, seek to spread risk across a large portfolio, encompassing aircraft from all leading OEMs, across global markets, and from a variety of age brackets.
Myth #4: Operating Leases only work in a bad resale market or when interest rates are high
It’s true that some restrictions exist within an Operating Lease, and primarily these relate to upgrades, modifications and who provides maintenance, all of which have potential impact on the residual value of the aircraft at the end of the lease. Other, usual lease terms will also apply. Use of the aircraft falls within the normal patterns of ownership. Ultimately, much depends on the lessor you choose to provide you with an Operating Lease. Some lessors will be a better match for your requirements than others. A well-matched lessor will look to understand your needs and work to offer terms that are flexible, and that achieve your particular requirements. One of the most attractive aspects of an Operating Lease is highlighted at the end of the lease term. Instead of shouldering the burden of finding a buyer, while continuing to bear the responsibility of a potentially depreciating asset, an Operating Lease with a predictable term makes disposition of the aircraft as simple as returning it to the lessor.
Myth #2: You’ll be trapped in an Operating Lease, even if your business needs change
While entering into an Operating Lease is contractual, it doesn’t have to mean the terms of that contract are rigid. Depending on the terms of the lease, modifications that adapt to your changing business model can be made. For example, it’s possible for contracts to be adjusted to www.AVBUYER.com
Regardless of the resale market patterns, or fluctuating interest rates, aircraft owners who understand the benefits of accessing Business Aviation are prepared to take a risk. To purchase an aircraft outright requires either a large cash outlay or a significant down payment to obtain the necessary financing. Geo-political situations, emerging technology, and the realities of economic variability all play their part in stabilizing and destabilizing markets. There are no guarantees that a strong market will still be strong when the time comes to sell the aircraft. The advantage offered by an Operating Lease is that it provides predictable costs throughout the duration of the lease, from the initial payment to the end of the lease term.
Myth #5: You can only achieve privacy by owning an aircraft outright
Due to the fact an Operating Lease reduces visibility to an aircraft’s end user (since the public records of the FAA identify the lessor as the owner of the aircraft), a leased aircraft may actually provide an additional layer of anonymity to those seeking ultimate discretion.
The above are just five examples of how misunderstanding can cloud perspective and the Business Aviation user’s view of the options available to them. Regardless of the type of ownership that ideally caters for your mission need, users should challenge the preconceptions and discuss the options with those well placed to shed light on them. An Operating Lease can be an extremely viable and very attractive alternative to outright ownership for savvy executives seeking the business aircraft ownership experience. T More information from www.globaljetcapital.com AVBUYER MAGAZINE Vol 24 Issue 5 2020
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FINANCE Rohit Jaggi holds airplane and helicopter licenses and frequently conducts flight tests of airplanes and helicopters for print and video. He held a number of news editing and reporting posts with the Financial Times before becoming a freelance writer. Find out more via firstname.lastname@example.org
How to Choose the Right Aircraft Finance Lender What do business aircraft buyers seeking financing need to ask when searching for the right lender? Rohit Jaggi interviews those in the know for some key tips and pointers… rave is the aircraft buyer who goes with the first offer of financing that he or she can find. Brave or foolhardy. It’s worth remembering that the borrower and the lender, while they both might want a transaction to work, are not actually on the same team. The borrower wants cheap funds. The lender wants to make a loan with the best return. The two sides can agree on some things, i.e. that neither want a loan so unfavourable and costly that the buyer defaults (the world of pain that comes from a failed loan is good for nobody). But short of that, the field is open. Leading aviation lawyer Paul Jebely points out that all lenders are not equal. “Business aircraft financiers look in varying degrees to credit risk, and to asset value and asset preservation – including factors such as jurisdictional and repossession risk,” says Hong Kong-based Jebely (who leads the private wealth and asset finances practices of Pillsbury Winthrop). The important thing is to choose a lender that is the best match for your individual requirements – not just the first one to agree to lend you the money. That means first working out exactly how much of
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your own cash you want to put down; what aircraft you are looking to buy; what you want to use it for; where you will base it; and how you will maintain it. Only then can you work out who the right lender is. Brendan Lodge, UK-based aircraft acquisitions specialist with Jet Support Services Inc, notes, “The lenders have become incredibly faddy in terms of the niches where they want to lend. At the point where liquidity became restricted, the banks became fussier: They were able to lend all the money they could get their hands on, then they became less willing to do the donkey work.”
Where to Begin Your Search for Aircraft Finance
Jebely says a good starting point is a bank you have an existing relationship with. But he adds that the search shouldn’t stop there. Even if you have the money to pay cash for the business aircraft you want, it may make more sense to finance the aircraft and put the money to use where it will earn a better return. That is especially relevant now, when interest rates are “bumping along the bottom”. If you’re in the happy position of not needing to www.AVBUYER.com
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borrow, but still want a loan, the options are likely to be much wider. Nevertheless, you should look at other conditions. Some lenders (who may be after your funds much more than wanting to lend to you) could require as much money as the loan to be deposited with them, possibly obviating the reason for taking a loan in the first place. The size of the loan will also steer you towards, or away from, specific lenders. And you should ask yourself how much transparency and disclosure you’re comfortable with. A complicated trail of ownership will rule out some lenders. “Line of sight to the ultimate beneficial owner, and transparency around the identities and source of wealth of all obligors, is absolutely critical,” says Gary Crichlow, director of London-based finance brokerage and advisory firm Arc & Co. “Clients with ties to certain jurisdictions – nationality, residence, assets – can be more challenging, but financiers are a global community, and appetite varies.”
How and Where Will the Aircraft be Used/Based?
The planned use of the aircraft is also key. Some lenders are more comfortable about the regulatory www.AVBUYER.com
environment for only partly chartered aircraft, for example. It’s important to find a lender that understands what you want to do with the airplane. And the use of the machine may determine where it’s based, and on which register it’s placed. But, again, make sure your lender understands the specific rules of the Lithuanian register (for example) or the Isle of Man register. Any lender who knows what they are doing should be able to work out for themselves that lenders, borrowers and aircraft need to be a good fit in this respect. But it is more important to you, so don’t scrimp on that research. “All of the domestic lenders are comfortable with the IoM register,” notes Lodge. “The issue with less well-known registers is that the bank may not have any experience of that register. In order to structure a loan or a mortgage it may first have to seek legal advice, taking time and money. So it makes sense to research which lenders are already comfortable with that register.” Aoife O’Sullivan, partner with The Air Law Firm, says the main consideration is flexibility to choose the regulatory regime that best fits the intended use and operation of the aircraft.
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“For example, aircraft flown commercially or on charter must be placed on the same register (with some exceptions) as the aviation authority of the chosen operator or AOC holder,” she outlines. “Aircraft flown privately are not as restricted in choice.” “Small deals can work particularly well when the client, the aircraft and the financier are all based and registered in the same jurisdiction,” Crichlow highlights. “The ultimate beneficial owner's identity and finances are straightforward, and the financier has a standard suite of contractual documents that the client is happy to sign up to with a minimum of negotiation.” Jurisdiction is also important for lenders to make sure they can collect on their loan if it all goes wrong. Your reasons for choosing the jurisdiction probably won’t include the lender’s ease or difficulty in reclaiming their security – but where the deal is based will be a factor in who you can approach for a loan.
How Will the Aircraft be Maintained?
Maintenance is another issue – some lenders want all-singing, totally comprehensive service
contracts that could be financial overkill for your intended use of the aircraft. That’s another good question to ask before going far down the road with any particular lender. As Crichlow says, “A low-rate financing offer that demands a high-cost operation may not always be the optimal overall deal.”
Help is at Hand…
All these factors add up to the need to do a lot of homework on how you want the loan to look, and who would fit your bill to provide it. But there is help at hand: Lodge points out that a good broker is worth his or her weight in aircraftgrade titanium here. “If you can find a broker who knows which bank to go to for the particular type of borrower you are, and can then polish the proposal so that the bank doesn’t have to do much work,” he concludes, “that is the best way of improving your chance of getting the right kind of loan, with the right kind of structure, from the right lender.” It may not be your first choice, or even your first offer – but this way there’s at least a chance that everyone can win. T
“...choose a lender that is the best match for your individual requirements – not just the first one to agree to lend you the money.”
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How Does Business Aircraft Finance Work? What are the sources of funding available, the typical length, and the interest rate of an aircraft financing agreement? And how can buyers give themselves the best chance of securing favorable terms? René Armas Maes offers insights…
usiness jets can be financed through a number of traditional and non-traditional mechanisms. Irrespective of the mechanism you choose, to allow you to secure the best financing structure and deal (i.e. one with the lowest down payment, monthly payments and rates), lenders will need to conduct an exhaustive creditworthiness analysis. From the potential lender’s perspective, they must understand how you as an entity are structured, and the net consolidated cash flow position. Borrowers may typically need to provide three years of audited financial statements and up to 10 years of financial and cash flow projections. Banks and supplier references (among others items) will be requested and thoroughly analyzed. Not only it is important for them to find out what the net cash inflow is, but also what the prospective borrower’s total debt position is – including interest and principal payments, any upcoming balloon payments, maturity terms and rates, and more. And as important as it is for potential lenders to conduct a thorough credit and risk analysis of the borrowing entity, it’s paramount for them to evaluate the condition of the aircraft and its intended
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jurisdiction, especially where pre-owned aircraft are concerned. The purchase process will include the prepurchase inspection, which is mandatory for pre-owned assets, followed by closing and filing of the aircraft title in the appropriate international registry. Ultimately, all of these will enable the lender to put together a customized financing solution that matches both theirs’ and your – the borrower’s – interests.
What Aircraft Funding Sources are Available?
There are five common ways to finance an aircraft purchase. These include: • • • • •
Cash; Bank Debt (common in the US); Lessors/Finance Companies; Export Credit Agencies (ECA); and Capital markets.
In addition, business aircraft can be financed using manufacturer support and other non-traditional financing options (such as tax lease, margin loans etc.). Other financing structures and mechanisms www.AVBUYER.com
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employed to finance an aircraft include operating leases where 100% of the asset can be financed, and residual value risk is minimized, transferring instead to the lessor.
Why do Aircraft Financing Conditions Vary?
Depending on the jurisdiction and country, lending conditions may vary and different types of collaterals (based on the status of a client/entity with a bank) may be requested. As an example, asset-backed (or secured) lending is when a bank loan is backed up by a valuable asset – known as lender collateral – which is placed as a form of insurance against defaulting on the loan. While a lenders’ conditions can vary, based on the intended country of aircraft registration, lenders will tend to favor jurisdictions that have signed up to the Cape Town Convention as this guarantees the rights of aircraft financiers to repossess an aircraft quickly if necessary.
How Long are Business Aircraft Financed For?
Generally, business aircraft can be financed for up to 10 years, but more typically between 5-7 years. An aircraft make/model with a solid production base www.AVBUYER.com
and history (including technological updates and upgrades) can command more appetite for financing from lenders than one without. Aircraft obsolescence is a major risk for lenders meaning that most prefer newer aircraft. If you’re considering buying a pre-owned aircraft, most lenders will have certain financing term limitations. For example, if an aircraft is 12 years old the lender might decide to finance it for 2-3 years and not more. Likewise, lenders may not be eager to finance every type of aircraft, including those with high times on the airframe (i.e. more than 5,000 hours). Older aircraft types and less marketable aircraft might be difficult to find financing for, and are most likely to command a penalty in terms of premium rates and/or shorter financing terms. For these aircraft, financers will analyze (among other items) total number of units manufactured and spare parts availability. An aircraft’s maintenance history is very important as lenders will insist that at least the aircraft’s engines are covered by a respected hourly maintenance cost program. And lenders will generally consider aircraft engine time and favor low hours or mid-time engines.
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Finally, and under an operating lease, the lender may look mainly at the number of aircraft manufactured and aircraft type residual values among other things to determine the lending conditions and premiums. Likewise, a shorter amortization schedule and a larger down payment can be expected for operations where heavy aircraft usage is anticipated (such as for a US Part 135 certificate and in fractional ownership operations).
What is a Typical Interest Rate for Business Aircraft Financing?
Depending on jurisdiction, entity/individual credit history, size of down payment, the amount to be financed and the term, the interest rate can vary from 3.5% up to 7% or more. Many lenders offer flexible structures at highly competitive rates including à-lacarte rates (i.e. fixed, floating and hybrid). Moreover, for credits considered high risk a larger down payment might be required to close a deal and/or be needed to negotiate a better interest rate. By contrast, a medium to low risk credit might
command a down payment between 15-18%, whereas a higher credit risk might involve 30% or more. Unless an all-in rate has been confirmed and negotiated, a lender term sheet interest rate can be seen as purely indicative and calculated according to the credit strength and the Aircraft Sector Understanding (ASU) rate. Likewise, a rate can be refinanced – an important tool to free up equity. If interest rates are lower, refinancing may optimize cash flow and be a sound cost-effective alternative. And in case a variable rate was chosen for a deal due to solid financial market conditions, financers can help you lock in a better rate through a fixed-rate transaction or swap if financial market instability suddenly arises. Finally, due diligence and negotiation of the best interest rate (based on one’s credit risk/history, type of collateral guarantees and ability to pay balloon payment(s)) may be the right strategy to maximize cash flow which is the end goal when negotiating a financial deal. T
René Armas Maes is an International consultant and aviation professional with a broad experience in business aircraft sales. René has participated as keynote speaker at a number of business aircraft conferences related to what are the benefits of Business Aviation vs. Scheduled Airlines, with a focus on optimizing corporate travel productivity. He is ATPL rated pilot with 5,000 professionally flown hours.
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