It is hardly news to declare the severity of the impact of the economic crisis on charter activity in the world of business aviation. Its impact on aircraft financing, however, has been notably complex, and warrants further exploration. To get to the crux of the key financial issues of the day, EBAN spoke to a cross-section of representatives from across the industry in order to ascertain the issues at stake, including representatives from manufacturers, lenders, lawyers and operators. The findings were certainly interesting.

“We have seen many lenders throughout the past several years in Europe, the Middle East and Africa scale back their lending for business aircraft purchases, and they are now primarily focused on aircraft valued at $10 million or more,” says Anthony Schieber of Beechcraft sales financing. Schieber's observation is one which is shared by many across the industry, and highlights the first issue at stake in funding options for aircraft: the size of the aircraft being financed.

It would seem that in many instances, larger and younger aircraft are far more likely to be given the go-ahead from lenders, as general manager of Primus Aircraft Management Solutions Stephan Krainer explains: “When you have a G650 for example, sometimes it is easier to get the finance or leasing when compared to a 10-year-old Excel. Big banks like Credit Suisse or UBS simply don't do small aircraft anymore, they only do aircraft that are big and new.”

He says that in Austria his company will have a hard time finding finance for older aircraft, and that extensive 'digging through contacts' is required to match a client up to a deal. “It always depends on whether the bank has some relationship with the owner already and knows their personal or corporate needs. If this happens they may jump over the line. Otherwise, you are stuck with smaller leasing companies.”

Graeme Shanks, vp of sales at CIT business aircraft finance, reinforces the selective nature of modern lenders: “Nowadays lenders are undoubtedly more stringent in their criteria, and it comes down to a question of asset classes. It is not just young jets that are the focus, but also jets in the medium to large cabin sector. Financing smaller aircraft and turboprops, especially older ones is, on this basis, problematic.” On the question of assets, smaller aircraft are viewed as a greater credit risk, asserts Aoife O'Sullivan, a lawyer at Kennedy's who has been at the centre of many an aircraft financing negotiation. “The credit risk, that is to say the borrower and its income from assets, is placed in a more challenging jurisdiction when the age of the aircraft is a factor. These types are not what the financier is interested in,” she says.

“As for small light aircraft, in many cases funding is refused for no reason other than that the bank puts as much effort into a small aircraft deal as it does on a large aircraft deal. The return rates on the larger deals are obviously more lucrative for the bank.”

Bernhard Fragner, ceo of GlobeAir, has consistently had to find financing for his fleet of Citation Mustang very light jets, and has run into difficulties due to the way the financiers perceive the value of the investment. He confirms O'Sullivan's view by illustrating the tentative nature of financiers, and their motivations: “I think the financiers who were really strong in the market have become shy over the last five years.

“They are still sitting on a huge pool of assets. If you talk to UniCredit, if you talk to GE, they are really now trying to clear their asset pool and clean their balance sheets.” Fragner believes that the book values these financiers have for their assets don't represent the market value and for this reason operators are struggling to sell aircraft. He says that leasing companies and financiers are now spending their time correctly managing assets, and this is why he believes they are not so 'aggressively' on the market as they were previously. “They have very often reduced staff and are simply not as hungry for new business.” Fragner is noting the exact same reaction from lenders as voiced by O'Sullivan, in terms of banks carrying out the same amount of work regardless of aircraft size, with vast differences in yield. “Financing a smaller jet such as a Mustang and financing a G650 have exactly the same work load for the financiers. Exactly the same legal work, exactly the same finance work. They will ask the question 'why should we spend our resources on a little aircraft which makes small margins, rather than going for a big aircraft?' Because of this policy, and with reduced staff and a focus on margins, everybody is chasing the larger aircraft.”

Krainer also feels that financiers are cautionary nowadays, and believes that banks were making their decisions based not just on asset value, but also on aircraft usage in the market. “The smaller aircraft were just standing on the ground and losing money, while the bigger ones still kept their value,” he says.

“The banks were pleased because they didn't have to make any big write-offs in their books for the larger aircraft, but this was not the case for the smaller ones. As we know, many aircraft are sitting on the ramp, no-one is flying them or buying them because, at least in Europe, the market as it stands is pretty dry at the moment.”

For Krainer, it is a question of risk once more, and the larger aircraft are seen as far less of a risk. This was not the case before the financial crisis when the market was buoyant: “Banks basically financed 100 per cent, based on the asset, because the aircraft value was something that crawled up, even after delivery. So there was no problem with the risk management. Now aircraft are like every car, where you lose some value over time.”

To combat this, potential aircraft buyers are now having to justify assets in other ways. Finding alternative assets is a theme which has been encountered by every contributor we spoke to. Krainer's examples of 'additional securities' include bank guarantees or houses, if the buyer is unable to offer at least 20 per cent cash up front. Fragner's attitude is rather more frustrated: “There has simply been no financing around. What I mean is there is financing, but the package they provide to you is not interesting. I'm talking about high security, personal guarantees and huge down-payments. So I think, what's the point?”

O'Sullivan outlines some of the options that are available: “PDP (or pre-delivery) finance remains more difficult to obtain and in some cases we have structured transactions away from the aircraft under construction and secured other assets for the bank instead. The difficulty with PDP finance is that until the aircraft is built and can fly, it is very difficult to secure a charge over the asset and in reality all the bank can charge is the underlying purchase agreement. If the borrower defaults, the bank can step in to finish the acquisition under the purchase agreement.”

Despite the inevitable obstacles, it is felt by many in the industry that the areas of growth in the market are spreading to the financial sector. O'Sullivan describes the market as 'fluid' and says that for 'sweet spot deals' involving these larger and newer aircraft types, there are in fact three clear options. The first of these comes from the private wealth banks, where the interest of the financier is based more on the relationship with the borrower than on financing the aircraft. The second comes from asset financiers at banks. These companies are subject to strict Basel banking regulations and will look to finance through a lease, as they prefer to own the aircraft and lease it to the borrower, with a limited purchase option available. The final option comes from operational lessors, that is to say smaller, more independent leasing companies. They too tend to own the aircraft and lease to the borrower.

With these solutions available, O'Sullivan feels that financing has not necessarily become more difficult in recent years: “More controls have come into play and we are certainly seeing some interesting new clauses or protections for the financiers. These are usually driven by tighter controls in the banking industry itself though.” She says that 12 months ago the deal sheet of Kennedy's was predominantly cash based purchasing, but the company is now financing 90 per cent of its transactions.

Likewise, Shanks is confident that the state of the market is continuing to improve: “A credible business story, sound financial metrics and an aircraft that is ten years old or less, registered in an established aviation jurisdiction – business aircraft financing is available in these instances.” CIT has seen an increase in lending this year. In Fragner's case, where financiers had been holding back, he is now hearing from them again as they begin to seek fresh business: “Since the middle of this year, people have been phoning, asking if we need finance and whether we might be interested. They are actively seeking the market out.

“Maybe buyers are wondering who is performing fine and who might be about to do well. They are viewing their client base and thinking about future potential. It is promising.” He says that some experts are even seeking smaller jets, and that this business originates mainly from Germany and the UK.

More specifically, these positive trends seem to be appearing regionally. Shanks elaborates: “Some regions are recovering more quickly than others. Africa and the Middle East have seen a gradual pick-up in activity during the second half of this year. Elsewhere around the world, we have seen an increasing amount of new business across Asia, eastern Europe, the CIS and parts of Latin America. Western Europe is recovering more slowly.” In his opinion, the challenges and obstacles in financing are not confined to any particular region. He says that one of the things that has shaken up the market is the prevalence of cash buyers in developing regions: “With today's low fixed rates, it's advantageous for individuals to use their capital to fund and grow their business and finance their aircraft acquisition.”

CIT has found it difficult to lend to African regions on occasion due to the lack of business and aviation infrastructure and what Shanks defines as 'common adherence to accepted international standards in insurance, registration, maintenance and operations.' He points out that that macroeconomic, legal and political factors will impact upon CIT's willingness to lend: “As a basic premise of lending, you need to have confidence that these big picture factors will not negatively impact your customers' ability to repay an obligation.” O'Sullivan also recalls some regional difficulties: “India and the problems associated with repossession arising out of a recent case have caused some concerns.”

It is apparent that financing is far from a straightforward process, but with a clear objective in mind and a shrewd attention to the finer details, successful investments can be made. Fragner puts this succinctly, as he explains that low market value can be a great thing for the discerning buyer. “Whether it's old aircraft, new or even secondhand, they all have a very reasonable pricing right now. They are stable, going at the real value and it can be quite well managed. I can borrow money for a new or secondary aircraft because pricing is at a reasonable level. Maybe I can get two to four per cent interest, and then it is interesting to private financiers.”