When Washington's summer debt-ceiling brinkmanship spurred ratings agency Standard & Poor's to take the once-unimaginable step of stripping the USA of its top-tier AAA credit rating, financiers started asking whether the theoretical risk of default would hit the cost of borrowing.
In aviation, lenders face a question that never came up when the USA was AAA-rated: will that risk force them to demand that borrowers - airlines and operating lessors - pay more for loans guaranteed by the US Export-Import Bank? And what about loans guaranteed by European export credit agencies (ECA) such as Coface in France, whose AAA rating is at risk from eurozone turmoil?
RISK MATTERS
The answers could have a huge impact on the cost of fleet plans. Airlines based outside the Airbus and Boeing home markets of Europe and the USA are eligible for ECA-backed financing, which is dramatically cheaper than commercial borrowing. Historically, about 20% of deliveries have received ECA guarantees, but in 2009 the financial crisis crippled commercial lending and ECA-backed deals jumped to almost 30% of deliveries. The willingness of ECAs to step in helps explain how Airbus and Boeing maintained near-record delivery levels during the crisis.
No price rise is yet evident. Summing up sentiment among financiers contacted by Flight International, Tony Diaz, executive vice-president of lessor CIT Aerospace, says: "So far, this is a non-event. I see no real impact on pricing from the Standard & Poor's downgrade as the other two rating agencies [Fitch and Moody's] maintained their rankings."
However, the western world's long dalliance with debt is going to hit airlines. Diaz adds: "The real impact will come from the new aircraft sector of understanding [ASU]."
The new ASU deal came into force in February, but will not take full effect until 2013 when grandfather clauses run out. Like the 2007 deal it replaces, it is designed to prevent the USA and Europe - and other aircraft-exporting countries - from pouring in cheap money to support sales by "their" aircraft maker.
The new ASU terms are tougher, to make ECA support less appealing to airlines and lessors that could borrow commercially. As one financier puts it: "ASU is designed to wean airlines off the candy they have been enjoying for too long."
ECA-supported deals have been available to airlines and lessors for as little as 25 basis points - a quarter of a percent - above the London interbank offered rate (Libor) for US Ex-Import Bank deals, and under 50 basis points for European transactions. The same financing would cost a minimum of Libor plus 200 basis points - 2% - in the commercial bank market. For a risky airline, commercial financing can cost Libor plus 600 basis points.
As the chart above shows, upfront fees on loans under the 2007 ASU range from 4% to 7.5%, depending on the credit rating of the customer. Under the revised ASU, even the most creditworthy will pay 7.72% upfront. Alternatively, they could pay Libor plus 137 basis points yearly over the typical 12-year term.
So, if a BBB-rated airline - Qantas is one example - wanted to finance a Boeing 737-800 with a list price of $80.8 million, that financing would cost $5.3 million upfront, based on a typical ECA loan for 85% of the purchase price. The same deal would have cost just $2.7 million under the 2007 ASU.
SHIFTING BEHAVIOUR
The changes are already affecting purchase plans. AirAsia chief executive Tony Fernandes, a long-time user of export credit support, declared at the Paris air show that ECA financing is now uncompetitive. AirAsia will fund the largest-ever commercial aircraft order, an $18.2 billion deal for 200 Airbus A320neos, through cash flow, debt and sale/leasebacks.
Airlines and lessors will also face more expensive aircraft financing under the Basel 3 bank capitalisation reforms, which come into effect in 2013 and will force European banks, which are the biggest aviation lenders, to double capital reserves by 2019.
For airlines and lessors, this is likely to mean higher loan rates as banks pass on costs.
The bottom line is, whether they look to ECAs or commercial banks, airlines and lessors will be paying more for aircraft.
Source: Flight International
