Jack Sellsby/LONDON
A wide choice of financial packages brings its own complications
Ask an aircraft financier about the best way to pay for an airliner and there is never a simple answer - either in healthy economic times or poor. But airlines may have a surprisingly wide choice of finance options, despite the demise of tax-based financing and the run on export credit agencies, likely to reach capacity coverage this year and next.
It is not as easy as a trade-off between balance sheet financing or operating leasing, as each category in turn reveals more levels of choice. Operating lessors generally offer a standard off-balance sheet structure, tailored to the needs of the individual airline with rates determined by supply and demand. Long-term balance sheet finance offers more complicated and diverse options, however.
Secondary market deals
Perhaps one of the most important factors facing the primary market for aircraft finance is the large availability of secondary market deals that continue to be offered to the banking community. When the Japanese banking crisis was in full swing last year, many banks and financial institutions were forced to shed non-core assets. Aircraft portfolios account for billions of dollars. Numerous deals being offered to banks are finely priced finance structures for airlines with very good credit. Most Japanese banks have either sold all their portfolios or are in the process of stripping them down, with few taking an active role in aircraft finance.
"What's setting the pricing in the primary market for aircraft finance is a vibrant secondary market, as lots of Japanese banks are offloading assets," says Peter Barker, head of aircraft finance at Halifax in London. Understandably, in an attempt to get the best return on their business, some banks are opting for this type of transaction rather than looking at new finance deals.
As a result, aircraft finance markets have experienced an influx of German banks, keen to build their portfolios with competitively priced good credit deals.
Michael Trentzch of Hypobank says a lot of German Landesbanks (state-owned banks) are picking up not only secondary market business but also new deals. They borrow from the German federal states at low rates, which they are then able to pass on to their clients. Conversely, the Japanese banks have been forced out of the market because of the so-called Japanese premium. This means their cost of borrowing is high, making it impossible to both make money and offer competitive pricing to clients.
New tools
Debt pricing on new deals depends largely on the airline credit and also on the asset type being financed, but most financiers believe airlines are looking at paying more for debt borrowing than they have for the last three or four years. "For the next couple of years, I don't think the situation will improve that much. Airlines are paying more and they have to accept that the cost of funding will increase," says a London-based financier.
The relatively high pricing on debt, which is priced from around 75 basis points over the London Interbank Offered Rate, the commercial banking version of a base rate, is one reason why eligible carriers are looking at export credit-backed deals. This type of debt is much less expensive. At the height of the Japanese leveraged lease market in the mid-1990s, some Japanese banks were lending at 27.5 basis over Libor.
Aside from the debt markets, financiers and airlines alike are showing a lot of interest in extending capital markets products and developing new products. By far the deepest capital markets are found in the USA, boosted by a proliferation of sizeable pension, mutual and unit trust fund companies.
This source of investment funds has helped many US airlines to finance aircraft through the enhanced equipment trust certificate (EETC) market. An EETC is structured so that even a sub-investment grade airline can tap the capital markets. Investors in these structures take different classes of certificates, secured by the aircraft held in a bankruptcy remote, special-purpose company.
But tapping the US capital markets is not as easy for non-US carriers to achieve, mainly because of US bankruptcy issues and the prevailing inherent conservative nature of US investors. It is, however, possible to source these types of funds.
Ansett Australia completed an EETC-like structure last year and Qantas became the first non-US airline to structure a full EETC in February. There is also a market rumour circulating that El Salvadorian carrier Taca International Airlines will launch a similar finance product. But this is said to be possible only because Taca's aircraft will be registered in the USA for the duration of the transaction's life and because credit-rating agencies, which judge such deals, are swayed by the fact that the carrier's earnings are mainly dollar-denominated.
A new chapter
While there has been a continued debate by aircraft financiers about launching similar products in Europe, no structures have emerged. Much of the problem in Europe stems from its diverse mix of capital markets and its variety of bankruptcy laws, whereas the USA has to deal with only one set of laws.
In the Asia-Pacific region, banks such as Sumitomo are keen to develop securitisation packages, once again based on the concept of certificate sales secured by aircraft portfolios or projected credit card sales. Air-India is likely to complete a $100 million deal based on credit card receivables in a deal structured by the Singapore office of ABN-Amro Bank.
Although the Japanese are likely to stay inactive in the finance markets for some time, many of their banks are attempting to structure new products. The main product on the agenda is the Japanese operating lease, which will be designed to replace the Japanese leveraged lease and tap large pools of investor funds in the country, say bankers in Tokyo.
Many German banks are also considering a similar product. But what is different about these products is that investors will have to take a risk in the residual value of the aircraft - unlike previously, when airlines have been mainly charged with taking this risk.
Whatever the best option is for any airline at any given time, it is clear that with the demise of one successful chapter in the aircraft finance story that airlines will have to pick up the slack while confidence levels in the banking and finance sectors are restored.
Source: Flight International
