For aviation borrowers looking to source cheap funds to pay for upcoming fleet and corporate requirements, the European Central Bank's decision to launch a €1 trillion ($1.14 trillion) round of quantitative easing is good news.
Weeks after the ECB's stimulus decision, Sweden followed suit and launched a government bond-buying programme worth SKr10 billion ($1.2 billon) to increase the amount of money circulating in its economy.
More liquidity in the European financial system clearly is a welcome sign for airlines and lessors in need of cash, but it is also a source of concern for aviation financiers as pricing levels continue to erode while the risks involved in lending to the sector remain.
Jose Abramovici, global head of asset finance group at Credit Agricole CIB, says the gross margin on aviation financings has decreased 35% within the last 18 months.
"And I keep seeing the margin going down for the best credits," he adds.
The estimate is based upon a loan tracker that the bank uses in deals that it "arranges – and those it loses to competition", he says.
An Asian-based bank agrees: "More money in the system will mean more liquidity for the European banks and therefore, more competition and pricing pressure not just for aviation, but the most decent-rated companies."
An alternative-investment financier based in London says "aviation pricing will reduce even further, and not just for the best credits".
Since the beginning of the year, at least one European financier, ING Bank, is rumoured to have reopened its doors to aviation financing. The biggest Dutch bank by assets exited the sector, except for export credit agency deals, following the 2008 financial crash.
While the return of ING may not be related to QE, the move demonstrates the appeal of the aviation sector due to the returns on investments, says an aviation banker. "Now, throw in QE and we are likely to see some new investors this year," he says, adding: "Just look at the number of aviation investors that entered the market following Japan's stimulus programme in 2013. Investors were looking for cash yield and they found it in aviation rental incomes."
The source suggests that low returns on government bonds have also "sent excess money into the aviation market", adding: "If you can get secured paper with a 5 or 6% yield, and there is a degree of liquidity in it, such as enhanced equipment trust certificate (EETC) financing with Chapter 11 protection, then why wouldn't you invest? In late January, the yield on a 10-year US Treasury bond was 1.691%, a 20-month low – so when you do the comparison, aviation makes sense."
Eroding pricing levels on aviation financings have been a growing source of concern for certain financiers.
At an industry event last month, Deutsche Bank's managing director of asset finance and leasing Richard Moody said that in 2014 certain transactions "were not priced correctly".
He adds: "When you price 90% LTV [on a] piece of debt, where it would have been 75% a year earlier, it does not sound right."
While he praises the industry for its ability to attract liquidity, he questions whether liquidity is pushing pricing down.
"Every single investor has different criteria to deploy to put the balance sheet to work, but that has consequences in a low-spread environment," he says.
Another financier says the industry is "giving credit away at low rates that don't reflect the risks involved in aircraft and airline transactions."
He says: "People are looking for returns as they need to do business right now, but they aren't weighing the risks involved in these financings properly."
Europe's stimulus comes years after other central banks embarked on quantitative easing, with the USA finally quitting the practice in October 2014. In the same month, with inflation low and consumer spending dwindling, the Bank of Japan increased its already massive stimulus programme to Y80 trillion a year from Y60-70 trillion.
Source: Airline Business
