Airlines have much to look forward to in the second-half of 2014 as aircraft financings are likely to become cheaper as an excess of liquidity continues to find its home in the aviation sector.
“If I were to make a very general statement, I think pricing could still go down on secured lending on assets on seven- to 12-year deals. There could be a further 20-40 basis points room for improvement,” said Eric Eugene, global head of transportation sector, BNP Paribas at the Ascend Finance Forum in London in July.
Recent pricings on narrowbody transactions for top-tier airlines have closed at Libor plus 100 basis points, while an Airbus A320 commercial debt financing, was recently completed at Libor plus 75 basis points – the lowest pricing level recorded this year, according to a London-based banker.
Last year the same credit airlines would have paid just over 200 basis points for the same asset type, while in 2012 they would have faced borrowing costs that were closer to 300 basis points.
This increased demand from the financial markets for aviation paper, which has resulted in these ultra-low pricing levels, has meant the export credit agencies have taken a back seat to aircraft funding.
The UK’s Export Credits Guarantee Department (ECGD) anticipates it will guarantee under 100 aircraft transactions this year, compared with 132 last year.
“We could be as low as 85 or 90 aircraft deals,” says Gordon Welsh, director of aerospace at ECGD. “Airlines are saying ‘can you do half of our deliveries’ but then when they send out the RFP, they realise they can get really attractively priced financing,” he explains, adding: “So we are saying: ‘take them’. If airlines are getting good commercial offers, they should take them.”
Michel Dembinski, head of aviation and structured finance at Bank of Tokyo Mitsubishi believes while pricing levels have fallen they are relative to the current state of the market. “Aviation pricing at 100 basis points today may seem cheap, but five or six years ago it wasn't,” he says, also speaking at the Ascend Finance Forum. However, Dembinski admits pricing in the past six months has fallen at a pace he “hasn't seen for years”.
Richard Moody, head of aviation financial solutions, asset finance and leasing, Deutsche Bank believes the favourable pricing environment for airlines reflects increased market demand for aviation transactions.
“In the airline industry, there is a whole spectrum that you can bid on, so if you want to buy the best airline credit in the world, you can buy a Ryanair unsecured bond…or on the other end, go for an asset-based deal, such as Castlelake, which also flew off the shelf," he says.
No doubt what also is helping to drive demand for aviation paper is excess liquidity in the financial system that is looking for a profitable home.
“This [excess liquidity] is not just an aviation issue, this is a financial services and banking issue, and this is not sustainable,” says Moody.
He says there has been $8 trillion worth of capital, which is equivalent to 50% of the gross domestic product of the USA, injected into the global financial system since 2007 by the various central banks. “To me, that sums it up really, and now we are in this sort of paradigm,” says Moody.
BNP’s Eugene, agrees. “There is money everywhere – it is not just aviation, basically it is all over the place.”
Moody warns while a abundance of liquidity is "great for issuers [of financings]” people need to be careful and disciplined” on the lending and investment side.
BTM’s Dembinski agrees excess liquidity is a “good thing” for airlines, but notes the $8 trillion of newly created liquidity is “going to have an effect” when the global central banks try and turn the tap off – “but who knows when that will happen”, he says.
Source: Airline Business
