Airlines can pick and choose how to fund their bulging orderbooks this year, thanks to strong investor demand spurring attractively priced deals widely available across the capital and banking markets.
This is in stark contrast to what was on offer just over a year ago, when commercial debt financings were considered costly, as banks were still trying to digest higher funding costs brought about by the 2008 financial crisis.
Boeing Capital’s managing director of capital markets and leasing, Kostya Zolotusky, highlighted the pricing divergence between the financing
segments in a December 2012 interview with Flightglobal.
Zolotusky noted in United Continental Airlines’ 2012 enhanced equipment trust certificates (EETC) offering, the airline received “12-year money at 4%”, or a “high 200 basis points over Libor spread equivalent”.
He also noted the capital markets deal has a “longer tenor”, and “probably gives a higher advanced rate than you would see with the commercial banks".
In contrast, Zolotusky added, commercial bank deals were being priced higher, in the 300-400 bps range over Libor.
Fast-forward to 2014 and the capital markets and banks "have become quite attractive”, says Ray Sisson, president of operating lessor AWAS.
Gerry Laderman, senior vice-president of finance and treasurer of United Airlines, said at an industry event in January: “We have done some bank debt recently and we would love to do more.” However, Laderman admits EETC funding is the airline’s “base form of finance”, that he expects to continue.
He adds: “Whatever we don't do in the other markets, we will pick up in the EETC market.”
Pricing on commercial debt has fallen due to an increase in the number of banks offering capital to the sector, and the return of certain financiers that pulled back on funding following the 2008 crisis.
An interesting case in point is Philippine Airlines, which closed various A330 financings in the space of a few months last year, from a variety
of global banks.
The airline received funding from JP Morgan and Citibank in the USA, from DVB Bank and BNP Paribas in Europe and from Manila-based Banco de Oro Unibank (BDO Unibank) for its aircraft deliveries. Look back to 2011 and the airline would have had a harder time securing so many sources, as fewer banks were active in this sector due to funding constraints at the parent levels.
Although the capital and banking markets have become more attractively priced for airlines, Boeing anticipates bank debt financing will decline this year in percentage point terms.
Commercial banks will account for 25% of this year’s funding requirement – a drop of three percentage points from 2013. In terms of dollar
funding this translates into $28 billion worth of new deliveries for this year, compared with $29.1 billion in 2013, estimates Boeing Capital.
Back in 2010, commercial banks represented 24% – or $15 billion worth of annual deliveries.
This year the capital markets will absorb 22% of the total deliveries – up from 14% in 2013. This translates into $24.6 billion worth of deliveries
this year.
Investor demand
Emirates and Ryanair are calling for the structuring of more locally-based EETC financings, in order to take advantage of robust demand
for aviation paper in the capital markets.
“What we want is an Islamic EETC – we want to see if it can work,” says Nirmal Govindadas, vice-president of financing at Emirates Airline, speaking at an aviation event in January. “We think there is a market there because Islamic structures have an excellent linkage with aircraft, so it is something we want to look at."
Ryanair is also keen to take advantage of the EETC market, but says one problem with the US capital markets, where these financings typically occur, is that they are dependent on the US dollar.
“Our business is based in euros, so we would like to see the development of a euro-based EETC, or a local currency-based EETC, to eliminate the currency risk,” says Ryanair’s treasurer, James Dempsey.
Dempsey says Ryanair is “toying” with funding part of its orderbook through the EETC market.
“We are in the process of getting the company rated, so that outcome will determine the market access that we have,” he adds.
Dempsey acknowledges that the favourable interest rate environment is encouraging Ryanair to pursue opportunities in the capital markets in the next couple of years.
Refinancings
An abundance of attractively-priced funding will result in a profusion of refinancings – as Korean Air demonstrated in January, when it launched a $193.4 million US Export-Import Bank-guaranteed bond to refinance two loans that closed in 2009.
The deal priced at attractive rates of market swaps plus 64 basis points for a coupon of 1.859%, according to a financier.
No doubt the increased availability of attractively-priced funding could also lead to fewer export credit agency (ECA) financings – a move already in progress due to the Aircraft Sector Understanding legislation that came into effect in 2012.
Boeing Capital expects the ECAs will support 18% of new commercial jet aircraft deliveries in 2014 – down from 23% in 2013. ECAs accounted for 31% of the new deliveries in 2010, or $19.2 billion.
Meanwhile, Airbus anticipates the ECAs will probably support 15-16% of its output this year. Last year 57% of Airbus deliveries were funded by cash and commercial debt.
Source: Airline Business
