Air China has made history as the first Chinese airline to finance most of a new aircraft purchase without a bank guarantee. But the chances that others will soon follow suit have diminished with a recent rating downgrade for non-sovereign Chinese debt.
Pressure has been mounting on China's airlines for at least a year to find alternatives to the routine Bank of China (BOC) guarantee that once supported every aircraft lease or purchase. The vice tightened further in January when BOC increased deposit requirements and boosted guarantee fees from 8.5 to 40 basis points.
Air China took the first step away from BOC a month later when it used Industrial and Commercial Bank of China to guarantee its financing of a B747-400 delivery. Although Industrial and Commercial Bank and other Chinese banks also raised deposit and fee requirements to match BOC's, Air China found BOC reluctant to give a guarantee.
The final step came in March with delivery of a new B767-300. Air China had spread the word in financial circles of its interest in at least some unguaranteed tranches, and it landed a $50 million unguaranteed loan from Japanese trading house Marubeni, representing some 70 per cent of the total purchase loan.
Air China will not comment on the pricing, but some sources claim the loan was 50 basis points more expensive than the guaranteed transaction a month earlier. If so, the net increase after saving the cost of a guarantee fee was just 10 basis points.
'We will continue to do the same in the future,' says Zhang Jianming, Air China's director of international affairs. 'Since the ability of Chinese banks "other than BOC" to provide the guarantee is very limited,' Zhang says, Air China is seeking 'a new solution which does not require a bank guarantee.'
One solution, which has held more appeal for other Chinese carriers than for Air China, may be operating leases. China Southern Airlines pioneered their use within China despite the CAAC's scepticism, and a number of other Chinese carriers have since followed its example. Steven Udvar-Hazy, ILFC's president and CEO, recently predicted that China's airlines would lease more aircraft due to the market's fast growth, the inability of carriers to finance aircraft, and 'a greater rationing' of bank guarantees. Hazy's remarks imply that operating lessors were ready to offer aircraft without bank guarantees.
BOC's willingness to guarantee future aircraft loans, even for China's big three airlines, is uncertain. It declined to assist Air China with its B747-400 purchase in February and has shown more interest lately in acting as co-arranger in aircraft transactions than as a guarantor. With BOC's exposure on aircraft guarantees now at an estimated $10 billion, the bank is under pressure to diversify.
The future was further clouded in late April when Moody's downgraded long-term debt at BOC and three other large Chinese banks on the grounds that they no longer warranted a sovereign rating when their obligations were not clearly guaranteed by Beijing. BOC maintains they are, but Moody's notes that state-owned institutions in China are operating with less central control and less assurance that their debts are indeed backed by Beijing. As a result the cost of unguarenteed finance for China's airlines has increased.
Source: Airline Business
