Amid fears of a major funding gap, aviation financiers and manufacturers sounded an optimistic note during the recent Commercial Aviation Online Inside Finance event in London.

But while fears on the size of the funding gap have eased,as the financial storm calms and feweraircraft needfunding owing to deferred or delayed deliveries, concerns remain. Notably that the estimated $68 billion new aircraft financing bill excludes pre-delivery payments, which are proving a difficult sell.

"This year is looking a bit better. The funding gap is progressively closing and aircraft delivery postponements and order cancellations are helping to alleviate this gap," said Christian McCormick, head of aviation finance at Natixis Transport Finance. He recognises funding could be a problem in 2010, but acknowledges there is "still room for other measures to be taken" to help bridge any shortfall, such as additional OEM financing. "Airbus and Boeing have admitted they haven't pulled their guns out yet," he says.

To date Boeing has recorded 58 cancellations, 32 in the first quarter, mostly 787s, and has financed four aircraft. Airbus funded just one delivery and cancelled 14 orders in the first quarter.

HSH Nordbank aviation financier Volker Fabian believes there will be adequate funding throughout this downturn. "My view is that airplanes that are needed in operation will get financed through export credit, commercial loans, other financing or by the manufacturers, but those airplanes that are not needed, won't be produced," says Fabian. "If nobody readily steps up to finance these assets, then it's the manufacturers that need to and they will help out." He adds: "This rings true for 2009, 2010 and through to 2035, or whenever else there is a downturn." He says a recent visit to Toulouse confirms this: "Active production line management is the name of the game for the manufacturers."

For their part, Airbus and Boeing remain upbeat about the industry's ability to source funds for the $68 billion new aircraft financing bill. "The body language in the corridors in Toulouse is not that nervous so far," says Christophe Million-Rousseau, senior director of customer finance at Airbus. It will double the amount of vendor financing on offer this year to about €2billion ($2.75billion) compared with 2008.

Tony Simpson, director of Boeing Capital, describes any potential funding gap as "manageable". Boeing Capital plans to offer up to $1 billion in new financing this year. Butthis could go higher. It has filed papers in the US saying it could sell up to $5 billion in debt securities.

Both manufacturers pinpoint the capital markets backed by export credit support as a future funding source. "The capital markets are opening and there is appetite for top corporates and AAA products," says Million-Rousseau. He says the UK is willing for the first time to see its Export Credit Guarantee Department provide direct guarantees to paper issued in public debt markets. Simpson, meanwhile, says US banks in particular are interested in export-supported capital market financings as these financiers are looking for "secured yields that beat what they are getting from US treasury deals".

Lufthansa's head of corporate finance Markus Ott, though, does raise concerns of export credit support having a distorting effect. "Export credit financing is an unfair practice as certain airlines are excluded from that method of financing and it creates an unfair financial market," he says. "There is no need for governments to step in. We need to learn to become a normal industry and behave like a normal industry." Lufthansa and other German, French, Spanish, UK and US airlines are excluded from obtaining export credit financing under the home country rule.

PDP Concerns

While there may be an air of optimism surrounding long-term aircraft financing, pre-delivery payments, which are short-term financings not included in the $68 billion financing requirement, are proving a harder sell to the financial community. During the good times of cheap liquidity, financiers were attracted to the PDP business partially as a means to lock-in the longer-term financing of the aircraft.

However, according to one European banker, given the current market where liquidity is tight, there is a preference to lend into a secured aircraft transaction rather than provide PDPs as this form of financing is generally not as capital efficient.

Another banker says the lack of appetite for PDPs stems from the fact that financiers do not want to find themselves in a position where they need to enforce their rights under the purchase agreement during a downturn.

"It can be tough during a down cycle to either sell the purchase agreement, or to pay the balance of the purchase price and sell or lease the asset," says a banker, adding "most financiers will choose to avoid this situation".

Further hampering lender appetite for PDPs is the insistence of Airbus on the clawback clause, which calls for the refund of equity to the airline by the financier in the event of bankruptcy or default. Some financiers say the clawback creates a risk they are not inclined to take.However, Airbus says clawback avoids speculative transactions by financiers, particularly operating lessors, which have taken advantage of airline defaults in the past.

Some relief could be on the cards.Gordon Welsh, head of underwriting for aviation at ECGD, says the agency is considering increasing the pre-aircraft delivery period when Export Credit Agencies will commit support from six monthsto one year.

Financiers say this would prove beneficial because they would be assured that in supplying PDP financing, long-term ECA support would also be available. This is an indicator that they are likely to be repaid.

Source: Airline Business

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