Market participants will agree that in the last six to nine months liquidity has been back to a point rarely expected a year ago. We are even seeing some 'top-tier' airlines borrowing secured money from certain banks at pricing that doesn't actually cover the marginal cost of funding (unsecured) of those institutions. Thus, we are again seeing banks in the charity business, or, worse, illusioned by 'cross-selling' other bank products, a carrot that many borrowers abuse smartly!
So here we are again....back to the 'status quo' where, if you're an "asset-based" financing bank, then you're back to scratching around in, either, the 'second-tier' (new or used equipment) market for airlines, or, the 'limited-recourse'/residual risk market for lessors/investors, in order to earn a decent risk-adjusted return. Mind you, it's not such a bad living!
If you're not interested in pursuing the, once again, wafer thin margins available in Export Credit supported financings, then you can join the queue of folks who are in line looking to finance new or near new aircraft for the so-called 'top-tier' airlines. The inevitable consequence of that particular gathering is that competition becomes less rational, leading to advance rates moving above, and margins below, reasonable 'senior debt' levels. "It's OK, the loan amount is only 80% of the average of three appraised values" - but which appraised values? Are they reliable? Are we talking market values or (theoretical) base values? 80% of one value may be 100% of another. Also not forgetting that as competition grows, then the definition of "top-tier" widens!
So, if you don't fancy that, but you're still one of the 'flight to quality' banks, where do you go next? To the relatively safe-haven of dealing with the bigger lessors on a full-recourse basis, or else on a limited-recourse basis for portfolios of new/near new, mainstream aircraft. The trouble is that this segment has got pretty crowded, pretty quickly, too, and, to "get that mandate", the same competition around advance rates and margins, as in the 'top-tier' airline segment, ensues. That may be kind of OK, particularly since the competition is not quite so extreme, and so long as you're dealing with a good lessor and/or lessee counterparty, your loan is going to amortise. The problem comes in setting the level of recourse or non-recourse balloon, which is where things can go badly wrong. If relying on someone else's opinion on appraised value at loan commencement is tough, then building in a number of years of additional uncertainty to such value to set your balloon/bullet repayment, and that's a whole different proposition again. Nevertheless, the competition allows the lessor to squeeze the banks to agree to balloon levels which a specialised financier will be unable to justify. Remember, we are supposed to be taking senior debt, not equity, risk!
If you do make the next step, and most banks will not, this is where things become much more rational: to the 'second (and perhaps lower)-tier' airlines and the financing of their new/used aircraft, or, to the lessors/investors and the onesy-twosy, 'limited-recourse' transactions for new/used equipment. Here the competition is more balanced and therefore reasonable - as always with one or two notable exceptions! - and this is where the true "asset-based" financier feels at home. Its safe haven! In this market, there are two handfuls of active financiers, but in some financing categories this number dwindles to just two or three lenders (you know who they are).
In 2009 and for part of 2010, an "asset-based" finance house would have dared to close transactions in the 'top-tier' airline category, but as 'fair weather' banks since returned to the market and in volume, these players have retreated to more familiar territory, where your ability to evaluate the maintenance cycle of your aircraft collateral throughout the loan term, properly understand reserve rates and return condition, propose structural enhancements, etc, becomes clearly a competitive advantage. It is also here that the client will differentiate between the reliability of the financier ("can they deliver what they say they can deliver?"), rather than select that last dollar of balloon or basis point of margin.
It may not be the most 'sexy' area of the market - like the bunch of A380 financings currently being conclude, where the egos of those involved are almost as inflated as the aircraft prices themselves - but it somehow feels like the place to be in order to deliver that consistent risk-adjusted return for the shareholder.
Message to all of you "corporate/credit based" banks: think twice before you let yourself be pushed to the pure "asset-based" part of the market. Without the appropriate expertise and research tools, it'll all end in tears.
Article contributed by David Goring-Thomas, Managing Director, Global Head of Aviation, DVB Bank SE
Source: Commercial Aviation Online
