Upbeat financing outlook could falter
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By Laura Mueller
Financiers and manufacturers are bullish about the state of aircraft financing, no doubt, due to recent aircraft order adjustments. However, this sentiment could prove short-lived.
Complicating matters is the fact that the aviation industry will call for capital above and beyond this year's estimated $68 billion financing requirement for new aircraft - a concern not reflected in any funding gap calculations.
There is also worry that export credit support, which has been gold dust for many, is creating an unlevel playing field that could threaten second-tier credit airlines.
In addition, the relatively attractive pricing tied to export credit financings could be under threat if the USA and the UK lose their AAA credit rating.
© Sipa Press/Rex Features |
Yet for the time being, and despite an increasingly worrying financial outlook, the aviation industry remains eerily upbeat about securing funds for its future needs.
UNCERTAINTY SOFTENS
"This year is looking a bit better, the funding gap is progressively closing and aircraft delivery postponements and order cancellations are helping to alleviate the gap," says Christian McCormick, head of aviation finance at Natixis Transport Finance, speaking at Commercial Aviation Online's Inside Finance event in London last month.
McCormick 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 vendor financing. "Airbus and Boeing have admitted they haven't pulled their guns out yet," he says.
Volker Fabian, head of aviation finance at HSH Nordbank, is confident every "needed" aircraft will attract capital. "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," he says.
But even if the manufacturers wanted to rescue every customer that comes to them cap in hand with vendor financing, the issue of sales recognition could prevent them from doing so. "Sales recognition is a powerful mitigant to a significant increase in customer finance," says DVB bank board member Bertrand Grabowski.
"The issue is very simple - under US GAAP (Boeing) or IFRS (EADS) [accounting measures], the seller of the equipment can only claim for a true sale if the transfer of title and payment comes with little or no strings attached. Thus any direct financing, but also residual value guarantee, backstop financing etc, can prevent Airbus or Boeing from increasing its revenues on a given sale."
To date Boeing has recorded 58 cancellations, 32 during the first quarter, mostly 787s, and has financed four aircraft, whereas Airbus has funded one delivery in the first quarter and cancelled 14 orders.
As expected, the manufacturers remain positive about the industry's ability to source funds. "The body language in the corridors in Toulouse isn't too nervous so far," says Christophe Million-Rousseau, senior director of customer finance at Airbus. The manufacturer will double the amount of vendor financing on offer this year to about €2 billion ($2.75 billion) 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 in 2009.
However, neither Airbus nor Boeing has pinpointed how much vendor financing they expect to offer in 2010.
LIQUIDITY CRUNCH
The short supply of liquidity has resulted in a sharp increase in pricing on aviation financings, but those banks that remain active in this sector are not rubbing their hands together at the juicy fees they are raking in.
Instead, these financiers are fretting about their balance sheets and whether their aviation department will survive the next cull as banks restructure.
A US-based hedge fund warns the diminishing supply of liquidity is already forcing airlines to turn to expensive sources of capital, such as hedge funds, and during a time of falling revenues that could prove disastrous.
© Lufthansa |
"The request for proposals currently on my desk are from good-credit airlines with attractive aircraft and are from names I've never seen before," he says. "I think that says a lot about the scarcity of capital in the market."
US and European export credit agency support, which typically guarantees 85% of an aircraft's financing, is a tool that is in increasing demand. However, its availability is being viewed as a mixed blessing.
On the one hand, it is proving the saviour for many airlines and lessors that are searching for attractive priced financing during, arguably, the worst financial crisis since the Great Depression.
However, export credit support is also considered by some to be a form of financial market distortion. "Export credit financing is an unfair practice as certain airlines are excluded from that method of financing, which creates an unfair financial market," says Lufthansa's head of corporate finance Markus Ott. "There is no need for governments to step in. We need to lean to become a normal industry and behave like a normal industry."
Lufthansa and other German, French, Spanish, UK and US airlines are not eligible for export credit financing on aircraft that are manufactured in their respective countries under the home country rule.
As a result, carriers such as Lufthansa must finance Airbus aircraft in the commercial markets, through other sources, using internal cash or with the manufacturers, which can result in more pricey deals than compared with export credit transactions.
Ott argues that parties unable to access export credit are at a competitive disadvantage compared with colleagues which are operating in the same markets but with access to a plentiful, and currently cheaper, source of financing.
In addition, certain market observers believe that the real financing squeeze will come from second-tier airlines, which do not qualify for export credit support, but who also can not attract first-tier pricing through other financing means.
"This is where the real pain will be felt because these guys can't get relief from the export credits or the commercial market and during a difficult operating environment," says a financier.
However, even those airlines that are eligible for US Ex-Im Bank and UK ECGD export credit could also see a rise in pricing if the UK and the USA lose their AAA sovereign ratings.
"A lower rating would require that banks apply capital to the export credit loans and that would be more costly. With the AAA sovereign rating, capital is zero," says Natixis Transport Finance's McCormick. He adds: "It would be a concern for airlines that would have to pay more as the banks would compensate by increasing the margins."
HIDDEN PRESSURES
While there may be an air of optimism surrounding long-term aircraft financing, pre-delivery payments (PDP), or aircraft deposits, which are not included in the $68 billion financing requirement, are proving a harder sell to the financial community.
Million-Rousseau at Airbus describes lender appetite for PDPs as "very limited."
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 a 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 considered not as capital efficient.
Another drain on funding for the sector will come from refinancings, again a figure which is not accounted for in the industry's $68 billion financing bill, but considering the scarcity of liquidity, is a significant capital requirement.
Jose Abramovici, global head of aviation and rail at European bank Calyon, estimates refinancings could reach $4 billion this year and includes the standard requirements for airlines, but also the refinancing of merger and acquisition deals, such as a lessor portfolio sale, where there is a change of ownership covenant.
Although a loan that does not get refinanced could cripple an airline or an operating lessor, bankers at Commercial Aviation Online's Inside Finance event agree that lenders will be pragmatic and choose to work through any refinancing hiccups, but this is likely to be costly.
The main reason for this dedication is not necessarily customer loyalty, but because financiers do not want assets returned in a downturn. "No-one wants to pull the trigger because this is not the right time to do so," says Abramovici.
Another European banker adds: "The original financiers will simply agree to the refinancing as the alternative could be bankruptcy - and nobody wants that."
Commercial Aviation Online tracks aircraft financing worldwide. Find out more about CAO
