Jetrader - July/August 2010 - 23

The Changing Landscape of

Aircraft Financing
re-enter the aviation space. It’s important to recall that, over the jet age, the world’s banks have traded the role of primary aircraft ﬁnanciers—ﬁrst the North Americans, and then the Japanese, prior to Europe’s current prominent position. This crisis has expanded opportunities for regional banks to build their aircraft portfolios. The result is that aircraft ﬁnancing has become more geographically diverse, reﬂecting the demand diversity of the aircraft market itself. Banks in China and the Middle East are putting account surpluses to good use in funding homemarket airplane deliveries and, in China’s case, stepping on to the world stage. Banks in Japan have continued their prominent regional role, as have Australia’s banks. They have been joined by regional banks elsewhere, including Russia, India and South Africa, in stepped-up regional investments. Lessors’ Lessons – Going forward, we expect the leasing community will have a smaller role as a capital source. The ﬁnancial storm hit ﬁnancial parents like GE, AIG and CIT hard, curtailing the credit arbitrage model that allowed offspring like GECAS and ILFC to use the parents’ strong credit to borrow unsecured to acquire inexpensive debt. Sector growth will require lessors to depend more on the health of their own balance sheets and the quality of the aircraft that will be securing most of their future ﬁnancing. As they become capital consumers rather than capital providers, lessors will evolve into an important distribution channel for commercial banks. As banks focus lending on better credits, lessors are better equipped to serve second- and third-tier airlines that have a harder time attracting commercial bank debt, and demand from airlines with weaker balance sheets is likely to boost used-aircraft leasing. Capital Markets Evolution – A pleasant surprise in 2009 was the unexpected return of the U.S. capital markets. Their role as a primary capital source for U.S.based carriers dates back to the Enhanced Equipment Trust Certiﬁcate’s (EETC) creation in the mid ‘90s. EETC bonds helped facilitate billions annually in aircraft ﬁnancing for many years. And bond performance itself has proved exceptional, with more than 99.5 percent of A-Trance ETTCs performing ﬂ awlessly. For the ﬁrst time in 2009, airplanes guaranteed by the Export-Import Bank of the U.S. were funded in the U.S. capital market. The several successful Ex-Im Bank bond deals helped bring down the funding costs of all of the bank’s aircraft guarantee products. The U.S. capital markets’ contribution this year is expected to be relatively small ($1.5B) as a result of fewer deliveries to U.S. airlines. However, as interest in international EETCs builds as more countries ratify the Cape Town Treaty, with its Section 1110-style bankruptcy protection, the market’s footprint is expected to grow, becoming a larger liquidity source. Changes in Export Credit – As witnessed by 2009, global export credit continues to be a stabilizing inﬂuence on aviation. U.S. Ex-Im aircraft authorizations reached a record $8.6 billion and 2010 support continues at a similar pace. Export credit faces its own stability challenge, as efforts to maintain a “level playing ﬁeld” for export lending is debated by aircraft-building nations before the Organization for Economic Cooperation and Development (OECD). The new Aircraft Sector Understanding (ASU) signed in 2007 and set to take effect late this year created a two-tiered ECA fee pricing structure—one for large airplanes built by Boeing and Airbus, the continued on page 26 Jetrader 23

By Kostya Zolotusky, Managing Director, Capital Markets Development, Boeing Capital Corporation

Aircraft ﬁnancing market conditions continue to improve as 2010 unfolds. This has allowed us to step back from the recent crisis mentality to consider how the turmoil is shaping the landscape of global aircraft ﬁnancing. We see the industry being re-sculpted, with the primary sources of ﬁnancing capital undergoing a generation change. The evolution of each of these— commercial bank debt, lessors, the U.S. capital markets and the world’s export credit agencies—will create disruptions and opportunities for us to address and to capitalize on. Evolving Bank Debt – While Europe’s banks have dominated aircraft ﬁnancing for the past two decades, they have suffered at the hands of the ﬁnancial crisis. Parent banks with large aircraft ﬁnancing business have been severely impacted. At the same time, their aircraft portfolios performed exceptionally well in the most signiﬁcant economic downturn of our lives. Many European banks are continuing to play a leading role, and others will

Jetrader - July/August 2010

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