Aircraft financing depends on both debt and equity markets for raising capital. The debt component largely consists of two markets: the public and the private. Government debt markets are primarily in securities issued in the form of Enhanced Equipment Trust Certificates (EETCs), which are securities issued by individual airlines to finance aircraft in their fleets, and asset-backed securities. assets (ABS) issued by operators to lessors to finance their aircraft portfolios with several airlines on the basis of a guaranteed lease or guaranteed debt (CLO and CDO respectively). These listed debt securities are issued in the form of securities, generally with a rating, and are generally acquired by institutional investors (insurance companies, pension funds, etc.). In contrast, private debt markets, while also funding airline fleets and donor portfolios, are typically funded by commercial banks in the form of loans (not securities).
This private market also includes other investors who acquire aircraft-backed debt on a private placement basis, in transactions that avoid registration under securities laws. This article will examine the evolution of the private sector debt market, examining the time period during which this author was engaged in the aviation finance markets. As an initial observation, aircraft financing is a form of asset-based financing, based on a type of collateral – airplanes – whose value has historically operated within expected ranges. The usefulness of a collateral, of course, depends on the financier’s ability to access it and realize its value, in the event of default. In light of US bankruptcy laws, primarily Section 1110 of the US Bankruptcy Code, there is a well-founded view that the inherent value of airline guarantees taken from a US airline can be realized. when that debtor airline cannot reimburse its guaranteed aircraft. ready. As a result, financiers viewed aviation finance in the United States as an attractive and relatively secure market in which to participate.
When I began practicing law in 1983, aircraft financing in the United States was dominated by three pockets of debt providers: American central banks, Japanese banks, and insurance companies. Citibank, Chase Manhattan, Bankers Trust and Chemical Bank dominated the commercial banking markets. These banks would be at the forefront of providing credit to airline borrowers; It should be noted that at that time the lessor operators represented a much smaller share of the market and were dominated by GECAS and ILFC, which did not require third party financing. Japanese banks of this time also took a prominent place in the financing of commercial aircraft in the United States. Companies like Mitsubishi Trust (MTBC), Sumitomo Trust, Yasuda Bank and Sumitomo Bank have been very active.
These banks were known to lend at low margins and for very long terms. Finally, the insurance companies participating in this market constituted a rather disparate source of funding. They bought debt securities secured by aircraft as a private placement of securities. The main leaders in this industry included Teachers, Prudential, John Hancock and MetLife, but the industry also included a very wide variety of small insurance companies with names like The Woodmen.
In the early 90s, the landscape changed. US central monetary banks have shifted away from lending, focusing more on commissions. Japanese banks have been largely excluded from this market as their cost of funding has skyrocketed with the turmoil in Asian markets. This turmoil resulted in what was called the “Japanese premium” – a premium which was the additional cost for Japanese banks to finance their transactions. As for insurance companies, they have completely withdrawn from this market due to newly enacted requirements that their investments must be rated by a nationally recognized rating agency. In this vacuum sank the European banks.
European banks were quite diverse. There were the German banks, dominated by the “landesbanks” (public banks), which included Schleswig-Holstein, Bayerische, NordLB, Hamburgische, Helaba, WestLB, Saxe, Bremer, Berliner, Rheinland-Pfalz and the Saar. In addition to these landesbanks, German commercial banks also participated, including Deutsche Bank, Commerzbank, Dresdner, DVB, KfW and HVB. In France, the market players were Société Générale, Paribas, Crédit Lyonnais, Crédit Agricole and Natixis. There were participating Dutch banks such as ING, ABN AMRO, NIB, Fortis, Rabobank and MeesPierson. English banks such as Halifax, Royal Bank of Scotland, Bank of Scotland, NatWest, Barclays and Alliance & Leicester were also involved in this sector. Finally, there were banks from Italy (Intesa), Switzerland (Credit Suisse) and Austria (Erste).
As a result of this plethora of participants and the resulting business competition, airlines (and, increasingly, operating lessors) have been able to depress the margins of these banks. Additionally, there has been some bank consolidation during this period, with the following institutions being merger partners: Halifax and Bank of Scotland, Landesbank Schleswig-Holstein and Hamburgische Landesbank (hence HSH Nordbank) and Crédit Lyonnais and Crédit Agricole (hence CACIB), among others.
The next banking market upheaval in the aviation finance industry came in the aftermath of the market collapse triggered by Lehman Brothers in 2007/2008. This development resulted in the loss to the market of a large number of European banks. There were no longer any English or Dutch banks in the market and a number of French and German banks also withdrew from this market. The German landesbanks were particularly hard hit, which were large investors in mortgage-backed securities (housing), a market that suffered catastrophic losses. Many of these banks were forced to withdraw from the aviation finance market in return for state aid for a government bailout (German states ordered a number of these landesbanks to restrict their activities to local markets) . Plus, their financing costs skyrocketed and their price was taken off the market (sounds familiar to you?).
In the aftermath of Lehman, therefore, only a handful of French and German banks remained involved in the aviation financing sector. French banks included BNP, CACIB and Natixis (and, to a lesser extent, CIC) and German banks included DVB, NordLB, Heleba, KfW and Deutsche Bank. With fewer bank participants, margins improved for these banks (although, in many cases, these better margins were needed to cover increased funding costs). Additionally, many of the banks that were forced out of the aircraft finance industry after Lehman were forced to sell their aircraft finance portfolios, while other of the exiting banks simply managed their portfolios down (without writing any new business).
The Lehman debacle is now almost a decade behind us. Since the resulting upheaval in the banking market, triggered by this event, the number of participants in this market has increased significantly. In addition to the post-Lehman “survivors” named above, Citibank and Wells Fargo Bank, American “money center” banks, play an increasing role as well as DekaBank (German), ING (Dutch), CBA (Australian) and Sabadell ( Spanish). Japanese banks (welcome!) Like DBJ, Norinchukin, MUFG and Tokyo Star are also making a significant foray into this market. Other banks in Asia, China, Taiwan and Korea, are also expected to increase their stakes in the aviation finance sector soon.
Finally, we are seeing a growing participation of certain segments of the US insurance market, such as New York Life and Mass Mutual, which have found a way to obtain a satisfactory rating on privately structured transactions.
The conclusion I would draw from this ever-changing private debt market in the US aviation finance industry is this: Aviation finance has always been a pretty safe investment. This relatively risk-free credit environment naturally attracts investors. The ebb and flow of market players are therefore not the result of losses in this sector, but rather of macroeconomic developments well beyond the aviation financing market. Stay tuned!
Originally posted in Euromoney Aeronautical expert’s guide 2017.