Rose Jacobs Financial Times
Finance: Mixed Fortunes for Jet Buyers
October 29, 2012
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  • By Rose Jacobs

    Optimism is growing in the private jet world that the financiers who disappeared after the credit crunch and began resurfacing in earnest only last year may soon be abundant enough to drive prices down.

    “I’m getting calls from banks now as opposed to having to call them,” says Aoife O’Sullivan, a lawyer with aviation solicitors Gates and Partners. “They’re even competing on basis points. We just did a deal for 2 points above Libor [the interbank lending rate].”

    That, she says, would have been unheard of even five or six months ago.

    But fortunes are mixed, with buyers in the US finding it easier than their overseas counterparts to access reasonably priced loans, and with money for bigger, longer-range aircraft easier to come by than financing for light and very light jets.

    Regional differences are diminishing, thanks both to local liquidity increasing and to western banks adjusting their views of repossession risk. Tracy Cassil, senior vice-president of global finance at Cessna’s financing arm, observes that in Latin America – and particularly Brazil – local lenders are offering more affordable deals: “I see incredible availability there,” he says.

    But the diverging experiences of small-aircraft and larger-aircraft buyers remain. This comes down to two factors. First, the valuations of smaller aircraft took a worse tumble post-credit crunch than those of the bigger models, leaving some lenders particularly fearful of that market. Second, the sheer scale of a deal can have an impact, with middle men aware they will make more money on bigger transactions.

    “It’s a capacity issue,” says Jay Heublein, vice-president at Nextant Aersopace, which refits light jets with new engines and more aerodynamic fittings.

    “There’s a limited number of dollars out there right now and if you’re a banker, and you have the opportunity of doing one $50m deal or 10 $5m deals, where are you going to migrate?”
    For the bigger deals, Ms O’Sullivan is seeing interest from alternative investors, including private equity groups and even one US pension fund.

    “You’re looking at returns of 8 to 9 per cent for an average term of five to seven years,” she says, underscoring the appeal of corporate aircraft to both types of investor – provided the industry can reassure lenders on risk.

    Leasing companies are meanwhile stepping up their presence at corporate jet conferences, suggesting an interest in expanding their activities in the sector, from mostly finance leases to include the area of operating leases.

    Still, cash remains traditional lenders’ biggest competition, with 60 per cent of private aircraft purchases paid for upfront by rich individuals or companies with strong balance sheets, according to Paul Sheridan at the consultancy Ascend.

    Mr Heublein questions how necessary alternatives will be, as traditional lenders warm to private jets once again. “The money’s going to flow to the bigger deals first, and when the market starts to get better, it will trickle down.”