Digital, Author at Sankaty Jet Capital

Securing finance is a crucial part of many business aircraft transactions. However, unwary borrowers could end up paying more than necessary. Gerrard Cowan asks aviation finance insiders to outline the key areas to consider when financing your business aircraft.

At a high level, the loan terms – such as the interest rate, loan amortization, loan-to-value, etc. – and the creditworthiness of the applicant are the two major factors when it comes to the cost of aircraft financing, according to Mike Francis, Head of Aircraft Finance at Citi Wealth. The higher the rate, the higher the debt service will be.

The ‘resaleability’ of the aircraft is another key factor. “If you have an applicant with weak financials and/or a plane with poor resale-ability, a lender will have to hold more capital reserves for that loan, which nets a higher rate,” Francis explains.

“The associated risk can also cause the lender to offer more conservative financing terms to the applicant.”

Because most aircraft are bought through a single-person LLC, the loan must be guaranteed by a person or entity with the requisite credit to underwrite the loan, says Ford von Weise, CEO of Sankaty Jet Capital. The credit quality of this ‘guarantor’ is the most important factor, he adds.

While a lower loan-to-value may impact the overall cost of financing, “the ultimate risk rating of the underlying guarantor determines the amount of [collateral] to be held in reserve for that loan, which has a large impact on the underlying cost of capital to the lender,” von Weise explains.

Aircraft Financing: The Question of Risk

It essentially all comes down to risk, according to Max Hooper, Co-Founder of Corporate Jet Consulting (CJC). A lower loan-to-value ratio enables a more favorable rate as it reduces the lender’s exposure. However, the individual’s creditworthiness will play the key role.

“In an ‘apples for apples’ scenario of two buyers putting down 20% on the exact same aircraft, over the same term, operating the same flight profiles, in the same jurisdiction, then it will come down to the client’s creditworthiness,” he says.

The newer an aircraft, the more options you will have when it comes to lenders, Hooper notes.

Options can be more limited for older pre-owned aircraft, with terms that are often less favorable. “You will see the established specialized aviation lenders as well as the private banks with dedicated aviation divisions start to move away, and you will need to seek alternative solutions.

“In Europe, I generally find that a lender does not want the aircraft to be older than 20 years by the end of the term,” Hooper shares.

This means, for example, that if you’re seeking to finance the purchase of a 15-year-old aircraft over a period of five years, you will likely deal with a lender who will want a larger down payment and who will charge a higher interest rate, “because the finance is being backed by an older asset where the maintenance cost will be higher and the residual value more unpredictable,” he elaborates.

“It will be based on the condition of the aircraft and strength of the markets.”

Von Weise similarly highlights the difficulty of gaining finance for an aircraft that is more than 20 years old. “Most lenders will not finance an aircraft that old. Only a few alternative aircraft financiers will consider those aircraft, at dramatically higher interest rates,” he says.

Stephan Krainer, CEO of PRIMUS AVIA, says that the size of a down payment is particularly important, with a larger upfront contribution serving to reduce the lender’s risk and typically leading to more favorable interest rates.

That being the case, borrowers should look to increase their equity as much as possible. “Where possible, increase the down payment to secure better rates and terms,” he advises.

Christopher Lee, President of the Aircraft Finance Division at 1st Source Bank, agrees that equity is one of the most powerful levers a borrower controls. Higher down payments reduce lender risk, improve loan-to-value ratios, and typically result in lower interest rates and more flexible terms.

“Borrowers with strong balance sheets often assume that minimal equity is optimal, but in many cases a modest increase in down payment can materially reduce lifetime interest expense and improve approval certainty,” he adds.

Purchase Price and Use of Aircraft Factor into Lending Cost

Not all aircraft are equal in the eyes of a lender, adds Lee. “Highly liquid, broadly accepted aircraft types with deep secondary markets typically attract more favorable financing,” he explains.

“Older aircraft, those with limited production or low production, and aircraft with specialty niche missions carry higher risk premiums.”

There are, however, ways to offset the impact of age, he highlights – notably maintenance programs, engine status and avionics upgrades. But overall, it’s important to avoid the trap of selecting aircraft based on aspiration rather than utilization, in a process Lee calls ‘over-aircrafting’, since this “not only increases acquisition cost but also raises insurance premiums, increases maintenance reserves, and pushes financing into higher risk brackets”.

von Weise reckons the single most important piece of advice to minimize the cost of finance that he has seen in 20 years of working with clients is to buy an aircraft that is the right fit for the required mission. Often, he says, buyers will try to buy aircraft much larger than they really need.

The value of such a large aircraft, relative to the overall net worth of the guarantor, can reduce the ultimate risk rating and thereby increase the interest rate, he warns.

“I have also often tried to convince clients who want to buy a whole aircraft that it is not the right decision and that they should consider a fractional share or buying a chunk of hours from a branded charter operator,” he adds. “The total cost of that is often more appropriate for the client’s net worth.”

Krainer also speaks of the risks in purchasing an aircraft that is larger or more sophisticated than is truly necessary. “Opt for an aircraft that meets your typical travel needs rather than the largest or newest model available,” he says.

And another consideration is closing costs, according to Brian Macbean, Director of Credit & Sales at AOPA Finance. These are often based on a percentage of the purchase price and can have an impact on the cost and therefore financing needs. “The larger the purchase, the higher the price for doing business,” he notes.

Aircraft selection also has an impact on operating costs, Lee says. Meanwhile, revenue-generating aircraft can introduce operational, regulatory and market risk, meaning that if you do want to go down the chartering route, the quality of charter management, utilization assumptions and contract structures become critical.

“A common misconception is that charter revenue automatically improves financing terms,” he highlights. “In reality, uncertain revenue streams can increase risk unless well-supported by history and contracts.”

Indeed, Macbean says that “if you’re focused on keeping as much of your cash in your pocket as possible, you may want to reconsider your intended use”.

Commercial use could increase the cost of generating the loan documentation, he notes, as the lender’s legal team will need to spend extra time to ensure your intended use is covered in the loan documents.

Krainer stresses that some financiers may be unwilling to support private use, while others might avoid commercial operations. “Today, true asset-based financing is increasingly rare, so the potential depreciation from charter activity is less of a direct concern for lenders,” he says.

“However, usage does significantly affect the aircraft’s resale value – higher wear and increased flight hours generally make an aircraft less attractive on the secondary market.”

Hooper agrees about the impact from chartering, noting that some lenders “might not have as much hunger for a charter aircraft as it would be deemed to have lower residual value due to high utilization and general wear and tear.”

This, ultimately, could lead to a higher down payment, higher interest rate and a shorter term, he warns. “It might be agreed that the aircraft can be operated commercially for charter, but not extensively, and only for a set number of hours per year.”

Preperation planning are key to cutting the cost of aircraft financing

Preparation & Planning are Key to Cutting the Cost of Aircraft Financing

Buyers who fail to forward-plan and do their due diligence on the aircraft they’re purchasing are much more likely to incur additional costs than those who do – especially if they need to pay extra to complete appraisals, required inspections or maintenance ahead of a looming deadline, Macbean warns.

“An aircraft purchase is often one of the largest purchases an aircraft owner makes, and large purchase decisions like this should be made carefully rather than on a whim,” he says.

“Planning the purchase in advance and talking to legal, financial and aircraft professionals before engaging in negotiations on a particular aircraft will go a long way to keep costs down and help the transaction move smoothly.”

One of the biggest mistakes that AOPA sees is when applicants think the lender doesn’t actually need the information they have requested, Macbean says. “There are some exceptions, but in most cases, if the applicant doesn’t provide the information requested, the process takes longer and the lender becomes less willing to be flexible.”

von Weise echoes this, noting that the single-most common mistake is to not provide enough financial information in the beginning. Often, additional information “may lead to a better risk rating, thereby reducing the credit spreads”, he shares.

Hooper says it is common for buyers to start shopping for an aircraft without getting the ball rolling on finance. “Yes, the financier will look at pre-owned aircraft on a case-by-case basis, but the due diligence on the client and mission profile can and should be done prior to this,” he stresses.

“Traditional aircraft financing can take weeks to put in place; there are ways to expedite [the process], but this comes at a premium.”

Tim Barber, Duncan Aviation Aircraft Sales & Acquisitions, agrees that “the biggest mistake is leaving the finance search until you have found the aircraft you wish to buy”. If you start early and find your preferred finance partner before identifying an aircraft to buy, “you’ll be able to move so much quicker. Even better: buy the aircraft and then refinance it.”

Francis has seen applicants who are confused over the differing terms offered by various lenders. Again, this often stems from the preparation phase and is usually connected to a failure to interview the lender and ask the right questions to ensure their focus areas fit the applicant’s profile.

As an example, “some lenders require a wealth/deposit relationship with the borrower, some like small planes, some are OK with applicants outside of the lender’s geographic footprint,” he illustrates.

Unrealistic expectations can also be harmful, Francis adds, with buyers applying for a loan beyond their financial capacity or requesting loan terms that aren’t commensurate with their credit profile or the aircraft’s condition.

“Those conversations can be challenging as we don’t want to insult the applicant, but we try to demonstrate to them that we are looking out for their best interests.”

It’s also vital to engage counsel who are experienced with private aircraft financing and transactions, Francis continues. “These are highly technical and regulated assets, and you need specialized knowledge. Every time an applicant decides to use an inexperienced attorney, it rarely turns out well, often causing delays, expenses and frustration.”

Location, Location, Location

The place where the aircraft is operated, registered and maintained is also a vital consideration when obtaining finance, according to Hooper. “Where the aircraft is based will also be assessed, and the routes that it will be performing.

“Is there hangarage, and is there suitable infrastructure at the aircraft’s home base? Is it deemed to be a saline environment? If the intention is to fly the aircraft to areas that might be deemed ‘higher risk’ for a variety of reasons, then this will also be assessed by the lender,” he elaborates.

The availability of excellent MRO services in the location will also be a factor. “A lender wants to take comfort in knowing that the aircraft is being well looked after, so an established and approved operator/management company will provide this reassurance. Experience with the aircraft type is key, as this largely translates into expertise with the aircraft type.”

James Carroll, Duncan Aviation Aircraft Sales & Acquisitions, also points to the importance of location, noting that some jurisdictions and countries appeal more to some banks.

“Look for a lender that is comfortable with working in the region you intend to operate your aircraft from before negotiating other terms.”

Lenders must assess whether the jurisdiction in question will support their interests in the event of a default, adds Krainer. “The country where the aircraft will be registered and operated is a critical consideration.

“Factors such as whether the Cape Town Convention has been ratified, or if the borrower can properly register their title, can directly impact the financing process.”

Assess all Your Financing Options

It’s important to consider alternative acquisition structures, adds Krainer: explore options like leasing or fractional ownership, and look beyond new aircraft to consider pre-owned platforms.

“Negotiate terms,” he adds. “Don’t hesitate to negotiate with lenders – terms are often flexible – especially for well-qualified borrowers.”

And, finally, don’t think of buying an aircraft in the same way you would buy a car or some other vehicle, Lee says. Think of it more as an investment in the company that made the aircraft. “Consider the financial health of the company that stands behind making the parts and will support it for years to come.”

Such a purchase demands a structured risk assessment. “It’s not always the best idea to leverage as much as you can,” he concludes. “A good finance partner will help the client balance the right structure to minimize risk and maximize leverage.”

More information from:
1st Source Bank: www.1stsource.com/business/industries/aircraft-financing
Citi Wealth: www.privatebank.citibank.com/we-offer/aircraft-financing
Corporate Jet Consulting: www.cjc.aero
Duncan Aviation: www.duncanaviation.aero
Primus Avia: www.primusavia.com
Sankaty Jet Capital: https://sankatyjet.com

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