Aviation Finance (AFC) will increase its funding volume for aviation assets to $4-6 billion this year, compared with $1 billion worth of closed transactions in 2013 - the company’s first year of operations, according to its chief.
Driving this demand is the company’s product offerings, which are a “stepping stone before a full-on enhanced equipment trust certificates issue in the public markets,” says Douglas Brennan, chief executive officer of AFC.
“Some customers don't want a credit rating and that is usually required for a EETC, so we can minimise those concerns with a private EETC issue,” he says.
Competitive advance rates and funding for smaller deal sizes are also fuelling customer demand.
“We can achieve higher loan-to-value ratios than found in typical commercial debt bank financings, and we don't say no to sub-$500 million deals, which are probably our most common transactions,” he says.
Last month, AFC announced its first direct investment in a “large global airline” pre-delivery payment (PDP) bridging facility. The deal helped to “eliminate the need” for a larger refinancing of short-term debt.
The financier is currently working on a “combination package” for Avianca, which involves bank and capital markets funding to help pay for 38 Airbus A330 and A320 aircraft. The financing also includes A320 pre-delivery payment financing.
The deal is a follow-on transaction for the Latin American airline group, after AFC secured the carrier’s major shareholder, Synergy, $263 million in PDP financing. That financing, which supported eight A330s, was later increased to $294 million this year.
AFC also completed a private placement in the capital markets to fund the purchase of five Boeing 737-800s for a “large international carrier” this year.
In addition, it secured PDP financing to help support 10 Bombardier Challenger 605 business jets for IALT, a Swiss aircraft financing, leasing and trading company.
“We finance all asset classes and all manufacturers, including turboprops and helicopters,” says Brennan.
The New York-based financier is working closely to expand its business with the help of its sister company, Guardian, which was established in Dublin this year.
“AFC and Guardian will work together to co-invest with aircraft operators in tranched financings, involving mainly new aircraft,” he says.
Brennan admits the amount of new money entering the aviation finance market is a concern for the financier.
AFC has “turned away five or six transactions” in the past six months as the returns did not fit the financier’s requirements.
“While we do worry about returns given the amount of liquidity entering the market, we don't think we are in a bubble situation,” he says.
Still, even with returns under pressure, the industry is the “healthiest it has ever been”.
“There is a lot financing opportunity out there, supported by a strong aviation market backed by solid GDP growth and a stable operating environment.”
While Brennan anticipates interest rates will "ease higher", he does not expect a "rate shock".
The operating lease market, though, is one he is watching closely.
“I imagine there will be some reasonable fall-out in the leasing market as lessors lower lease rates and offer shorter rental terms to stay competitive,” he says.“The market has run-up, so it is subject to a healthy correction in the near term."