Sarah Conway, senior analyst for risk advisory at Flightglobal consultancy Ascend, looks at the aircraft financing requirements for 2013
Against an estimated $101 billion (based on Ascend Full Life Base Values) requirement for new aircraft deliveries this year, the focus turns to where the money will come from to meet this demand.
An estimated 96% of this requirement is for Airbus and Boeing commercial jets, with nearly 1,300 units scheduled for delivery. Regardless of the larger total value of new deliveries, there seems to be few concerns in the market about liquidity, as the debt and commercial markets are predicted to step up for more transactions.
There will be some changes in sources of financing from previous years, reflecting the declining reliance on export credit agencies (ECAs) and the growing involvement of capital markets and commercial debt (in particular Asian and Middle Eastern banks).
In January 2013, the Aircraft Sector Understanding (ASU) came into force, bringing higher premiums for those who access export credit financing. The expectation is that those who traditionally used this source of funding will look more to commercial debt or sale-leaseback opportunities as they become more competitively priced.
However, Ascend does not forecast export credit to lose its appeal, as it will remain an important source for those who do not have access to the alternatives and therefore, will pay the premiums required to have their deliveries financed. Overall, Ascend forecasts export credit to fulfil 24% of the total financing obligation this year.
The European debt crisis has played a major part in limiting the capacity of key European aircraft finance banks, as many are still deleveraging their portfolios. However, the US, Middle East and Asian banks are growing their presence in the aviation industry. The Japanese banks are leading the way with bullish moves to grow their global market share, benefitting from the strong yen and cash balances.
According to Flightglobal's Ascend Online database, around 15% of deliveries in 2013 will be to Chinese airlines. Ascend expects most of this funding demand to be met by Chinese banks, which have been fulfilling domestic airlines' financing needs over the recent years. The interest in aviation finance is also on the rise in the emerging markets of Taiwan, Malaysia and South Korea.
Capital markets should contribute at least 12% of the financing required for new aircraft this year. They will continue to support US airlines and lessors, but it is possible that we will see better-rated non-US carriers looking at the enhanced equipment trust certificate (EETC) market this year, after the success of the Doric Series EETC issue in 2012. Ascend expects that airlines with access to the EETC market will continue to benefit from cheaper financing costs as international demand for this type of financing grows.
With institutional investors seeking to invest in high quality assets that offer better risk-adjusted returns compared with other asset classes, we are seeing a rise in the number of potential aircraft investors. The Ascend Aircraft Investment Index (AAII) shows that favourable and stable returns that are uncorrelated with other asset classes are available by investing in the "metal", rather than by looking at the credit of the operator.
The importance of lessors to the financing of new aircraft is undisputed. This year, with the funding requirement forecast to exceed $100 billion for the first time, Ascend predicts that $43 billion (including sale-leaseback activity) will be financed by lessors. To facilitate the growth of lessors, we expect that they will continue to tap on the capital markets and commercial bank market.
The recent GECAS $650 million asset-backed securitisation (ABS) facility, secured by 26 narrowbody aircraft, highlights the capital markets' demand for secured and unsecured debt issued by lessors. This transaction marked one of the first lease ABS deals since 2007, and given its competitive pricing and oversubscription, shows all the positive signs that more of such deals are expected over the coming months.
While it will be a year before we see if these predictions on funding are true, one thing is certain: as investors seek higher yields from their investments, it is inevitable that there will be more interest in this market that can offer stable and uncorrelated returns.