ANALYSIS: Markets liquid for aircraft financing in 2014

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The financial markets remain liquid giving airlines and lessors ample access to capital, agree attendees at the aviation finance industry’s International Society of Transport Aircraft Trading (ISTAT) Americas conference in San Diego.

The number of bank and capital market deals is expected to continue to rise as the use of export credit decreases in what is widely called a robust market.

“The markets are very good,” says Kostya Zolotusky, managing director of capital markets, leasing and aircraft financial services at Boeing Capital. “There is great, balanced liquidity.”

Boeing Capital anticipates $112 billion in aircraft deliveries in 2014 in its current aircraft finance market outlook. Bank debt will cover about 25% or $28 billion, cash 23% or $25.8 billion, the capital markets 22% or $24.6 billion and export credit 18% or $20.2 billion.

These numbers represent an increase in the percentage of deals financed using the capital markets and a decrease for bank debt, cash and export credit – continuing the existing trends in the sector.

“There’s a lot of capital out there chasing financing opportunities and aircraft financing, amongst other things, has benefitted from that,” says Doug Greco, vice-president of sales finance at Airbus Americas. “Banks are more active [and] capital markets are very active.”

BOND OR BANK

The capital markets have seen some of the most robust growth in recent years. Airlines and lessors did about $14 billion in deals in 2013, a roughly 40% increase over the $10 billion in 2012.

Nearly 70% of those in the audience of the finance panel at ISTAT Americas expect $12 billion to $20 billion in capital markets financing in 2014. The largest plurality of attendees expects $15 billion to $20 billion in deals.

The growth is due to a combination of tightening spreads, longer tenors and abundant capital, says Patrick Kaufer, managing director and global head of aviation finance at Deutsche Bank. However, deals are more complex than those in the bank market and there is a steep learning curve for new issuers, especially non-US ones, he adds.

American Airlines and United Airlines are expected to issue enhanced equipment trust certificates (EETCs), the most common capital markets tool available to airlines, at some point in 2014. Other potential US issuers include Alaska Airlines, Delta Air Lines and Hawaiian Airlines.

More foreign carriers are expected to enter the market in 2014. Attendees at ISTAT Americas were pretty well split on the number of new foreign issuers with 29% expecting two, 22% three and 25% four or more.

Turkish Airlines and WestJet are known to be looking closely at a EETC issue but it is not clear when they might enter the market.

Air Canada, British Airways and Virgin Australia issued their first EETCs in 2013, following Emirates who reopened the door to non-US issuers in 2012.

Bank debt remains a strong competitor with the capital markets in the sector.

“I’m hearing terrific capacity, terrific pricing,” says Thomas Hollahan, managing director and global aviation corporate banking industry head at Citi, on the bank market.

“This is really a six month old phenomenon, in terms of the level of aggressiveness we’re seeing,” he continues. “I expect we’re going to see a lot more deals financed in the bank market, especially for the airlines.”

European lenders who pulled back sharply following the 2008 credit crunch are back in the market as are Asian and US lenders who have expanded into the sector, say various attendees.

“The bank market is very strong right now,” says Jude Bricker, treasurer of Allegiant Air. The carrier is meeting all of its financing needs through bank debt and plans to continue to do so dependent on rates, he says.

Las Vegas-based Allegiant intends to finance for two used Airbus A320s with loans in 2014, he says. It closed secured bank deals for seven used A320s and one used A319 in 2013.

The ultra low-cost carrier has relationships with DVB and Wells Fargo.

EXPORT CREDIT

Export credit remains an important piece of the aircraft financing pie, despite continuing efforts to shift borrowers to commercial markets.

“Ex-Im [US Export-Import Bank] and ECAs [export credit agencies] are still active, [but] they probably don’t need to be as active given all the private money around,” says Norm Liu, president and chief executive of GECAS.

Bob Morin, vice-president of the transportation division at US Ex-Im, says airlines easily get “hooked” on their established financing practices, citing WestJet as an example.

The Canadian low-cost carrier has continually raised Ex-Im guaranteed debt for its Boeing 737 deliveries despite being considered a “great credit” by commercial bankers. It has discussed a capital markets deal with lenders but has yet to move on one.

Ex-Im anticipates supporting about the same percentage of Boeing deliveries in 2014 that it did in the 2013 calendar year, which was about 14% of the airframer’s 648 deliveries, says Morin. This equals at least 100 aircraft based on Boeing’s guidance of 715 to 725 deliveries during the year.

Two-thirds of ISTAT attendees expect $5 billion in $10 billion in authorisations by the US Export-Import Bank (Ex-Im) in 2014, according to the audience poll.

The buoyant financial market chatter at ISTAT was overshadowed by very little. Few talked about an inability of airlines or lessors to access capital, or of any expected sudden changes to the financing landscape.

Some attendees cites upcoming stress tests at certain European banks that could result in new limits on their lending capacity but the comments were brief asides to a largely positive picture.

“[My concern] is more focused on the macro economic risks, rather than aviation specific,” says Zolotusky. “Something that disrupts the global GDP. We’re mindful of various things, from Thailand to Ukraine to Venezuela, but we’re not at this time ready to call an audible that plans ought to be changed.”