ASU to have limited impact on export credit demand: market sources

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Costlier regulation under the Aircraft Sector Understanding will do little to reduce demand for export credit guarantees from airlines and lessors on the hunt for aircraft financing in 2013, say market sources.

"For years, the cost of capital has been artificially reduced where buyers have been able to secure export credit loans at a cost that is drastically lower than the next best alternative," says a source. "But even with higher pricing under ASU, it will still be an attractive source of financing, particularly with commercial debt financing becoming more expensive due to Basel III."

According to the source, the pricing differential between export credit loans and "the next best alternative" is "at least 350 basis points", depending on the length of the financing.

Export credit financing rates will be reset in 2013 when ASU comes into full effect.

Unless financiers that reigned in lending following the 2008 financial crisis return to market soon, the impact of ASU, which is intended to bring the level of export credit financing closer to commercial rates, will be "muted", says a leasing source.

"ASU is pushing up export credit rates and banks are increasing pricing too, so unless some of these financiers return to market, I don't see any real change in export credit demand," he says. "ASU was intended to make commercial debt more appealing, but there is a squeeze on both sources of funding, so one is not more attractive than the other."

A banker agrees adding: "Airbus and Boeing don't stop producing aircraft, so airlines will have to choose their best option and that could push more airlines into the sale and leaseback market."

Another financier believes pricier export credit support could lead to more vendor financing.

"We haven't seen much manufacturer funding, but if the landscape becomes more difficult, resulting in more order cancellations, bankers could take a negative view on the industry, limiting their funding," he says. "This could mean the manufacturers have to step up to offset the more expensive export credit funding."

The new ASU terms are tougher, to make ECA support less appealing to airlines and lessors that are able to borrow commercially.

ECA-supported deals have been available to airlines and lessors for as little as 25 basis points - a quarter of a percent - above the London interbank offered rate (Libor) for US Export-Import Bank deals, and under 50 basis points for European transactions.

Upfront fees on loans under the existing 2007 ASU range from 4% to 7.5%, depending on the credit rating of the customer. Under the revised ASU, even the most creditworthy will pay 7.72% upfront and the lowest investment grade carrier will pay 14.74%.

Operating lessors at the US ISTAT conference in March had a more optimistic view of the impact of ASU on export credit demand.

"The new ASU will bring the level of financing closer to commercial rates and operating lessors will be the largest beneficiaries of that move," said Steven Udvar-Házy, Air Lease's chairman and chief executive officer at ISTAT in March. "When the export credit agencies financed airlines due to geographic location, I felt there were distortions in the market."

Another lessor agreed. "Once new the new ASU takes effect in the market, airlines will see operating leasing as one of their best options financially. Add in Basel III and leasing looks even better."

The lessor also believes ASU could help the values and lease rates of older aircraft as more airlines consider five-to-ten-year old aircraft again, instead of new equipment.