Aviation borrowers to be squeezed on loan terms

London
Source: Flightglobal.com
This story is sourced from Flightglobal.com

Airlines and lessors should expect shorter terms on their aviation loans as banks continue to grapple with funding pressures, particularly for US dollars, says a German-based banker.

"Our preference is for five-to-seven year loans, not 10-15 year financings as we offered in the past," says the banker. "Again, this is our preference, as this would help ease funding pressures, but in some cases we have to do longer-term financings because this is what the customer wants."

The source says European banks are "facing balance sheet issues" that will take "a long time to sort through", so "banks will be insisting on shorter-terms with their customers."

He adds: "Funding in currencies other than the euro is a real concern for European banks. Add in a long term request and the more difficult for the bank to offer the required funding. Unfortunately, this is where the market is right now, so expect shorter terms. "

Ron Wainshal, chief executive officer of Aircastle, echoed these remarks on an earnings call last week and said lessors could feel the squeeze on their return on equity [ROE] due to shorter loan repayment periods.

Banks are looking for "much faster" loan repayments and are being "much more belts and suspenders in the way of loan to value tests," he says.

Each step down the ladder in terms of credit quality will result in the borrower putting up more equity and incurring a shorter repayment period, according to Wainshal.

"And that has a dramatic impact on what your ROE [return on equity] turns out to be, even more than the margin on the debt," Wainshal says, adding: "That's where you are seeing the greatest pressure."