Aviation banks are failing to price financings to reflect market conditions and are allowing their existing relationships with customers to dictate the cost of doing business, says a banker.
"Banks are being stupid, there is a huge amount of dislocation in the bond markets and bank pricing hasn't adjusted to reflect this," says the source. "We allow our history, as banks and clients, to determine the current pricing and this doesn't reflect the markets and the risk."
The source points to a recent bank financing for a European airline that "priced inside 200 basis points" during the bond markets sell-off.
"The price should have been adjusted to reflect the current conditions and the risk," he says. "Banks shouldn't shy away, as this is the right way to price deals," he says.
He also notes that despite banks on both sides of Atlantic now being made clear on how the international Basel III rule book on capital will be digested, pricing has not budged to communicate this move.
"We all thought, due to the impact on liquidity under Basel III and regulation, we would see pricing increase, but it hasn't," he says, adding: "If anything, pricing has come down but we have the same LTVs [loan to value ratios] on financings."
The source says tier-one airlines are pricing at 200 basis points "and sometimes below", while pricing on tier-two carriers range from 225-250 basis points "which is extremely attractive".
His comments follow a busy fortnight of chartered and scrapped financings in the capital markets.
Last week, British Airways launched its first enhanced equipment trust certificates offering (EETC), after a series of non-deal investor meetings and calls in Europe, the USA and Asia.
The Class A certificates priced at 4.625%, while the Class B certificates priced at 5.625%. The EETC is secured by 14 new aircraft, including six Airbus A320s, two Boeing 777-300ERs and six 787-8s.
The deal closed on Tuesday.
Also, Doric Nimrod Air Finance Alpha returned to the capital markets with a $630 million pass through certificates offering to finance four Airbus A380s under 10-year operating leases with Emirates Airline.
The $462 million of Class A notes carry a final maturity of 9.9 years and an average life of 5.7 years, while the $168 million Class B notes a mature in 6.4 years with an average life of 3.8 years. The Class A certificates priced at 5.25% and the Class B certificates priced at 6.125%.
However, turbulent markets forced operating lessor Avolon to postpone its capital markets financing, as "rates remain volatile".
Also, Michael Rousseau, chief financial officer of Air Canada, said in a 27 June statement that the carrier's decision to pull it $1.1 billion offer to buy back outstanding debt was because recent volatility in the debt and capital markets "was such that available terms were no longer attractive" to the carrier.