Growth in alternative funding will, in time, ease European pullback: GAP

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A pullback in lending by European banks in the aviation sector will be helped by the continued, albeit slow development of alternative sources of financing, says Guggenheim Aviation Partners' (GAP) chief.

"Markets this year seem to be in line with our expectations - debt is hard to find and difficult to close. There is certainly a shortage of liquidity in the markets, and the European banks absence from the 2012 market will have an impact," says GAP chief executive Steve Rimmer.

He adds: "We need to have some new liquidity sources and probably the capital markets are where some significant volume could emerge. However, this will take time as it faces large hurdles given that most borrowers don't already have ratings."

Rimmer notes Fitch Ratings "seems to be preparing" to rate some potential non-US borrowers, but he admits the "process will take time."

In terms of regional US bank financing, as these sources are naturally long in US dollars, which European banks are struggling to secure, Rimmer says the "time frame for educating these players is not measured in single digit months - at least not in the volumes that are needed."

And like the capital markets, the development of regional banks as a liquidity source "will take time," he says.

The lack of US dollars has forced some European banks to address this situation by asking for borrowers to place US dollar deposits with these lenders, says Rimmer.

The banks, in turn, are making the move attractive in terms of deposit rates, "so it's not just a 'grab' it's a genuine attempt to address a real issue proactively," he says.

Challenging finance market have resulted in an increase in the number of market disruption clauses, which can be invoked when bankers are experiencing exceptional difficulty in raising funds, being issued to borrowers during the past year. These clauses often result in borrowers facing an unexpected increase in pricing on financing deals.

"We are seeing the market disruption clause used more as an excuse to re-price deals to a point where the borrower will say 'no' and then the bank can walk away from commitments it doesn't want to follow through on," says Rimmer.

However, he says banks that want to do want to do business in aviation are "trying to find ways to address internal issues and [are] asking the borrower to help" such as through US dollar deposits to soften the squeeze on dollar funding.

Rimmer acknowledges GAP will raise capital this year in a financial environment that is very different than that of 2007 - the last time the lessor secured funding.

"We anticipate that while pricing will be one element of challenge, as we may see a squeeze on management fees and carried interest, but we believe that our hands-on-management, which is core to our strategy. provides a strong defense against that trend."

Rimmer says investor still have opportunities in many sectors and in order to attract investors into aviation "one needs to give them certainty that their money will be deployed, quickly and in line with projections, which means that pre-identification of specific assets and debt to support the acquisition of those assets are key."