An increase in the base rate could be a double-edge sword for the leasing community that has been operating in an ultra-low interest rate environment since 2009.
“We are at historically low interest rates, but not forever, so if lessors are locking in very aggressive rental rates that are commensurate with today’s interest rates, it is going to be really, really tough to sell those aircraft to another investor in the future,” said Frank Pray, chief executive of Intrepid Aviation, speaking at Ascend 2020 Finance Forum in San Francisco.
According to him, the only way to overcome that situation is to find investors that have “significantly lower return requirements”.
“My caution here is, if you are locking in fixed-rate rentals at today’s interest rates, as a lessor, you are going to impede your ability to trade these aircraft in the future,” he says.
To avoid such an event, Intrepid has a “significant portion” of its fleet on floating rates that adjust every three- to six-months, says Pray.
If an interest rate increase follows an increase in economic activity “that will obviously be a good thing,” said John Willingham, chief executive officer of Macquarie Air Finance. “This would mean we can probably place the aircraft at higher rates, in excess of the interest rate adjustment alone would require.”
Willingham says rising interest rates would also give investors a “broader range” of options than right now, and that move should favour used aircraft - where Macquarie focuses its business.
“If you are a money manger you can’t just put money in safe places, but if Libor is back at 4% then we will have less money chasing alternative asset types, and probably a more rationale supply of money and demand in the new aircraft space,” he says, adding: “The cost of ownership is skewed in favour of new aircraft, as you can fund new aircraft cheaply, but higher interest rates would skew that back to used aircraft.”
Steve Rimmer, chief executive of Guggenheim Aviation Partners, agrees rising interest rates could be good for used aircraft funding. He also points out that higher rates “needn’t be bad on the cost side – it really depends on how the different markets interact."
According to Rimmer, lessors have seen a reduction in the debt credit spreads, and the return of banks to balloon risk "which all goes into the actual cost of the funding , so a higher interest rate might not be that there is an overall increase to us.”