IN FOCUS: Who will finance 2012's expected growth in commercial aircraft deliveries?

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The year 2012 will see more commercial aircraft deliveries hitting the market and financiers may be scratching their heads to work out how the funding requirements will be met.

Boeing Capital anticipates $95 billion worth of new commercial aircraft deliveries in the large and regional jet sector next year, up from $77 billion in 2011. Airbus and Boeing will deliver more widebody aircraft such as the Airbus A380 and the Boeing 787, while production on the narrowbody sector will go up. Boeing announced earlier this month the roll-out of its first factory-complete Next-Generation 737 at the production rate of 35 aircraft a month, as it looks to deliver around 420 single-aisle aircraft in 2012.

As in previous years, the lessors, public debt/capital markets and private equity/hedge funds will fund part of the deliveries, but the big talking-point is the impact of the sovereign debt crisis on the European banks.

In its updated "traffic light" assessment of the various aircraft-financing sources, Boeing downgraded the commercial banks to the status of "major concern", saying the change reflects the European banks' struggle to raise long-term US dollar finance and comply with the new regulations under Basel III.

boeing 787 @ dubai 2011, billypix

Over the past two decades, European banks have been the major players when it comes to financing new aircraft. They have actively used the guaranteed structures of the Export Credit Agencies (ECAs), but have also developed tax products.

The ECAs will remain the primary source of finance, with an estimated $29 billion worth of aircraft deliveries in 2012, representing about 30% of the market. The commercial banking market will provide finance of $20 billion for next year's deliveries but its percentage, in absolute terms, will drop by four percentage points to 21%.

The European banks have lost some ground in ECA-guaranteed structures and the US and Japanese banks now undertake the majority of new financing transactions.

The recent central banks' decision to halve the penalty cost of borrowing US dollars at corporate level may ease European commercial banks' funding problems.

However, Boeing Capital still expects European banks to reduce their lending capacity in 2012. "We anticipate European banks to continue to be active in 2012 and beyond, but their aviation portfolios will need to be reduced, limiting their ability to grow," comments Boeing Capital's managing director for capital markets Kostya Zolotusky. He predicts European banks will be at 80-85% of their 2011 capacity next year.

Part of their capacity drop could benefit other banks in Japan, Australia and Canada, which have previously had a smaller presence.

Zolotusky argues that US banks have $1.5 trillion of undeployed capital, which has accumulated from the US Federal Reserve's two quantitative-easing exercises. The Japanese banks' liquidity has more to do with an ageing population repatriating their global investments back into yen and Japanese accounts.

But as the aircraft finance market enters a "phase of realignment", Zolotusky also expects insurance companies to play a greater role on the equity and debt side. According to him, insurance companies could play a role in ECA transactions, by providing guarantees on the finance.