Richard Whitaker

Japanese banks have withdrawn from aircraft financing due to Asia's economic crisis and the forthcoming demise of the Japanese leveraged lease may deter them from returning.

Japanese institutions have accounted for some one-third of aircraft financing. In late 1997, however, most of them ceased approving new deals, and Ian Hosier, head of transportation finance at Sanwa Bank, believes they will not re-emerge at least until the fiscal year-end on 31 March. As a result all airlines will face higher pricing and weaker credits may have problems completing deals, says Hosier.

Japanese and European banks have competed aggressively in Asia, but problems like Garuda's payment defaults may put them off aviation, says Klaus Heinemann, head of aviation at the Long Term Credit Bank of Japan.

To make matters worse, Japan's ruling Liberal Democratic Party has agreed that the tax advantages of the JLL should be abolished from 30 September, and this measure seems certain to become law.

The JLLhas accounted for an average of $5 billion a year in financing during the last 12 years, says Hosier, and in its heyday saved 5-10 per cent of an aircraft's cost. However, the benefit has declined to 2-4 per cent, which is often not enough to counterbalance the JLL's lack of flexibility. 'The broader issue is how many Japanese banks funding debt will lose interest in the aviation market if they can't earn fee income on equity underwriting,' says Heinemann.

As a potential replacement, the Japanese Operating Lease confers some tax advantages on the equity investor, but its shorter term means that the investor has to take a risk on the asset value.

Source: Airline Business