The pool of airlines that lenders are willing to accept as collateral has gone “really just down to a handful” amid the Covid-19 pandemic, the chief financial officer of Wings Capital Partners has said.

At the beginning of the crisis, everyone in the industry was “just trying to assess what this was going to be, how much cash do you have, how long are you going to be sustained”, Bryan Billings said on 4 November during the virtual Airline Economics Growth Frontiers Hong Kong 2020 conference.

Parked Brussels-c-Brussels Airlines

Source: Wikimedia Commons

Parked aircraft in Brussels in April 2020

“And, clearly, we thought it was going to be a shorter phenomenon, and now we find ourselves at a point where we have airlines that are at the part of the year where they are going to make the least amount of profits, and we’re clearly looking to just get hopefully to the summer season.”

That, he says, has led to a new reality in the banking markets where “the number of names that folks are willing to look towards as collateral is really just down to a handful”.

He adds: “When you look at the fundamentals in the space, it was always asset first and then credit, and right now that has kind of been turned on its head. It’s very difficult for all of us in the industry to even make an assessment with regards to which airlines are going to survive and be around, and the consequence of that for the financing community is… really reduced down to a very small group of names that they are even willing to consider doing transactions with.”

Sourcing financing for twin-aisles will be more challenging than for single-aisles, Billings goes on to say.

“Clearly, there’s a change in the dynamics with regards to how airlines are going to operate fleets, and the widebody aircraft as we’ve already seen are going to come under the most pressure, which is going to make it very challenging to finance those aircraft.”

Marc Iarchy, director of World Star Aviation, agrees, saying that lessors are becoming “increasingly choosy” on certain credits, or saying they do not want to touch some credits at all.

“We’ve also seen changes to some of the terms, with some banks saying: ‘We’re no longer doing non-recourse financing’. We’ve seen, effectively, from last year when the banks couldn’t give money cheaply enough to save their lives, to effectively a situation now where people are more picky, and there are definitely less alternatives out there,” he says.

“So, effectively, what that does is you have got to price things unlevered and make sure that works, and if that does not work, maybe you don’t do the deal.”

Ted O’Byrne, managing director of Carlyle Aviation Partners, adds that he is seeing a “drastic change of terms from both an LTV [loan-to-value], spreads and amortisation standpoint”.

“I would say that this time this is when the relationship counts and as Mark [Billings] said, non-recourse deals are fewer and further between, and relationship banks will do deals with people they know,” he says.

“This is only amplifying trends that may have started before the crisis with Basel III and Basel IV where the risk pricing models that banks are using are being questioned and are probably going to evolve towards something much more drastic in the industry.

“I expect that we will see even less candidates for lenders in the next few months and probably few years, and those lenders will really be active with fewer credits, in my view, in the years to come. So I think this crisis is only accelerating this process and you’re starting to hear rumours…about some banks looking to exit the industry altogether.”