The recession that started in December 2007 and the new banking regulations it spawned have changed the way loans and leases are offered for jet aircraft. You can still get one, but now you need to be a buddy to the banker, unless you go to a non-bank financier. This is especially true for the more expensive jets, but it’s true as well for jets at the lower end like an owner-flown Cessna Citation Mustang.
There were better times. Dave Goode of Goode Ski Technologies in Ogden, Utah, still has his Mustang purchased in 2007 when AOPA put him on the cover of a special turbine report in AOPA Pilot. “When I purchased it in 2007, I was asked if I wanted to finance 100 percent of it, with no down payment. Money back then was more available,” he said. Things have changed.
Fifth Third Bank reported a $30 million business jet “impairment” earlier this year. The bank had bet that medium- and large-cabin jets leased in 2007 would be worth a certain amount when the lease was up, but due to the recession, they were worth much less, according to a report by Corporate Jet Investor. The leases are up in 2017 and later, but rather than wait for the jets to come home to roost, the bank decided to take the impairment now.
“When you do a lease, you are basically establishing what you believe the future value will be five, seven, or 10 years out. You’re saying that plane is going to be worth X dollars when you take it back. If that plane is not worth that, that’s a direct write-off to the bank,” said Wayne Starling, senior vice president and national sales manager at PNC Aviation Finance.
Declining jet values aren’t the only factor affecting banks’ willingness to finance jets. Regulatory changes meant to increase capital and decrease risk have influenced banks’ lending policies and led to a shift toward relationship banking that goes beyond a single transaction.
“The banks got a bad rap during the downturn [that said] because we weren’t lending money, we caused part of the downturn in the aviation industry. That was not true. Every bank had money but due to the values declining and the tightening of [banking] regulations, everybody had to step back and re-evaluate how they were doing their business and become a little more conservative on their structures and their terms. That was perceived as the banks don’t want to lend on aircraft which is not true,” Starling recalled.
The banking regulations were tightened in a series of accords developed in Basel, Switzerland, a city known to tourists who step off cruise boats on the Rhine River to sample wines. Bank regulators met there to tighten banking regulations and force banks to prepare for a rainy day. Under the Basel III agreement, banks must have enough liquid assets to cover cash requirements for a stressed period lasting 30 days. In a few years they will need stable funding in place to address needs for a stressed one-year period. Under the new regulations, risks are more heavily controlled.
“Another factor is the risk weight of a particular loan and the reserves you have to hold against that,” said Ford von Weise, director and head of Global Aircraft Finance for Citi Private Bank. “In the past under Basel II you had to hold 2.5 percent against any kind of loan you had. Under Basel III they say, ‘Hey, guess what, one-size solution doesn’t fit all. In fact, we ought to really adjust the amount of reserves you hold against a particular loan to reflect the actual risk in that loan.’ We have to hold that money in cash. We can’t invest it, we can’t do anything. We can invest it in government treasuries, but that’s it.”
Banks haven’t stopped lending and leasing, they’re just more careful about it. Corporate Jet Investor conducted a $2,300-per-person seminar in Miami in October where some of the sessions had scary titles, like, “Will banks still be financing jets in 2020?” and “Why you should not write off banks.” Another session was titled, “Are non-bank financiers the future?” Starling spoke about why customers should not write off banks while von Weise of Citi spoke about whether banks will still finance jets in 2020. Shawn Vick of Global Jet Capital spoke about whether non-bank financiers are the future. The conclusion was that banks are continuing to fund jets, but something has changed. To get the loan you want, you might need to become a buddy to your banker.
“I can tell you what became very clear at this conference, and that is, the majority of the banks today are really, really, really focusing on people and customers that can become a client of the bank for multiple products and services,” said Starling. “What you’re going to see, and what we have already seen is that banks are less interested in doing standalone transactions—doing a loan for someone on an aircraft where they have no opportunity for any other type of business with that individual. It’s becoming more and more important that we have a relationship and opportunity to provide other services for that customer.”
Customers aren’t storming the loan desks of aircraft financiers, banks report. “The market is already depressed and continues to not benefit from the broader economic expansion to the extent which other industries have,” said von Weise. His bank focuses on jets costing $10 million and up.
“When I look at our customers, when they’re going to buy an airplane, they have to have three fundamental requirements. Otherwise they’re not going to buy one. The first one is the need to travel. Second is the ability to pay for it. Third, and probably the most important of the three, is confidence.
“Now, what we don’t have right now is confidence. For a variety of different factors, our clients don’t have the confidence today—the majority of them—that they did a few years ago—to buy an aircraft. [He’s not allowed to mention the number of customers that feel that way.] So they’re not, even though they have the money. We don’t see a real recovery yet,” the Citi official said.
“Are we having more discussions with our clients who are thinking about purchasing an aircraft? Absolutely. In the past two years the level of interest has increased markedly. Have they all translated into those clients purchasing aircraft? No. But is there a sense of urgency that once they think they have the need, the money, and the confidence to purchase an aircraft [they will]? No, there’s no sense of urgency. As a matter of fact they’re sitting back and taking a look at the industry, saying, ‘Hey, aircraft residual values continue to fall appreciably faster than what we would have expected, and maybe it makes more sense to wait so the values fall even more,’” von Weise said.
Aircraft loans are more profitable for non-bank loan sources such as Global Jet Capital. The firms are free of banking regulations, like Basel III, but as Vick points out, the industry isn’t unregulated. “We still have every obligation under the AML (anti-money laundering) and KYC (know your customer) obligations,” Vick said. Know your customer requires firms to gather certain information on customers. Global Jet Capital can also partner with banks.
“What we’re looking to do is partnering with the larger banks to provide them solutions that don’t encumber their balance sheet or impact their loan-to-value issues. Or when they’ve got a client that is near the upper limit of the amount that they’re willing to loan we’re happy to come in and provide an equity piece to the bank’s debt piece in order to get those clients’ aircraft financed,” Vick said. His company is mainly aimed at the high end of the jet market, but there are exceptions.
“With the acquisition of the GE portfolio, that broadens the scale of the marketplace that we can operate in. We had started the business focused on super mid-size and above. We’ve now got a very large installed base of customers, some of who[m] want to move from turboprops into mid-size jets or light jets into mid-size jets. We’re happy to have a conversation and look at financing their next acquisition. We’ve already financed, as Global Jet Capital, airplanes like the Gulfstream G650.
“When we launched the business at last October’s NBAA we specifically pointed out we did not want to be in the lower end of the market, that we were focused on the higher end of the market which was the $25 million to $80 million range,” Vick said. So are non-bank lenders trending toward developing relationships with customers who will use multiple products and services? Do you need to be a buddy to Vick?
“We’re agnostic to those issues,” Vick said. “We’re focused solely on aircraft finance. That is all we do. We are prepared to do straight loans. We are prepared to do operating leases, finance leases, [or] progress payment financing. This is all we do. We don’t seek any other relationship than to be the informed aircraft [financier] sitting across the table from people who need to put airplanes to work in order to grow their businesses or expand their net worth. We don’t have any other requirement but that,” he said.
To address the question posed at the Corporate Jet Investor conference, is the non-bank approach the way to go in the future? “There is room for everyone,” Vick said. “We’ve got a competitive product and service, and I think the traditional banks are challenged to continue to grow in this space given the regulatory issues that they face, and the moves that are being made amongst many of the very large financial institutions and banks regarding shedding assets. We are positioned as well as anybody else to grow and probably better than most.”
But Global Jet Capital, while it has smaller aircraft in the GE portfolio that it acquired, really prefers to operate in the $25 million to $80 million jet aircraft area. Citi prefers customers who want a jet costing $10 million or more. Where does that leave the Cessna Mustang customer?
Customers for jets at the lower end of the market can tap their regional bank, but what is true for the high-wealth individual or company is true for the small-jet owner: Be a buddy to your banker and buy lots of his banking products. “Based on the industry information that is available, [more than] 50 percent of all the aircraft loans that are done by lenders [are done by those who] do less than four aircraft loans a year,” said Starling. “What that means is you have a small bank in Oregon and you have a high-wealth client that is a member of that bank and maybe they have his line of credit to help him grow his business. He wants an aircraft. It may be the only aircraft loan that bank has but they will provide that for him because of that relationship.”
What if you don’t want any additional products except the loan or lease? Banks will still talk to you, but as one banker noted, you’ll pay more for that loan or lease. Still, banks are not disappearing from the jet loan arena.
“No, if you talk to them [banks], and most were represented in Florida [at the Corporate Jet Investor conference], almost every one of them is meeting or exceeding targets established for this year,” Starling said. “The number of aircraft financed are equal or greater than last year. The banks still do the majority of the lending.
“When it comes to leasing aircraft, there’s only been a small number of players in the business in the past. At PNC, we never did leasing until about 18 months ago. We were always on the sideline but we started offering more of it. We have a very small portion of our portfolio that is in actual leases.”
Relationship banking is part of a mathematical formula used by banks to calculate risk. It might actually be profitable to take your banker to lunch and see if the terms of the deal improve a little. Should you hug your banker? That hasn’t been converted to a mathematical value as yet.
AOPA Aviation Finance Co. has increased the number of turbine loans done in 2015 and plans to do more in 2016, finance company president Adam Meredith said.
AOPA has long been in the piston-engine arena, but is expanding. “Our focus within the turbine segment will continue to be within the turboprop and light jet areas,” Meredith said. “That’s consistent with AOPA membership. Traditionally, it’s been owner-flown aircraft.”
That said, Meredith added that opportunities to finance larger jets in the past have been pursued. He doesn’t see banks backing away from aircraft loans.
“I don’t see tougher times with banks,” he said. “I definitely think banks are going to still be lending in general and certainly in the aircraft space as well.”