Lenders tend to consider the worst-case scenario. If a lender had to repossess the aircraft with it needing an overhaul, it would have to use its own money for an overhaul to make the airplane marketable again. So, most lenders specify you must have enough liquidity to cover an overhaul from Day 1.
Some lenders may require an overhaul as part of the purchase. Others may require a “hold back” amount, sufficient to cover overhaul costs. Lenders may also require an additional cushion of liquidity for unexpected expenses. Some lenders will simply bow out of the transaction entirely.
Some clients believe their ability to liquidate an asset to cover an overhaul should count in their favor. Lenders tend to disagree, for two reasons. First, offering to liquidate an asset against an overhaul changes the global financial picture of the borrower, which may have a negative effect overall. Second, while borrowers tend to feel eternally confident about their ability to quickly liquidate any asset they own, lenders are more skeptical. Financers can draw from plenty of historical precedent where the asset a borrower thought would be easy to sell fetched far less than expected—or didn’t sell at all.
In two instances, an owner whose engines are at TBO might easily obtain an overhaul loan. In the case of an aircraft that is free and clear, it’s generally possible to get virtually 100-percent financing. The second case is when a loan is still outstanding. If the amount requested plus the remaining principal adds up to less than 80 percent loan-to-value, a lender will typically refinance. In that case, the owner may not have to go more than 20 percent out of pocket to pay for the overhaul.
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