Finance: Too good to be true

Here’s why deals like that just don’t happen. A bank must make money on the loans it services. It costs banks money to acquire the money they loan to customers. The rate they pay for that money is called the cost of funds. For example, they might buy a five-year note from the Treasury at 1.66 percent. That is their cost of funds. The difference between the lending rate charged to their customers and a bank’s cost of funds is the net interest margin.

That net interest margin is a bank’s primary income stream. All expenses, from salaries to rent and utilities, are debited from that net interest margin. Those healthy reserves banks must maintain to cover losses from bad loans also come out of that same source. Even though the cost of funds for each bank is unique to their circumstances, that figure is typically based upon a universally recognized benchmark like the overall yield curve of the U.S. Treasury.

Let’s say the bank bought five-year Treasury notes at 1.66 percent. Its cost of business is 166 basis points. Typically, banks start lending at 200 basis points above their cost of business—in this case, 366, or 3.66 percent. That starting point is for a bank’s best customers—folks with cash collateral and amazing credit, who are well-known to the bank, for example.

So, for a bank to offer a client a 2.9-percent interest rate on an aircraft loan, given the above example, the bank would have to be willing to reduce its net interest margin from 200 basis points to only 124. What would possess a bank to structure such a “skinny deal”?

A deep-pocketed client who is very familiar to the lending bank and whose investments are already being fee-managed by that bank could be one scenario when a bank might make an exception to the rule. AOPA Aviation Finance recently brokered a super-mid cabin, new aircraft deal valued at more than $20 million. The borrower had an existing relationship with a bank, and AOPA Finance had an existing relationship with its aircraft group. The bank wasn’t aware that our client was looking to purchase an aircraft, and the client wasn’t aware his bank had an aircraft financing group.

Because we had relationships with both, we were able to articulate the reasons for keeping the deal in-house. The bank was already familiar with the client and his financials; the bank’s aviation group had done several deals of this size and type before; and the client’s substantial financial holdings with the bank allowed the bank to stipulate, and the borrower to agree to, using his accounts as collateral for the loan. 

Banks love to leverage liquid assets over the airplane. It’s much easier to reach into an account if a loan goes bad than it is to sell an aircraft, no matter how popular the model. And pointing out that allowing another bank to finance the aircraft would open the door to that other financial institution potentially enticing the client (and their money) away helped our client get, far and away, the most competitive rate and best structure possible.

That’s a rare real-world example. That said, AOPA Aviation Finance may find great deals for folks who have investments with certain lenders. Whether your financial situation is typical or “unicorn,” our process will match you up with the best lender for your circumstances.

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