Deal of the Year 2012 : BNDES $175 million financing for Flight Options

There is a perception that export credit guaranteed finance deals take a long time to structure. The 15 months that Flight Options and Banco Nacional de Desenvolvimento Econômico e Social (BNDES) spent working on their $167 million agreement does nothing to dispel this.

But the participants say it was the effort.

“It is the first of its kind it and it always takes time to break new ground,” said Michael Silvestro, CEO of Flight Options. “We are really pleased it has closed and it is very important to Flight Options.”

It is the first time that BNDES has structured a true asset-based business jet deal (its first ever deal for a Lineage 1000 was largely based on the corporate strength of the borrower), its first support for the Phenom 300. And it is the first time it has financed a fractional operator. It is also the first time a US aircraft operator has received export credit from any export credit agency.

Although fractional operators rely on selling aircraft to customers — who are normally responsible for finding their own financing — operators still need to acquire core aircraft (which are used to provide extra lift at busy times such as public holidays) and aircraft used for card or smaller membership programmes. In the past they have usually had to finance these themselves.

“One of the biggest challenges for fractional operators has been finance. It is particularly important to card programmes where customers cannot get financing for monthly or annual fees,” says Kenneth Ricci, chairman of Flight Options. “Export credit has solved this problem for us and finance will be even more critical for operators in the future.”

The BNDES loan means that Flight Options can sell its JetClub membership programme to customers whilst knowing that it has already financed the aircraft. The $167 million will finance about 20 aircraft being delivered over the next three years.

Under Flight Option’s JetClub Membership programme members buy the right to fly either for 24 hours or for 50 hours. They pay a joining fee but they do not have ownership rights. This is important as BNDES holds the mortgage on each aircraft.

BNDES is providing a 10-year loan — with a 10-year insurance fee — however there is a mandatory prepayment balloon at eight years for each aircraft. Pricing has not been disclosed. The direct loan from BNDES is guaranteed by the Brazilian Ministry of Finance, advised by the Brazilian Export Credit Insurance Agency (SBCE). The Brazilian bank will lend 80% of each aircraft’s value with Flight Options putting in the other 20%. Although the loans are cross-collateralised (so a default on one aircraft would cause default on all the financed aircraft) it is not a revolving facility.

This means that once an aircraft has been financed by BNDES it cannot be sold to fractional owners, unless Flight Options pays back the entire loan on that aircraft. Flight Options and BNDES did look at ways of financing a facility but that proved to be too complicated.

“We want Flight Options to have as much flexibility as possible so we kept breakage costs as low as possible ,” says Marcio Nobre Migon, head of aircraft financing – export credit division, BNDES. “The modest pre-pay cost gives them opportunity to use our financing when deliveries occur then find fractional or card investors. If they want to sell shares in the aircraft they can repay early cheaply.”

Analysing business aviation

BNDES is experienced at financing airlines but needed time to understand Flight Options. “Our learning curve was steep,” says Nobre Migon. “Flight Options has a very different business model and business aviation is far more complex than the airline industry. You have all the usual risks – like fuel prices and labour – and more variables like the variety of aircraft types and operators.”

Nobre Migon estimates that the Flight Option loan took about twice as long to structure as a similarly-sized loan for an airline buying Embraer aircraft. However, he says the bank was keen to finance Flight Options as it is an important Embraer customer and because they are keen to support the manufacturer’s executive jets.

BNDES is happy to talk with other Embraer customers, although like other export credit agencies it is able to finance private individuals. Because of the time and legal costs, export credit loans are most suited to multiple orders.

As most business jet operators are privately owned, BNDES also found it hard to find comparisons for Flight Options. It helped that Flight Options has been profitable for the past two years – and will be in 2012 – after five years of losses. Flight Options business also strengthened considerably whilst they were discussing the deal.

The Brazilian Ministry of Finance, which is lending the money, and SBCE, its adviser, also analysed the operator separately.

“Flight Options is a financially sound, well-run fractional jet operator with a sophisticated clientele – the perfect company to make the best use of an advanced plane such as the Phenom 300,” said Vitor Sawczuk, head of business underwriting, SBCE. “We believe the Phenom 300 is a game-changer for the light-jet category, and we are confident in Flight Options’ ability to help build this plane’s market share in the U.S.”

Financing future orders

Unlike airlines which often ask for financing commitments before choosing aircraft, when Flight Options placed its order for 100 Phenom 300s in 2007 it talked with BNDES. At the time the fractional operator placed the order, Silvestro and Kenneth Ricci, chairman and founder of Flight Options, were not running the company.

The first eight Phenom 300s have been delivered and all of the shares in these aircraft have been sold. Flight Options says it will have 15 Phenom 300 jets in operation by the end of 2011. Embraer plans to deliver the remaining jets over the next eight years.

“Phenom 300 sales have been extremely well received on the fractional side,” says Silvestro. “The BNDES loan now means that JetClub members can have access to the type and we know the demand is there.”

Flight Options is now working on a mid-cabin order. Having closed its first export credit deal Flight Options would be keen to use a similar structure on the next order.

“We see BNDES as an important partner now. They know us and we would definitely like to work with them again,” says Silvestro.

BNDES’ Nobre Migon is also positive about the idea. “We think Flight Options is a very strong company with good operations and a very competent and successful management team,” says “If they wanted to talk to us about financing future aircraft we would definitely be happy to work with them.”

Both Silvestro and Nobre Migon are confident that a future deal would take less time to structure.