Export credit finance for business jets and helicopters
Every country wants to increase its exports. One way that countries can help is by making it easier for foreign buyers to finance imports. This is particularly important in emerging markets where finance can be less readily available.
Governments offer this support through export credit agencies that either lend to foreign importers directly or reduce the risk of them defaulting by guaranteeing loans made by banks.
Export credit loans are widely used in the commercial aircraft market where Airbus and Boeing receive a lot of support from their export credit agencies – particularly when commercial bank finance is hard to obtain.
Although business jets and helicopters have been supported for over 10 years, less than 5% of helicopters and business jets have received export credit support (compared to around a quarter of commercial aircraft). This is partly because export credit agencies tend to have small specialist teams and it takes roughly the same amount of time to structure a loan for a $10 million business jet as it takes for three $150 million 777s going to one airline.
However, business jet and helicopter manufacturers and export credit agencies have been keen to increase the amount of aircraft financed through export credit since the 2007 credit crunch.
Because they are focused on exports, export credit agencies are used to lending to jurisdictions that other lenders may find challenging like China, Turkey or India. In fact, they have financed commercial aircraft in most of the world’s countries.
It is where the aircraft – or parts of it – are built that is important; not the nationality of the manufacturer. This means, for example, that Bombardier can work with three different agencies (as its aircraft are built in Canada, the US and the UK) and that the Export Import Bank of the United States can support exports for nine aircraft manufacturers.
The people running export credit agencies are aware that they are lending tax payer’s money so they take risk very seriously. This means that although it is reliable – and often the cheapest source of financing – it is also usually the most time-consuming and least flexible structure for a borrower.
The approval process typically takes at least four months and deals can easily take over a year. Export credit agencies also demand more information from borrowers than banks and leasing companies. On the whole, export credit agencies do not like financing aircraft for individuals so export credit loans are most commonly used by corporates, operators and governments.
Aviation export credit is not restricted to helicopters or aircraft. Flight simulator company CAE, for example, is often supported by Export Development Canada, and spares and engines can be financed.
|Export credit agency||Country||Has the ability to support|
|Coface||France||Airbus Corporate JetsDassault|
|Export Development Canada||Canada||Bell CanadaBombardier|
Pratt & Whitney Canada
|Export Import Bank of the United States||US||Bell HelicoptersBombardier (Learjet aircraft made in Wichita)CessnaEmbraer (Phenoms built in Florida)Eurocopter USHawker BeechcraftHonda JetGulfstream|
|UK Export Credits Guarantee Department||UK||Airbus Corporate JetsAugustaWestlandBeechcraftBombardier|
Agencies can also work together. The UK’s ECGD, France’s Coface and Germany’s Hermes normally cooperate on Airbus aircraft. The amount that each agency guarantees of each aircraft is split between the three agencies by estimating the percentage of the aircraft that has been manufactured in each country. ECGD will typically end up guaranteeing more in a deal financing an Airbus aircraft with Rolls-Royce engines than it would for one with GE engines.
Export credit structures
US Ex-Im deals typically involve a bank lending the money (which is then guaranteed by the export credit agency) other countries like EDC or BNDES (which acts as arranger for the Ministry of Finance) lend direct.
If you are buying a new aircraft and would like to consider export credit financing you should ask the aircraft’s manufacturer. All of the manufacturers are in regular contact with their export credit agencies. They can introduce you to the relevant agency or in the case of US Ex-Im suggest banks that can arrange the financing as arranging banks usually lead deals.
Buyers of Cessna aircraft or Bell Helicopters can work directly with Cessna Finance Corporation which has a $500 million US Ex-IM facility. This is a unique deal where Cessna structures deals that conform to pre-agreed conditions and was helped by the fact that Cessna already had a finance organisation. It was agreed in 2008 and is due to be refinanced in 2012.
The approval process for US Ex-Im
The approval process typically takes between 16 and 20 weeks:
- Buyer selects an arranging bank
- Mandate Letter signed between arranging bank and Borrower
- Financing Proposal submitted to US Ex-Im Bank by the arranging bank
- Approval from US Ex-Im Bank
- Establishment of special purpose company and designation of Security Trustee (if required)
- Execution of Loan and Security Documentation
Borrowers typically need to provide: three years of audited financial statements; up to 10 years of financial projections; copies of purchase agreements and any amendments; and bank and supplier references.
They will also need corporate documents (Articles of Incorporation, Board Resolutions, etc.), credit and security agreements plus legal opinions, proof of insurance, proof of registration and, for US Ex-IM, a US FAA Export Certificate of Airworthiness.
The Aircraft Sector Understanding
Because export credit financing could be used to give one manufacturer an advantage, the OECD manages negotiations between all the major commercial and business aircraft manufacturing countries and export credit loans are governed by an Aircraft Sector Understanding.
After almost a year’s negotiations, the 2011 Aircraft Sector Understanding was signed by: Australia, Brazil (even though it is not an OECD member), Canada, the European Union, Japan, Korea, New Zealand, Norway, Switzerland and the US. (Russia and China were invited to participate but chose not too.)
This Aircraft Sector Understanding governs all business jet and helicopter deals from now on.
It basically specifies that all aircraft export credit deals must have:
- A maximum of 12 year financing
- A maximum loan-to-value of 85%
- Be priced based on eight risk factors
- A discount is given to borrowers in countries that have ratified Cape Town
How export credit loans are priced
Export credit premiums are based on three things:
1) Risk-based rates/Premium rates:
Based on long term loss given default and updated annually.
2) Market reflective surcharge:
Based on a 90-day daily average Moody’s credit spreads index, discounted to 50% to reflect security.
3) For Direct Lending ECAs, a Liquidity Margin Benchmark:
A 90-day rolling average of the lowest funding cost charged by banks to fund large aircraft transactions in USD backed by an ECA guaranty.
Export credit finance is not meant to compete with commercial lenders so almost uniquely in finance, the OECD agreed pricing is designed to penalise strong credits. This comes from the airline market where carriers complained that airlines like Ryanair and Emirates were being subsidised by cheap export credit (however, there are very few investment grade airlines so it has limited affect).
Borrowers are divided into eight risk category.
|2||BB+ to BB|
|8||CC to C|
If a borrower is not rated by a recognised rating agency, the export credit agencies make an internal classification and then send their rating through to the other agencies. Agencies that have a relationship with the borrower – so may have financed their aircraft in the past or looked at supporting sales campaign – have the right to appeal if they disagree with the rating.
Classifications are valid for 12 months when sent as part of letters of offer. The letters of offer can be extended to 18 months if there is a firm commitment and commitment fees are paid.
12-year repayment term, asset-backed transactions
|2007 ASU||2011 ASU|
|Risk category||2007 (bp)||Feb 11|
|Jul-11 (bps)||Oct-11 (bps)||Up-front (%)|
|2||BB+ to BB||96||166||147||147||162||9.16|
|8||CC to C||249||231||226||234||257||14.74|
Risk mitigants are based on the creditworthiness of the borrower.
There are two types:
- Category A: 5% reduction in LTV, equal principal payments, 10Yr term
- Category B: Security deposit, payments in advance, maintenance reserves
One Category A risk mitigant can be replaced by a 15% surcharge on the credit margin/premium rate
|Risk Classification||Category A||Category B||Total A+B|
|AAA to BB||0||0||0|
|B+ to B||1||1||2|
|CCC and below||3||1||4|
Minimum required security package
The ASU stipulates:
That a first priority mortgage on aircraft and engines; or sovereign guarantee (full faith and credit unconditional and irrevocable guarantee) must be granted on aircraft loans;
In the case of a lease structure, the export credit agency gets assignment of first priority security interest in the lease and related payments;
If more than one aircraft is financed the agency also gets cross default and cross collateralization of aircraft and engines owned legally and beneficially by the same parties;
If commercial creditor participates in loan of up to 80/85%, security can be shared pari-passu with such creditor;
Interest rate/premium commitments can only be extended 18 months prior to delivery;
All contractual cash concessions continue to be deducted from the aircraft price;
Cape Town Discount
The Cape Town Convention is an international treaty designed to standardise transactions involving aircraft and aircraft engines. Countries that ratify the treaty agree to respect registration of ownership, security interests in aircraft, leases and conditional sales contracts, and lenders rights to repossess aircraft.
Countries that sign the treaty have an option to ratify it in several ways. If they fully agree to all aspects of the treaty they are then able to get a 10% reduction to the credit margin/premium rates on export credit deals.
Not all the countries that have signed the treaty qualify, but the ones that did in 2011 were:
|Countries eligible for Cape Town discounts|
Non-asset backed transactions
It is also possible for an export credit agency to support aircraft with non-asset backed loans, but these transactions are still be governed by the Aircraft Sector Understanding.
If the asset is not considered but it has a sovereign guarantee, sovereign risk is subject to a minimum surcharge of 10% for B+ risk, 15% for B/B- risk and 25% for CCC/C risk.
Non-sovereign risks are subject to a 30% premium surcharge; may only have a maximum contract value of $15 million; with a maximum repayment term of 10 years and there can be no sharing of security.