How to find business jet finance
Gulfstream G550
There is no such thing as a perfect deal for every financier. Private bankers look for different things in transactions than equipment leasing companies. Export credit agencies have different requirements to hedge funds. Whilst the credit quality of any borrower is clearly important, it is not the only thing that matters.
It is worth looking at things from the financier’s perspective. No lender ever enters into a deal expecting it to go wrong, but they have to expect some to not work out. As a borrower you can help add comfort relatively easily and this may also improve your ownership experience at the same time. The most obvious ways would be to choose a friendly aircraft registry, use reputable aircraft management company and enrol at least your aircraft’s engines (if not the whole aircraft) on a maintenance plan.
Some financiers look for five or more pillars to support every transaction – the borrower’s credit, the asset itself, an independent aircraft manager, the country where the aircraft is registered, and the location of the aircraft. Even a very strong credit, which chooses to register aircraft in a tough jurisdiction will put off some financiers.
One of the benefits of aircraft as collateral is that banks have a movable asset which they can sell. However, this only works if they can repossess easily following a default and know that the aircraft has been maintained properly (an aircraft without full maintenance records could be impossible to sell). In the majority of cases where the borrower can no longer afford to meet finance payments they agree to return the aircraft to the bank. However, financial institutions need to think of the worst cases where a buyer refuses to hand back the aircraft.
You may not want to think about it; but the easier that they perceive repossession to be, the more comfort they will take. They also want to know that the asset is being looked after –maintenance makes a huge difference to the value of the aircraft – as well as being regularly.
You should always remember that you are the customer and that banks make money lending. But the more flexible you are as a borrower, the more sources of finance will be available to you.
1. Full transparency and audited statements
In an ideal world every business jet buyer would have full financial statements prepared to International Accounting Statements (IFRS Financial Statements). In reality – particularly in countries where annual audits are not required – serious business jet and helicopter financiers know that they will not always possible.
Clearly, the more information you have the easier the process will be. If your business is doing well enough to buy a business jet this could be a good opportunity to start getting audited statements.
For export credit deals, which involve government guarantee providers, you will need even more. 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.
2. Diversified – preferably dollar – business and investments
A business aircraft is a long term commitment. As well as being able to afford to make lease or interest payments financiers need to know that you can afford these commitments throughout the time you own it. Many banks had aircraft returned to them during the 2008 financial downturn because owners could no longer afford to pay for running costs.
Because of this, they are also increasingly focused on cashflow and not just (company or personal) balance sheets. If you have a business that generates diversified cashflows you are much more attractive.
As aviation is still a dollar based industry (aircraft are priced in dollars) international revenues provide even more comfort. If you are based in a country like Russia banks will also take comfort from any international assets that you own.
3. Know your client information
As well as evidence of how you or your company makes money, banks will ask for corporate documents – Articles of Incorporation, board resolutions etc – or for things like copies of passports and utility bills for individuals.
This is not the bank wasting time. It is a legal requirement. Acts like the US Patriot Act of 2001 were introduced to help crackdown on financial crimes including money laundering and the penalties for any bank breaking them are serious. All financial institutions are requested to check the identity and sources of wealth for existing and new customers. But no borrower ever enjoys collecting this information.
4. Corporate or personal guarantees
Nearly all lenders will be looking for a corporate or personal guarantee. You will probably not want to provide one but will end up having to if you want cheap finance. Very few lenders offer non-recourse financing.
In reality, it is very hard for banks to enforce personal guarantees but this is an area where a specialist business aviation lawyer should advise you.
5. Aircraft managed by an independent, professional operator
“One of the biggest issues for us is when a client comes to us with a specific manager in mind that it is not really a manager,” says one financier. “It could be a trust company, it could be a friend they play golf with, and it could be a flight department. We have a pretty simple rule in these cases. We walk.”
While you could choose to set up a flight department and run your aircraft yourself, there are benefits in using a third party manager. Aircraft financiers like third party managers because they know that the aircraft is being looked after. Managers can also warn banks when clients are not paying and help them manage the aircraft when a default happens.
It is common for financiers to have operators that they prefer working with but most will consider other reputable ones.
Banks will typically ask you to enter into a three-way agreement or tri-partite agreement with the operator which recognises their interest in the aircraft. These have become very common.
Whilst operators are unlikely to break these agreements, in reality they usually have stronger relationships with owners than they do with financial institutions.
6. The aircraft, its value and loan-to-value
Although not all banks consider themselves to be true asset-based lenders, they will all want to understand the aircraft that is behind the deal. This makes sense. Even private banks rely on being able to resell the aircraft if a borrower defaults.
On the whole, most banks prefer new aircraft. Many have limits where aircraft can only be a maximum of 10 years, 12 years or 15 years at the end of financing (so will only offer five-year finance on a 10-year-old aircraft). But there are some exceptions.
Banks will also usually want to get their own valuation for the aircraft from at least one independent appraiser. They will want to see what you have paid the manufacturer or previous owner but they may value the aircraft lower (they will never value it above the OEM price!).
This will also effect the loan-to-value. Most banks will limit themselves to below 80% of the aircraft’s appraised value. The lower the loan-to-value you take, the easier it is to find finance. Banks like owners to have “skin in the game” and the more equity you own, the more comfortable they are.
If you need 100% finance you are best off looking at leasing the aircraft.
7. Aircraft registration and aircraft location
The choice of registry is very important. You do not have to register the aircraft in the country where you live. By far the easiest place to find finance is the US and many US banks only provide financing to US (or N registered aircraft).
If you are outside the US, you may be able to improve your chances of finding finance by using a different registry. Many international lenders are very confident financing aircraft registered in Hong Kong, for example, but have concerns about repossession in mainland China. The same is true with Austria or Brazil where local laws do not always recognise mortgages.
Popular off-shore registries include Aruba, Bermuda, Cayman, Guernsey San Marino and the Isle of Man. There are lots of registries to choose between. Lenders may also favour jurisdictions that have signed up to the Cape Town Convention. This is an international treaty that guarantees the rights of aircraft financiers to repossess aircraft.
8. A history of aircraft ownership
“You don’t spend money buying an aircraft, you spend money owning one,” is an old saying. It is easy to underestimate the costs in owning and operating an aircraft and it is probably a mistake to think that you can rely on paying for these costs by selling chartering on your aircraft.
Financiers like owners who have already learnt these lessons and also shown that they really want (or even better need) an aircraft.
9. Maintenance programmes
Maintenance programmes offer buyers a lot of benefits – they allow you to budget for scheduled maintenance, cover you if something goes wrong and improve the value of your aircraft – so as a buyer you should definitely consider them anyway.
Financiers also like them. In fact a significant number of financiers will insist that at least the aircraft’s engines is covered by a manufacturer programme, like Rolls-Royce’s Total Care – or by Jet Support Services Incorporated (JSSI) the leading independent programme provider. JSSI and aircraft manufacturers also offer programmes that cover the airframe and many banks will push for this too.
Banks like maintenance programmes for several reasons.
First it means that the aircraft will be maintained well and be up to date with airworthiness directives – which are issued by the FAA to update aircraft and second, they know that aircraft covered by maintenance programmes tend to retain value better and are easier to sell.
Financiers will typically ask for assignment of maintenance programme to them in case of default. They will ask you to sign a three party agreement similar to the one they will ask you to sign with an operator.
The other reason financiers appreciate maintenance programmes is that they know these are the first things that aircraft buyers stop paying when cash is short. So they view them as early warning signals (although they probably do not want you to know this).
10. Future business
This does not apply to some lenders but the majority of aircraft finance banks are far more likely to finance your aircraft if they perceive that they will get other business. In fact, few private banks will consider you as a client unless you will commit cash for them to manage – although some may also consider future investment banking opportunities.
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