Is this the start of the golden age of export credit?
The actual aircraft can be similar, but apart from that, business aviation and the commercial airline market are completely different industries.
Although there are noticeable differences between carriers, all airlines rely on passenger and freight sales to make (or quite often) lose money. A few business jet buyers rely on a similar business model to make money from charter, but many others fund their flying from money they make in completely unconnected industries, or their own personal wealth.
This fundamental difference has made life difficult for export credit agencies that have been asked to increase their support for business jet exports since 2008.
The Export Import Bank of the US (Ex-IM), Export Development Canada (EDC), Brazil’s Banco Nacional de Desenvolvimento Econômico e Social (BNDES) and France’s Coface are all very experienced providers of guarantees for commercial aircraft. Although they all have occasionally financed business jets and helicopters for over 10 years, it was not been a major focus for them.
Whilst commercial manufacturers often asked export credit agencies to meet airlines before orders were placed, business jet manufacturers relied on banks that were keen to finance deals.
The 2008 credit crunch changed this. At the same time as banks stopped lending, manufacturers also saw the geographical split of their customer base change. On the whole, US and European orders fell whilst Asian ones grew rapidly. Not only had the number of lenders fallen, many of the remaining ones would not consider transactions outside North America or Europe.
“Before 2008 I am not even sure that all of the manufacturers had our number,” said Bob Morin, vice president, transportation, US Ex-IM, speaking at International Corporate Jet & Helicopter Finance Conference in London in February 2012. Since then ever manufacturer in the US has called him.
Export credit agencies wanted to help but they had problems of their own.
Airlines were suffering from a similar lack of credit, so commercial aircraft manufacturers were also asking for more help. All of the export credit agencies have small teams dedicated to aviation and this stretched them further. Whilst there were keen to do business jet deals they just did not have time – particularly as it takes more time to structure a loan for a $10 million business jet than it takes for them to arrange financing for three 777s, worth $150 million each, going to a single airline.
Five years later, the numbers show that little had changed.
In 2011, Ex-Im helped finance Boeing commercial aircraft worth $12.6 billion in its 2011 fiscal year. It financed business jets and helicopters worth just $90 million in the same year. Business jets accounted for less than 1% of aviation guarantees.
To be fair to Ex-Im, there were some exceptions. Textron, the parent company of both Cessna aircraft and Bell Helicopters, had a finance subsidiary. Before 2008, it had financed its own aircraft as well as competing to finance other manufacturer’s aircraft. After 2008, when securitisation markets closed, it stopped doing this and needed funding. US Ex-Im arranged a $500 million facility for Cessna Finance Corporation and then directly funded it when it was unable to fund it.
This was a massive benefit to Cessna – which awarded the bank with an award for innovation. Customers also appreciated it. “Of course I prefer to work through Textron with the funding from Export-Import Bank, because you can provide us with the structure and the speed we need to close the deal with our customers,” said Leonardo Fiuza, sales director of TAM Executive Aviation, Brazil, in Textron’s 2010 annual report.
But demand for Ex-Im far outstripped demand. Other manufacturers without captive financer organisations were frustrated.
Outside the US other export credit agencies also stepped up. Export Development Canada also gave provided a $125 million facility to support sales of Cessna models, equipped with Pratt & Whitney engines to US customers and a $145 million facility to support Bell exports.
Brazil’s BNDES also closed its first business jet deals including a significant $167 million for US fractional Flight Options. France’s Coface also supported Dassault deals.
However, with all of the major manufacturers building aircraft in the US, the pressure was on Ex-Im.
Behind the scenes, Ex-Im was working hard. At the European Business Aviation Convention in Geneva in May 2012, Fred Hochberg, chairman and president of US Ex-Im announced two major projects.
First, the bank agreed to guarantee a second loan to Textron Finance. This time, reflecting improved market conditions, the $300 million loan was provided by PNC Bank.
Second, Hochtief announced that Ex-Im had launched a new qualified adviser scheme, where private sector organisations would outsource due diligence and credit analysis for the bank. He said this would speed up approval times – one of the biggest criticisms of business jet export credit deals. (Export credit banks recommend that customers begin talks six months before deliveries. Most aircraft finance banks aim to close deals in six weeks.)
“We want to offer government at the speed of the business,” said Hochberg. “We want to provide financing in a real time way.”
He says that Ex-Im bank will try and approve deals within two to four weeks of applications. Deals below $10 million can be approved by Bob Morin, vice president of transportation.
The first qualified adviser was Airfinance, a specialist firm run by Kirsten Bartok, former vice president of structured finance and corporate development at Hawker Beechcraft, and Tom Low, former president of Textron Financial and Cessna Finance Corporation. Airfinance will work with buyers to prepare applications with Apple Bank providing guaranteed loans once deals are approved by Ex-Im.
Low and Bartok immediately started hiring, taking senior people from Cessna Finance, including Brent Cox, formerly the chief operating officer.
Ex-Im says that they are keen to talk with other firms that would like to become qualified advisers. “We are keen to support general aviation manufacturers that do not have captive finance arms. We are very happy with Cessna and Bell and want to expand it,” says Hochberg. “Ex-Im Bank understands that business-aircraft transactions require specialised knowledge and experience but has limited resources to meet the growing demand for export financing in this industry. By leveraging private-sector expertise to assist and support our evaluation of these credits, we will be able to expand Ex-Im Bank’s support for U.S. business-aircraft exports and the manufacturing jobs that they sustain.”
So far no other firm has been made a qualified adviser. Other banks involved in export credit have also been active in 2012. TD Securities, a division of Toronto Dominion Bank, has financed two Gulfstream aircraft into Turkey and is working on a helicopter deal.
Hochberg says that Ex-Im wants to finance business jets and helicopters worth over $1 billion by 2013. This would more than triple its commitment to business aviation.
“Business aircraft and helicopters are a vital part of the US aerospace industry that is one of the most competitive sectors of the economy and employs thousands of Americans,” says Hochberg. “We want to support these good jobs.”