No interest – how rising rates will affect aircraft market
There is a strong correlation between your thoughts on Kombucha and interest rates. If you are not a big fan of fermented black tea you are probably not that worried that the US rate is 3%-3.25% because you remember when they hit 20% in 1980.
If you have a TikTok account, you probably are worried that the US rate has had three consecutive rate hikes of 0.75%. Today’s US job figures – with unemployment down to 3.5% from 3.7% – also mean that another 75 basis point rise is likely.
Most business jet owners are in the first category. “Interest rate rises have had zero impact so far,” says one international private banker, who typically focuses on larger aircraft. “This is partly because rates are not that high if you look back at the last 40 years.”
Financiers say that they are still seeing strong demand for finance – partly driven by US buyers wanting to close transactions before they lose 100% bonus depreciation at the end of the year.
It may seem odd, but higher rates could also encourage people to use more aircraft financing.
“Interest rates should be a factor in purchase decisions, but because they have been so low recently, they really have not been. People have been happy writing cheques for aircraft and using private bank facilities or general corporate credit lines, this could change now,” said Vivek Kaushal, CEO, Global Jet Capital. “As Bridgewater’s Ray Dalio said this week, ‘cash is no longer trash.’ We may see even more people wanting to put their cash to work getting returns rather than being tied up in what is ultimately a depreciating asset.”
Global Jet Capital funds itself through securitisations typically with fixed rate interest and already has warehouse financing arranged. Kaushal is also optimistic that higher rates will encourage buyers to use operating leases as well as loans.
The private banker agrees. “We are seeing buyers looking at the spread between money costs and opportunity costs. Most large aircraft buyers do not need financing to buy an aircraft but it makes sense to finance it if you can get a better return elsewhere.”
Andy Blundell, managing director, Close Brothers Aviation and Marine, which focuses on UK aircraft buyers, agrees. (At a time when many UK banks are withdrawing home loans he also stressed that Close Brothers is very much open for aircraft finance.)
“The effects of interest rates are felt in different ways. Some people may decide not to buy or replace because of rates, while others will prefer to wait to see what happens. But those who were going to pay cash for aircraft may now borrow instead to ensure the have additional liquidity,” says Blundell. “You will also see a number of owners refinancing to strategically release liquidity to get a ‘war chest’ for opportunities they know are coming rather than having it tied up in an asset.”
Wayne Starling, executive director, IADA – and a former banker – says that most existing US owners are insulated from rises. “Because rates have been so low, less than 25% of US deals in the last few years have been floating rate,” he says. “Very few lenders have been pushing fixed rates. This is very different from five years ago so right now there is not a big exposure.”
The private banker says that larger aircraft loans are typically floating rate, but they are also seeing increased demand for interest rate collars (where buyers can protect themselves from interest rate rises using swaps). Swap collars also give buyers the ability to repay loans without the expensive pre-payment costs you typically get with fixed rate loans.
Some owners – particularly newer ones dealing with maintenance costs for the first time – may feel that a rise in interest payments is enough to make them sell. But few bankers expect this to happen quickly.
Kaushal adds that rising interest rates may encourage more people to buy aircraft. “The value proposition for business aviation is very clear. When things get uncertain people see this even more,” he says. Something worth raising your oat milk flat white to.