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Capital Markets and Financing

This article explores the various financing options for aircraft deliveries, including airline funding, delivery financing for lessors, and operating lessor funding. It also discusses the considerations and strategies involved in aircraft financing, such as cost, diversification, managing financing risk, and the role of capital markets. Additionally, it addresses credit rating considerations and the importance of adapting to changing financial markets.

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Capital Markets and Financing

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  1. Capital Markets and Financing 3 November 2015 Wui Jin Woon Senior Director, Capital Markets

  2. Agenda • Airline funding of aircraft deliveries • Delivery financing options for lessors • Operating lessor funding

  3. Airline funding of aircraft deliveries

  4. How are aircraft financed? Source: Boeing

  5. Airline Financing Considerations • Cost v Diversification • Manage financing risk • Financial markets change over time and a particular source might be unavailable at a point in time • Balance • Relationship • Execution risk • Flexibility • Regional v Global Banks • Lease v Buy

  6. Consider the various cycles

  7. Delivery financing options for lessors

  8. Capital markets an increasingly significant financing source Source: Boeing

  9. Lessor Financing Considerations • Cost v Diversification • Cost is key to leasing competitiveness • Similar diversification considerations to airlines (financing risk, market risk, balancing other issues) • But a wider scope to diversify due to portfolio of lessees • Trading flexibility • Fleet strategy • Liability management • Ratings considerations

  10. Financing strategy is connected to fleet strategy 100+ Warehouse facility Portfolio Size 50-100 0-50 0-10 10-20 20+ Growth Rate (aircraft added per year) Bilateral (non-recourse) Unsecured debt Bilateral (full-recourse) Secured portfolio financing Note: box sizes are not strictly representative. Chart excludes export credit financing

  11. Operating lessor funding

  12. Lessors have a constant need for funding • Aircraft are depreciating assets, so lessors have to buy aircraft just to stay the same size • To achieve IRR targets, aircraft under 15 years of age need to be financed • Aircraft usually need to be re-financed at least once while they are owned by a lessor

  13. Lessors must adapt to changing financial markets Financial crisis and recovery • Increased ECA borrowing • Use of recourse • Portfolio finance in bank market • New capital markets issuance Post Gulf war and GPA • GPA workout refinancing • First ABS transactions • Many banks in market 2000 2010 1990 2015 Currently • ABS for debt and equity • Growth of capital markets • Diversity of banks Post 9/11 • FI backed lessors • ABS markets re-opened • Banks re-entered as market improved

  14. Lessors need to pay attention to the liabilities side of the balance sheet Recipes for trouble: • Borrowing short/lending long • Excess leverage leading into a downturn • High refinance risk • Unmatched funding • Concentration of relationship banks • Dependence on capital markets • Structures that are difficult to unwind

  15. Credit Rating Considerations • Rating agencies differ in the sector teams that cover lessors (S&P: corporates, Fitch, Moody’s: FIG) • While the rating methodologies are different, there are some common considerations:

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