Aviation Lending: Managing the Risk in Aircraft Collateral Value

By Wilke, Robert F. | The RMA Journal, February 2016 | Go to article overview

Aviation Lending: Managing the Risk in Aircraft Collateral Value


Wilke, Robert F., The RMA Journal


On October 6, 2008, the 61st Annual Conference of the National Business Aircraft Association opened with a clear blue sky and enthusiastic crowds at Orlando's Orange County Convention Center. Despite turmoil in the financial markets following Lehman Brothers' bankruptcy filing three weeks earlier, everyone attending seemed in high spirits.

The highlight of the opening session was an engaging discussion of the political landscape by James Carville and Mary Matalin. Just as the Washington power couple began their audience Q&A, Blackberry devices started to hum and vibrate all over the room. Their owners seemed to reach for their phones in unison. And the messages were all the same: The stock market was in free fall.

The panic in people's faces was obvious as they literally began running toward the exits. The convention floor became a virtual ghost town, with stunned exhibitors walking around with nothing to do and no one to talk to. Things remained that way for the balance of the three-day show.

At the same time, the industry's newest and best products were carefully parked in the static display area at Orlando Executive Airport. Among them was a pristine pre-owned Bombardier Challenger 604 with an attractive asking price of $19.9 million. By the following day, the asking price had dropped to $17 million. The day after that, the same aircraft was being offered for $14.5 million, and by the afternoon the seller was accepting offers on the back of a business card. That beautiful Challenger 604 experienced a drop in asking price of more than $5 million, or 25% of its previous fair market value, in just three days.

The worst stock market crash since the Great Depression finally bottomed out in May 2009 and began a sustained recovery. The Dow Jones Industrial Average index climbed from 6,000 seven years ago to more than 18,312 on March 19, 2015. Unfortunately, for those who invest in business aircraft, the struggle to recover values in many segments of this market continues to this day.

As the aircraft market was being turned upside down, many traditional financing sources simply stopped funding deals and some panicked and began to sell off their aviation portfolios. Virtually all lenders readopted the conservative lending principles of the past: relationship lending, shorter terms, lower advance rates, greater security deposit requirements, higher interest rates, and restrictions on financing newer aircraft. Character, capital, capacity, and conditions became the iron-clad rule at most institutions.

Why These Four Cs Really Don't Protect You

All lenders, lessors, and investors do their best to perform appropriate due diligence reviews on their clients, but despite all these efforts, major problems still occur. Here's why.

Credit Quality

Concentrating your lending on "high quality" credits is not necessarily the answer.

Q: What do General Motors, CIT, Texaco, Chrysler, Pacific Gas & Electric, WorldCom, Enron, and Lehman Brothers have in common?

A: All were considered top-tier companies, all made extensive use of business aircraft, and all went bankrupt.

On June 1, 2009, General Motors filed for Chapter 11 bankruptcy protection from its lenders, lessors, and other obligors. Several months later, this author was asked to inspect the two Gulfstream G-Vs and five G350s that were on lease to GM. When those aircraft were ultimately returned to their lessors as a part of the proceeding, they had not been maintained as required, had not been recently flown or cleaned, and had to be transferred from their base at Detroit Metropolitan Airport under a Special Ferry Permit. Ultimately, each lessor lost several million dollars per aircraft.

Today, credit quality can change more quickly than ever, and some of the most sophisticated financiers in the world can be caught off guard.

Character

When it comes to the issue of character, company size doesn't seem to matter. …

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