Why export credit agencies make good banks for aircraft

http://www.airfinancejournal.com/default.asp?page=7&PubID=44&ISS=25049&SID=712486

Export credits might be one ray of sunshine through the big cloud that hangs over the financing market.

Airlines and lessors that need to finance future aircraft deliveries have many reasons to feel nervous. In the past few weeks one UK bank (Bradford & Bingley) has been nationalized, while two of them (Lloyds and HBOS) have merged. In Europe, a Belgian bank (Fortis) has been partly nationalized and the governments of France, Belgium and Luxembourg have injected money into a Franco-Belgian bank (Dexia). In the US two investment banks (Wachovia and Merrill Lynch) have been taken over and another two (Lehman Brothers and Washington Mutual) have gone bankrupt.

The news does not make the drafting of a request for proposal (RFP) any easier. But taking these events into account, it is easy to see why export credit is one of the most popular sources of funding for aircraft deliveries. 

It is understood that Gecas, the world's largest aircraft lessor by number of aircraft, plans to use export credit to finance future aircraft deliveries. This will be the first time that the lessor has used this form of financing since 2000, when it tapped the export credit agencies to finance a $1.6 billion portfolio of A320-family aircraft, with Deutsche Bank as arranger.

The latest RFP, for up to 25 A320s, comes after an increase in the cost of commercial financing and a decrease in the liquidity levels of commercial lenders.

A spokesman for Gecas says: "Gecas is always looking to explore options for financing, as well as looking for ways to help its customers." It is believed that the lessor is looking for $300 million and has five aircraft delivering in September, two in October and two in November.

It is understood that a number of French bankers, who are among the most active arrangers of export credit deals, are looking at RFPs. One of them has also been mandated by ILFC to finance some of its export credit deliveries. ILFC received $6.4 billion of the $6.5 billion available to it on three unsecured revolving credit facilities. The liquidity enabled the lessor to repay its commercial paper and other obligations as they become due.

Export credit financing is becoming a popular alternative to commercial bank debt, and arranging banks have seen improved pricing on deals. Some bankers are not surprised about the Gecas request for proposals.

One says: "As the cost of bank funding increases, airlines and lessors are looking at other options. Many banks are not taking on new deals for the rest of 2008 and, as a percentage of deliveries, commercial bank debt will halve next year. Export credit support would help, so too would manufacturer support."

Another banker adds: "Many airlines and lessors will tap export credit as an alternative funding source."

For its fiscal year ending September 30 2008, Ex-Im Bank in the US has guaranteed $5.5 billion to finance 90 aircraft. This is $1 billion more than the previous year. Over the past few years Ex-Im Bank has guaranteed an average $4.4 billion-worth of financing for 70 aircraft per year. "The next two years will be even busier," predicts Robert Morin, vice-president of the transportation division.

Morin declines to comment on the Gecas request for proposal, adding: "They [Gecas] have not used Ex-Im Bank in the past. But one just has to look at the order books of Airbus and Boeing to see how many lessors and airlines need financing."

While Morin admits that export credit has become a popular source of funding for airlines and lessors, he believes that commercial appetite has not vanished.

"Export credit charges can also be high. Higher interest rates don't reflect the high cost of funds. The banks decide their own cost of funds and there is certainly a flight to quality among them. Not so long ago the margins on export credit were so low that banks didn't want to lend. Now we have new banks and companies in the non-traditional bank sense that are coming to the table."

Simmons & Simmons is one of five law firms on the European export credit agency panel. Mark Moody, a partner, agrees that pricing and margins on export credit deals have improved. He thinks that the impact of the new aircraft sector understanding, which applies different premiums to airlines depending on their creditworthiness, will vary from airline to airline.

For those airlines and leasing companies which are good credits and located in countries that have ratified the Cape Town Convention, the impact of the new aircraft sector understanding will be less dramatic. In addition, under the new aircraft sector understanding, mismatch loans are no longer legible to rank pari passu with ECA loans. This in itself may affect pricing.

Because there are grandfathering periods for aircraft delivered before the end of 2010 in accordance with firm purchase contracts concluded before April 30 2007, the full impact of the new aircraft sector understanding has not been fully realized. Ultimately, some airlines may suffer from higher premiums but they are unlikely to have the same financing options available to them as they would have had two years ago.

One UK banker is also looking at the Gecas request for proposal. He says the fact that the lessor is considering export credit is not bad news.

"It is not to say the lessor is in trouble or that it's the end of the world. They are wise to use it, as they may want to take advantage of the old rules. GE's creditworthiness is better than most banks. Also, banks have different forms of pricing. Libor isn't reflective of banks' cost of funds."

The banker agrees that the financing choices for airlines and lessors are limited, and export credit is helping a lot of them to secure financing.

"It would be interesting to ask the 20 airlines what their capex [capital expenditure] is and to see how they plan to finance aircraft that are delivering in the next 12 months," says the banker.

Another UK banker adds: "Even if export credit is risk-free financing, you need to find a bank which can access the cash. The days of ECA financing at five basis points are over. Nowadays pricing is around 100 basis points plus fees. But borrowers want to spread their funding sources as widely as they can."