Much of the unprecedented recent growth in sales of business aircraft has been driven by the international market, where advantageous exchange rates have made dollar-denominated assets unusually affordable.
Toennies von Limburg, director of international sales in Bank of America’s corporate aircraft finance division (Booth No. 873), said as he prepared for his second EBACE that he was looking forward to helping buyers finance their purchases. “Obviously the market in the U.S. is also growing, but the growth rates internationally are significantly higher,” he said. “In the past we always spoke about three quarters of the production going into the U.S. market but lately it has really changed and it’s more like 50 percent U.S. and 50 percent to the rest of the world.”
Global economic growth is fueling the boom, von Limburg said. “Companies are growing again, the stock market is up. Clearly that is generating a lot of liquidity and financing capabilities, and so you see a lot of transactions which are paid out of companies’ cash flow. But beyond that the banking industry is very interested in offering loan and lease solutions for the financing of corporate aircraft.”
Weak Dollars
As aircraft are priced in U.S. dollars, exchange rates that have seen the pound sterling rise to two dollars while the euro has been lodged around $1.35 for some time are an important factor. “That clearly helps aircraft buyers,” he said. “I don’t expect the prices to change to a euro price in the near future, so at the moment it’s very attractive for European companies to buy U.S. dollar-denominated assets.”
Buyers should be cautious, though, von Limburg counsels, about financing their aircraft in euros. “You also have an impact, which I frequently come across with clients who want to finance their aircraft in euros, he said. The interest rates are slightly more favorable, so it is tempting to finance the asset in euros, but my argument frequently is that you risk the possibility of a mismatch.”
He quotes the example of a customer who was considering an aircraft replacement. “He has a six-year old aircraft, financed in euros. While saving maybe 1.5 percent in interest per year, after six years he suddenly figures that the exchange rate has turned so strongly against him that the outstanding loan amount on that aircraft–in spite of the extremely strong market for pre-owned aircraft–is significantly exceeding the aircraft value.”
The value of the aircraft had appreciated in dollar terms, but the loan had a high residual in euros. “At the current exchange rate he has lost some 35 percent if he sells the aircraft and pays back the loan. Of course it can also go the other way–you finance your aircraft now with a euro financing and the exchange rate turns back, then you would make a big gain on the exchange rate. But that’s not what companies normally do. They try to work a financing in a way that protects them against risk, not to gamble for a profit on exchange rate or risk losing money.”
Currency Exposure
The lesson, von Limburg said, is “they should always consider a U.S. dollar loan. As a bank we are open to finance in U.S. dollars or euros, but there is an issue if you use a different currency than U.S. dollars for this asset, especially if you look at financing with a residual position.”
If a buyer plans to keep the aircraft for 10 years and you amortize down to zero then obviously there is no risk because you won’t have any outstanding loan amount at the moment when you sell the aircraft. Looking at a typical corporate aircraft financing with term of 10 years to a balloon of 60 percent, you may run into difficulties with this mismatch between the two currencies.”
To remove the currency exposure for companies with revenues in euros and payments in dollars, von Limburg suggests a U.S. dollar-denominated loan with the loan or lease payments swapped into euros. “The residual of the aircraft will remain in U.S. dollars because the balloon payment is in U.S. dollars, being the same currency as the value of the asset,” he said. “You would have euro payments over the term of the financing and the dollar payment at the end of it. That pretty much takes out the currency exposure you have in the financing of the aircraft.”
One recent trend von Limburg has detected is a growing interest in operating leases. “Many clients are happy with their normal loan financing, but it appears to me that over the past year or two, especially with the increasing prices of the aircraft, clients are also considering operating leases as an interesting solution.”
