What is Asset-Based Lending in the Context of Aircraft Financing

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This situation can lead to a decline in asset values, affecting lenders' willingness to finance at previously agreed terms. The lessor retains ownership and may offer maintenance services as part of the agreement. Airlines operating within these regions benefit from tailored solutions that address local challenges while aligning with international standards.

Furthermore, tax treatment varies significantly across countries and can impact overall costs. Conversely, those deemed higher risk may face steeper rates or even denial of credit.

Establishing a Solid Financial ProfileBeyond your credit score, lenders will evaluate other aspects of your financial profile, including income stability and debt-to-income ratio. The asset is recorded on the lessee's balance sheet as both an asset and liability.

How does leasing impact an airline's balance sheet compared to buying aircraft? Essential elements include clear terms regarding payment schedules, maintenance obligations, insurance requirements, and return conditions.

What is Aircraft Financing and How Does It Work

How does asset-based lending benefit airlines seeking financing for aircraft? Each option has different implications on ownership, tax benefits, and accounting treatments. Frequently Asked QuestionsWhat is a sale-leaseback agreement in aircraft financing?

The total cost of ownership includes not just monthly payments but also maintenance costs, insurance premiums, taxes, depreciation, and potential resale value. By following this comprehensive approach toward securing aircraft financing efficiently serves both immediate operational demands while strategically positioning airlines for future growth opportunities within competitive aviation markets.

This involves negotiating terms that optimize interest rates, repayment schedules, and tax implications while minimizing risks associated with currency fluctuations and market volatility. Analyzing these variables will help determine if refinancing is a viable option for you.

Once finalized, implementation involves disbursing funds as per agreed timelines or taking delivery of leased equipment according to schedule plans established during negotiations. Frequently Asked QuestionsCertainly!



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What is a Sale-Leaseback Agreement in Aircraft Financing?

Negotiating Terms and Finalizing AgreementsThe final stage involves negotiating loan terms that suit both parties while ensuring long-term feasibility for you as the borrower. Traditional bank loans are a common choice for many buyers due to their structured repayment plans and competitive interest rates. How do accounting standards affect the treatment of operating and finance leases?

Lessees can adjust their fleet size based on current demand without being tied down by long-term commitments to particular models. Investors and financiers need to be well-informed about the aviation industry's unique characteristics, which include large capital outlays, long asset lifecycles, and fluctuating market demands.

Export Credit Agencies (ECAs)Export Credit Agencies play a crucial role in supporting commercial airline financing particularly when purchasing new aircraft from manufacturers based in different countries. Engaging experienced aviation attorneys during this drafting phase ensures that agreements comply with applicable laws while safeguarding interests.

Each jurisdiction may have distinct requirements for registering leased aircraft; therefore, understanding these local laws can prevent future complications. Factors influencing an appropriate LTV ratio include the type and age of the aircraft, its market value stability, borrower's creditworthiness, and overall market conditions.

What is the Importance of Creditworthiness in Aircraft Financing Deals

Aircraft Leasing vs. Purchasing: Pros and Cons

On the other hand, leasing offers a more economical entry point. This minimizes potential losses if one sector experiences downturns.6. Typical providers include specialized aviation finance companies, banks with dedicated aviation finance divisions, leasing companies, and sometimes private equity firms that focus on transportation assets.

Here are five concise and important questions related to the secondary market for used aircraft financing:What factors influence the valuation of used aircraft in the secondary market? What role do financial institutions play in facilitating transactions within this market?

However, specialized aviation lenders may offer more tailored solutions that align with unique industry requirements. EETCs specifically allow airlines using structured finance techniques where investors receive graded tranches offering varying degrees of risk exposure tied directly into future revenue streams generated via underlying equipment usage agreements.

What is Asset-Based Lending in the Context of Aircraft Financing - bank

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Demonstrating a consistent income stream reassures lenders of your ability to make timely payments. Structuring the Finance DealOnce potential funding sources are identified, structuring the deal becomes crucial.

How to Choose the Right Lender for Aircraft Loans

Long-Term Industry ImplicationsThe broader implications of interest rate changes extend beyond individual transactions into the overall aviation industry landscape. Their expertise can help navigate complex transactions efficiently while ensuring alignment with both immediate needs and future objectives. Future TrendsLooking ahead, several trends may shape the future of used aircraft financing in the secondary market.

Such transactions introduce additional layers of complexity with respect to taxation, including potential double taxation issues if not properly managed. Assess your budget, including down payment capabilities and monthly repayment limits.

The primary asset considered in this type of lending is the aircraft itself. Strong credit ratings bolster investor confidence by demonstrating sound financial management practices within the company seeking funds.

To mitigate this risk, lenders may charge higher interest rates or require additional guarantees or collateral from borrowers. Are there any additional fees or costs associated with the loan?

What is the Role of Leasing in Aircraft Financing?

Additionally, there are concerns about transparency and accountability regarding how funds are allocated and managed across different projects worldwide. Frequently Asked QuestionsHere are four concise and important questions related to "Aircraft Leasing vs. Some lenders may specialize in aircraft financing, offering tailored packages that consider unique variables associated with owning an aircraft.

What role do central bank policies play in determining interest rate trends affecting aircraft finance? Look for lenders that offer tailored services for aircraft purchases, whether for personal use or business operations.

What is Asset-Based Lending in the Context of Aircraft Financing - bank

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Regularly consulting reliable sources like trade journals and networking events helps keep abreast of any developments impacting current arrangements made under existing contracts-and thereby safeguard against unforeseen disruptions arising out thereof when least anticipated! Market conditions such as interest rate fluctuations, demand for aircraft, and economic trends can significantly affect negotiation leverage.

Depreciation and Tax DeductionsDepreciation is a key factor in determining the tax obligations linked to aircraft ownership. Consulting with a financial advisor specializing in aviation can also provide valuable insights.

Impact of Interest Rates on Aircraft Finance Deals

How can a business qualify for government-backed aircraft financing? ECAs enhance the competitiveness of domestic aircraft manufacturers by leveling the playing field against foreign competitors who may also have access to similar governmental support. A high credit rating suggests that the borrower is reliable, making them more likely to receive favorable financing terms.

Unlike traditional loans that may focus on cash flow or creditworthiness, ABL emphasizes asset valuation and recovery potential. Staying Informed About Policy ChangesFinally, staying informed about policy changes related to government programs is critical since political shifts can lead to modifications in funding availability or conditions attached thereto over time-sometimes unexpectedly so!

How to Utilize Government Programs for Affordable Aircraft FinancingUnderstanding Government ProgramsNavigating the landscape of aircraft financing can be complex, yet government programs offer a viable avenue for affordable solutions. However, many lease agreements include provisions where lessors handle significant aspects of maintenance, thereby reducing the lessee's burden.

There are primarily two types of aircraft leases: operating leases and finance (or capital) leases. Consider all associated costs beyond the purchase price, such as maintenance, insurance, fuel, and hangar fees.

Aircraft finance refers to financing for the purchase and operation of aircraft. Complex aircraft finance (such as those schemes employed by airlines) shares many characteristics with maritime finance, and to a lesser extent with project finance.[citation needed]

Private aircraft

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Financing for the purchase of private aircraft is similar to a mortgage or automobile loan.[citation needed] A basic transaction for a small personal or corporate aircraft may proceed as follows:

  1. The borrower provides basic information about themselves and their prospective aircraft to the lender.
  2. The lender performs an appraisal of the aircraft's value.
  3. The lender performs a title search based on the aircraft's registration number, in order to confirm that no liens or title defects are present. In many cases, a title insurance policy is procured to protect against any undetected defects in title.
  4. The lender then prepares documentation for the transaction:
    • A security agreement, which establishes a security interest in the aircraft, so that the lender may repossess it in the event of default on the loan
    • A promissory note, which makes the borrower responsible for any outstanding loan balance not covered by repossession of the aircraft
    • If the borrower is deemed less credit-worthy, a surety from a third party (or from multiple third parties)
  5. At closing, the loan documentation is executed and then funds and title are transferred.

Commercial aircraft

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Aircraft are expensive and owning one requires hefty Capital Expenditure. A Boeing 737-700, the type Southwest uses, is priced in the range of $58.5–69.5 million.[1] Airlines also typically have low margins so very few airlines can afford to pay cash for all their fleet.[citation needed]

Commercial aircraft, such as those operated by airlines, use more sophisticated leases and debt financing schemes. The three most common schemes for financing commercial aircraft are[citation needed]

  1. Secured lending
  2. Operating leasing
  3. Finance leasing.

However, other ways to pay for the aircraft & flying equipment are:[2]

  1. Cash
  2. Operating leasing and sale/leasebacks
  3. Bank loans/finance leases
  4. Export credit guaranteed loans
  5. Tax leases
  6. Manufacturer support
  7. EETCs

These schemes are primarily distinguished by tax and accounting considerations, particularly tax-deductible depreciation, interest, operating costs which can reduce tax liability for the operator, lessor and financier.[citation needed]

In May 2016, lessors had a 42% share of the market.[citation needed] It was increasing until 2008 but has since stagnated, and should continue[why?] so if not for a rise an interest rates, a slowing of airlines' profits, an increase in lessors' share of new airliner deliveries, and market liberalization. Lessors could also increase their market share by including more start-up airlines, more older aircraft recycling, a change in views on residual values, and lower returns acceptance.[3]

Direct lending

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As described above for private aircraft, an airline may simply take out a secured or unsecured loan to buy a commercial aircraft. In such large transactions, a syndicate of banks may collectively provide a loan to the borrower.[citation needed]

Because the cost of a commercial aircraft may be hundreds of millions of dollars, most direct lending for aircraft purchases is accompanied by a security interest in the aircraft, so that the aircraft may be repossessed in event of non-payment. It is generally very difficult for borrowers to obtain affordable private unsecured financing of an aircraft purchase, unless the borrower is deemed particularly creditworthy (e.g. an established carrier with high equity and a steady cash flow). However, certain governments finance the export of domestically produced aircraft through the Large Aircraft Sector Understanding (LASU). This interstate agreement provides for financing of aircraft purchases at 120 to 175 points over prime rate for terms of 10 to 12 years, and the option to "lock in" an interest rate up to three months prior to taking out the loan. These terms are often less attractive for larger operators, which can obtain aircraft less expensively through other financing methods.[4]

By directly owning their aircraft, airlines may deduct depreciation costs for tax purposes, or spread out depreciation costs to improve their bottom line. For instance, in 1992, Lufthansa adjusted its accounting to depreciate aircraft over 12 years instead of 10 years; the resulting drop in depreciation "expenses" caused the company's reported profits to rise by DM392 million. JAL made a similar adjustment in 1993, causing the company's profits to rise by ¥29.6 million.[5]

On the other hand, prior to the advent of commercial aircraft leasing in the 1980s, privately owned airlines were highly vulnerable to market fluctuations due to their need to assume high levels of debt in order to purchase new equipment; leases offer additional flexibility in this area, and have made airlines increasingly less sensitive to cost and revenue fluctuations, although some sensitivity still exists.[6]

Operating leasing

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Commercial aircraft are often leased through a Commercial Aircraft Sales and Leasing (CASL) company, the two largest of which are International Lease Finance Corporation (ILFC) and GE Commercial Aviation Services (GECAS).

Operating leases are generally short-term (less than 10 years in duration), making them attractive when aircraft are needed for a start-up venture, or for the tentative expansion of an established carrier. The short duration of an operating lease also protects against aircraft obsolescence, an important consideration in many countries due to changing noise and environmental laws. In some countries where airlines may be deemed less creditworthy (e.g. the former Soviet Union), operating leases may be the only way for an airline to acquire aircraft.[7] Moreover, it provides the flexibility to the airlines so that they can manage fleet size and composition as closely as possible, expanding and contracting to match demand.

Conversely, the aircraft's residual value at the end of the lease is an important consideration for the owner.[8] The owner may require that the aircraft be returned in the same maintenance condition (e.g. post-C check) as it was delivered, so as to expedite turnaround to the next operator. Like leases in other fields, a security deposit is often required.[9]

One particular type of operating lease is the wet lease, in which the aircraft is leased together with its crew. Such leases are generally on a short-term basis to cover bursts in demand, such as the Hajj pilgrimage. Unlike a charter flight, a wet-leased aircraft operates as part of the leasing carrier's fleet and with that carrier's airline code, although it often retains the livery of its owner.[10]

US and UK accounting rules differ regarding operating leases. In the UK, some operating lease expenses can be capitalized on the company's balance sheet; in the US, operating lease expenses are generally reported as operating expenses, similarly to fuel or wages.[11]

A related concept to the operating lease is the leaseback, in which the operator sells its own aircraft for cash, and then leases the same aircraft back from the purchaser for a periodic payment. The operating lease can afford the airlines flexibility to change their fleet size, and create a burden to the leasing companies.[citation needed]

Finance leasing

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Finance leasing, also known as "capital leasing", is a longer-term arrangement in which the operator comes closer to effectively "owning" the aircraft. It involves a more complicated transaction in which a lessor, often a special purpose company (SPC) or partnership, purchases the aircraft through a combination of debt and equity financing, and then leases it to the operator. The operator may have the option to purchase the aircraft at the expiration of the lease, or may automatically receive the aircraft at the expiration of the lease.

Under American and British accounting rules, a finance lease is generally defined as one in which the lessor receives substantially all rights of ownership, or in which the present value of the minimum lease payments for the duration of the lease exceeds 90% of the fair market value of the aircraft. If a lease is defined as a finance lease, it must be counted as an asset of the company, in contrast to an operating lease which only affects the company's cash flow.[12]

Finance leasing is attractive to the lessee because the lessee may claim depreciation deductions over the aircraft's useful life, which offset the profits from the lease for tax purposes, and deduct interest paid to those creditors who financed the purchase. This has made aircraft a popular form of tax shelter for investors, and has also made finance leasing a cheaper alternative to operating leases or secured purchasing.

The various forms of finance leasing include:

  • Equipment trust certificate (ETC): Most commonly used in North America. A trust of investors purchases the aircraft and then "leases" it to the operator, on condition that the airline will receive title upon full performance of the lease. ETCs blur the line between finance leasing and secured lending, and in their most recent forms have begun to resemble securitization arrangements.
  • Extendible operating lease: Although an EOL resembles a finance lease, the lessee generally has the option to terminate the lease at specified points (e.g. every three years); thus, the lease can also be conceptualized as an operating lease. Whether EOLs qualify as operating leases depends on the timing of the termination right and the accounting rules applicable to the companies.[13]
  • US leveraged lease: Used by foreign airlines importing aircraft from the United States. In a US lease, a Foreign Sales Corporation (FSC) purchases and leases the aircraft, and is tax-exempt so long as at least 50% of the aircraft is made in the US, and at least 50% of its flight miles are flown outside the US. Because of the extensive documentation required for these leases, they have only been used for very expensive aircraft being operated entirely outside the US, such as Boeing 747s purchased for domestic routes within Japan.[14]
  • Japanese leveraged lease: A JLL requires the establishment of a special purpose company to acquire the aircraft, and at least 20% of the equity in the company must be held by Japanese nationals. Widebody aircraft are leased for 12 years, while narrowbody aircraft are leased for 10 years. Under a JLL, the airline receives tax deductions in its home country, and the Japanese investors are exempt from taxation on their investment. JLLs were encouraged in the early 1990s as a form of re-exporting currency generated by Japan's trade surplus.[15]
  • Hong Kong leveraged lease: In Hong Kong, where income taxes are low in comparison to other countries, leveraged leasing to local operators is common. In such transactions, a locally incorporated lessor acquires an aircraft through a combination of non-recourse debt, recourse debt, and equity (generally in a 49-16-35 proportion), and thus be able to claim depreciation allowances despite only being liable for half of the purchase price. Its high tax losses can then be set off against profits from leasing the aircraft to a local carrier. Due to local tax laws, these investments are set up as general partnerships, in which the investors' liability is mainly limited by insurance and by contract with the operator.[16]

Corporate trust lease

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Some U.S. banks hold an aircraft "in trust" to protect the privacy of the true "owners" of the aircraft or to "secure U.S. registration of aircraft for non-U.S. citizen corporations and individuals".[17][18][19][20]

See also

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  • Option (aircraft purchasing)

References

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  1. ^ "Boeing Commercial Airplanes Prices". Archived from the original on 2010-01-06. Retrieved 2010-01-06.
  2. ^ Airfinance Journal
  3. ^ "Lessors unlikely to manage 50% of fleet within 10 years: Ascend". Flightglobal. 6 May 2016.
  4. ^ Morrell, Peter S. (1997). Airline Finance. Ashgate. pp. 153–4. ISBN 0-291-39845-6.
  5. ^ Morrell 1997, p. 23
  6. ^ Morrell 1997, p. 6
  7. ^ Morrell 1997, p. 178
  8. ^ Morrell 1997, p. 175
  9. ^ Morrell 1997, p. 177
  10. ^ Morrell 1997, pp. 178–9
  11. ^ Morrell 1997, p. 25
  12. ^ Morrell 1997, p. 49
  13. ^ Morrell 1997, pp. 174–5
  14. ^ Morrell 1997, pp. 173–4
  15. ^ Morrell 1997, pp. 172–3
  16. ^ Johnson Stokes & Master, Legal Aspects Of Aircraft Finance In Hong Kong Archived 2007-09-29 at the Wayback Machine (March 18, 2005).
  17. ^ "Corporate Trust Lease - Wells Fargo Commercial". www.wellsfargo.com. Wells Fargo. Archived from the original on 2014-04-05. Retrieved 18 April 2014.
  18. ^ CORKERY, MICHAEL; SILVER-GREENBERG, JESSICA (17 April 2014). "Iran Gets an Unlikely Visitor, an American Plane, but No One Seems to Know Why". www.nytimes.com. The New York Times Company. Retrieved 18 April 2014.
  19. ^ Wood, Connie L. (August 2000). "INTERNATIONAL AIRCRAFT OWNERSHIP". www.agcorp.com. World Aircraft Sales. Archived from the original on 19 April 2014. Retrieved 18 April 2014.
  20. ^ Cirillo, Gregory P. (June 21, 2013). "FAA finishes its evaluation of non-U.S. citizen trusts for aircraft ownership". www.lexology.com. Wiley Rein LLP. Retrieved 18 April 2014.