UBM Aircraft & Engine Finance & Leasing Conference
Government Support in Financing the Aviation Market
Elizabeth Evans
Andrew Steinberg
September 15, 2010
Overview
Aircraft Finance
Liz Evans concentrates her practice in
aviation, project, and satellite finance as
well as in equipment leasing and related
transactional work, including private
placements of debt and equity, structured
finance arrangements, asset-based
financings, and leveraged leasing.
NextGen Finance
Andy Steinberg advises airline, aerospace,
and travel technology companies on
strategic and regulatory issues before the
U.S. government, including the Federal
Aviation Administration and the Office of
the Secretary of Transportation.
AIRCRAFT FINANCE
Background on Export Credit Finance
•
Export Credit Agency (ECAs)
•
•
•
•
Institutions, private and/or governmental, that provide financing to support
exports of various aircraft and engine manufacturers in the host country.
The precise terms and conditions of the financing support available from
the individual ECA differ.
Broad parameters governed by the Aircraft Sector Understanding (ASU)
(effective July 1, 2007) under which the ECAs of the U.S., EU, Japan,
Brazil and Canada agreed to guidelines for financing to provide fair and
balanced competition of aircraft exports.
Key ECAs
•
•
•
•
•
•
Export-Import Bank of the United States (Ex-Im)
Export Credits Guarantee Department (ECGD) in the UK
Compagnie Francaise d’Assurance pour le Commerce Exterieur
(COFACE) in France
Consortium of Hermes Kreditversicherung Aktiengesellschaft and C&L
Deutsche Revision (HERMES) in Germany)
Export Development Bank of Canada
Brazilian Development Bank (BNDES); EXIM Brasil Agéncia Crédito á
Exporta çāo do Brasil S.A.
ECA Financing in Today’s Market
•
•
•
ECAs have been a traditional aircraft financing source for over thirty years.
In 2009, ECA support for Boeing and Airbus increased from 20 to 40% of deliveries.
In 2009, Ex-Im authorized $8.6 billion of aircraft financing (as well as $980 million for
exports of other small-transportation related equipment). This compares with an
average of $4.4 billion for each of the past several years. Likewise, the European
ECAs substantially increased their support for Airbus deliveries.
From The Wall
Street Journal
August 13, 2010
Ex-Im Products Offered
To accomplish its mission, Ex-Im offers the following products:
1.
Direct loans at competitive, fixed interest rates to foreign buyers of U.S. exports.
2.
Export credit insurance, protecting exporters against the failure of foreign buyers
to pay their credit obligations.
3.
Guarantees to commercial lenders, providing repayment protection for loans to
foreign buyers of U.S. exports.
4.
Guarantee of bonds limiting the impact on bondholders if the issuer of the bond
goes into default.
5.
Working capital guarantees, encouraging commercial lenders to make loans to
small companies with export potential who need funding for production/ marketing.
Ex-Im Finance Lease Structure
Most Ex-Im supported aircraft transactions use a finance
lease structure.
1.
A special purpose company (“SPC”) is established to act as both
borrower under the Ex-Im guaranteed loan and lessor (or purchaser)
under a finance lease (or conditional sale agreement) to the airline
purchasing the aircraft
2.
The airline assigns its rights under its Boeing Purchase Agreement
to the SPC in respect of the aircraft being financed.
Ex-Im Finance Lease Structure (cont)
•
The Guaranteed Lender(s) make a loan to the SPC towards the
purchase price of the aircraft pursuant to a Guaranteed Loan
Agreement (the “Guaranteed Loan Facility”).
•
•
•
Under applicable regulations, the amount borrowed under the Guaranteed
Loan Facility cannot exceed 85% of the net-net invoice price of the aircraft.
The rent under the finance lease (or installment under the conditional sale
agreement) covers the debt service owing pursuant to the Guaranteed
Loan Facility.
As the amount of the Ex-Im financing is limited, the remaining 15% of
the aircraft purchase price is often financed by a commercial loan.
•
•
Secured but subordinate to Guaranteed Loan Facility.
Standstill period (often up to 180 days) during which junior debt is
prohibited from proceeding against the aircraft or any joint collateral.
Ex-Im Bank Typical Finance Lease Structure
Ex-Im
Guaranteed
Lender
Manufacturer
Purchase
Agreement
Lessor
Rents
Purchase
Agreement
Assignment
Lease
Lessee
Export
Credit
Agency
Assignment
of
Lease
Guarante
e
SPC
Aviation Companies Use Export Credit
To Access The Capital Markets
A significant innovation in aviation financing is the export credit bond.
• On October 8, 2009, Emirates airline priced the first US bond
offering guaranteed by Ex-Im. The bonds were issued by Amal
Limited, a Cayman Island’s special purpose company, which
acquired 3 Boeing 777-300ER aircraft from Emirates using a loan
provided by Calyon. Amal then issued 12 year 144A registered
bonds 100% backed by triple-A rated Ex-Im.
• The first European export credit bond issued by AerCap closed
this summer guaranteed by ECGD.
– It is unclear what the European capacity will be as US government
entities have simpler regulations than the Europeans, COFACE and
HERMES are not set up to guarantee bonds (and did not participate
in the AerCap offering), unlike Ex-Im, ECGD is not a bank.
Ex-Im Capital Markets Fundings*
Issue Date
Aircraft
Amount
Pricing
October 8, 2009
*1st
3 x 777300ER
$413mm
12 yr
MS + 55 bps
Coupon 3.465%
October 29, 2009
2 x 737-700
$59mm
12 yr
MS +50 bps
Coupon 3.613%
November 5, 2009
3 x 737-800
$115 mm
12 yr
MS + 47 bps
Coupon 3.585
December 9, 2009
1 x 767300ER
12 yr
MS + 47 bps
January 12, 2010
3 x 737-800
$88.5 mm
[12 yr]
MS + 45 bps Coupon
3.65%
public bond offering
backed by US Ex-Im
guarantee
*1st
lessor to issue bonds
backed by US Ex-Im
guarantee
* This information is based upon previously published public information. Reflects initial pricing only.
Ex-Im Capital Markets Fundings (Continued)
Issue Date
Aircraft
Amount
Pricing
January 2010
1 x 777-300
$126 mm
12 yr
MS + 49 bps
Coupon 3.55%
March 11, 2010
2 x 777-300
3 x 787-800
$298 mm
12 yr
MS + 49 bps / L + 29
bps
Coupon 3.547%
March 15, 2010
2 x 737-800
$59.2 mm
12 yr
MS + 47 bps
Coupon 3.580%
May 19, 2010
2 x 737-800
$74.3 mm
11.5 yrs
MS + 52 bps
Coupon 3.281%
June 18, 2010
5 X 737-800s
$190 mm
12 yr
MS + 60 bps
Coupon 3.35%
European Export Credit Bond
Issue Date
Aircraft
Amount
Pricing
June 2010
2 x A330
$151 mm
11 yr
Coupon 3.795%
1st
*
European export
credit bond
NEXTGEN FINANCE
NextGen– What is It?
• Fundamental long-term transformation of how aircraft are operated
and airspace is managed
• Shift from air traffic control to air traffic management with aircraft
as “nodes” in a network
• Modern communication, navigation, and surveillance (CNS)
technologies supporting the transition from:
Ground-based navigation aids to satellite-based (think: GPS)
Analog to digital communications (think: texting)
Disparate systems to integrated IT (think: the Web)
Major Systems Within NextGen
1. ADS-B: Satellite navigation system designed, along with other
navigation technologies, to enable more precise control of aircraft
during en route flight, approach, and descent.
2. SWIM: Information management architecture for the NAS managing
surveillance, weather, and flight data, as well as aeronautical and
system status information, providing the information securely to users.
3. DataComm: Digital communications link for 2-way exchanges
between controllers and flight crews for ATC clearances, instructions,
advisories, flight crew requests, and reports.
4. NNEW : Weather support services – using airborne sensors to
create common weather picture across the NAS.
5. NVS: New voice switches provide foundation for all air/ground and
ground/ground voice communications in the future ATC environment.
16
NextGen– How Much Will It Cost?
(The real answer: no one knows)
• Official cost estimates vary: currently in $40 billion range or
“significantly more” according to DOT Inspector General
• Several of the new systems are highly dependent on avionics
• Roughly split between public and private sector
• FAA: R&D, acquisition of infrastructure, deployment = $20 Billion
• Operators: equipage, training, and related costs = $20 Billion
• SWAG: retrofit could cost from $1 to $2 mm per aircraft
Obstacles to financing avionics
• Immature regulatory framework- no certification or approval
mechanisms for certain privately developed services
• The “incentivization” conundrum
• Market mismatch: infrastructure spending determined by federal
budget; equipage by private sources
• Mobile assets: new avionics are installed in the assets of others
but can they be effectively securitized?
• Government monopolies
• Civil aviation authorities and state-controlled air navigation service
providers control many of largest commercial opportunities, affecting
both procurement and sales of NextGen equipage. To what extent
can third parties sell services/products directly to aircraft operators
historically provided by the agencies themselves?
What Sources of Financing Work for Avionics?
1.
2.
3.
4.
5.
6.
7.
Equity
Bonds
Lease Financing
Vendor Financing
Public Subsidy (e.g. grants, research funding)
Debt (private sector)
Debt (public sector): e.g. World Bank, European
Investment Bank, U.S. Ex-Im Bank
Infrastructure Bank?
•
•
•
•
Most US airlines' reluctance to spend on equipage
has cast doubt on how fast and effectively
NextGen can be deployed
President Obama’s “Infrastructure Bank” -- part of
the $50 billion spending plan -- would “leverage
private and state and local capital to invest in
projects that are most critical to our economic
progress.”
US DOT Secretary LaHood: "there is an interest"
at high levels of the administration in using federal
money to equip aircraft with NextGen technology
But no specific pledge on aircraft equipage -funds invested as part of the infrastructure plan
"will help both the FAA and airlines to install new
technologies."
Thank you
21