New analysis (1) from Global Jet Capital, a global provider of financing solutions for private aircraft, suggests that between now and 2025, companies around the world could take delivery of as many as 5,400 business jets, and up to $178 billion to fund these.
In terms of how the findings break down between publicly listed companies and privately owned ones, it estimates that public companies could acquire 1,617 aircraft costing approximately $85.2 billion. The corresponding figures for private companies are 3,799 and $92.5 billion respectively.
Global Jet Capital, which has over $1 billion to lend to clients purchasing business jets, says the bulk of these purchases will be based on leases and loans. The company currently finances over 200 business aircraft for clients.
Dave Labrozzi, Chief Operating Officer of Global Jet Capital, said: “There is often misperception in that high net worth individuals and corporations mostly pay in cash for large private aircraft. Even if the cash resources are at hand, often the preferred approach is to lease or finance assets of this nature. If a new or pre-owned aircraft is acquired for cash – costing tens of millions of dollars –that’s a lot of capital tied up in an asset that typically depreciates.”
“Funding the acquisition of a new or pre-owned jet with cash is 100-percent equity financing – equity capital that the individual or corporation could use to make other investments. Many conclude that the investment in their business is probably a better bet than buying into an asset that will likely lose value each year. The decision that most businesses reach is that it’s most efficient to use third-party capital to fully or partially fund the acquisition of the private aircraft they wish to use.
Global Jet Capital has produced a whitepaper on the options open to those looking to fund the purchase of a business aircraft, and the advantages and disadvantages of each. It can be downloaded at: http://blog.globaljetcapital.com/private-jet-financing-to-buy-or-to-lease-0
Below is a brief description of the third-party capital finance options available.
LEASING VIA AN OPERATING LEASE
In an operating lease the private aircraft (new or pre-owned) is purchased by a third-party financial institution (the lessor) and then leased to the operator (the lessee) for a stated term and rent. The lease is documented as a contract between lessor and lessee with both parties having certain obligations to each other, primarily regarding the operation and care of the aircraft. Title to the aircraft resides with the lessor, and the lessee enjoys the use of the aircraft as if it were their own.
The alternative to an operating lease is to retain ownership of the aircraft and use third-party financing for a portion of the acquisition cost. This could be a senior secured mortgage loan or other financing structure, such as a finance lease.
In a typical loan structure, the third-party lender advances between 50% and 85% of the aircraft value to the borrower by way of a secured loan. The difference in advance rate may be a result of the borrower’s credit status, the age or type of the aircraft, or other factors. The security interest is typically a mortgage interest in the aircraft, giving the lender a first-priority security interest in the aircraft. This security interest is designed to offer the lender protection in the event of a default by borrower. Proceeds from liquidating the aircraft after a default are intended to repay the aircraft lender ahead of other creditors. Other loans may be available, particularly for individuals that have a substantial private banking relationship with a lender. In such instances the underwriting of the loan may focus as much on the financial assets held by the individual as the aircraft in determining the nature of the financing.
Title to the aircraft typically remains with the borrower in the secured-loan structure. The loan is usually repaid over a multi-year period to a balloon amount (a lump sum payment at the end of the loan repayment schedule). The loan, including the balloon payment at the end, is usually recourse to the borrower, meaning any deficiency the lender incurs (post default and sale of the aircraft) will still be owed by the borrower. In certain non-recourse or limited-recourse loans, the borrower will have fewer obligations of this nature, but typically at a higher rate of interest.
An alternative to the senior secured loan is the finance lease. Unlike an operating lease, the lessee does not return the aircraft to the lessor at lease expiry. In a finance lease, the operator makes scheduled lease payments along with a final balloon payment at the end of the multi-year finance lease term. When the final payment is made, title to the aircraft (which had been held by the lessor) will transfer to the borrower. At this point in time the aircraft is fully owned by the lessee and there are no further financial obligations to lessor.
Dave Labrozzi said: “In either the buy or lease scenario, the operator will need to work with a third-party financial institution to enter into a lease or loan agreement. This multi-week process will afford the provider of third-party capital a chance to review the aircraft collateral and assess the credit profile of the lessee/borrower. The lease or debt rate offered by the financial institution will reflect the prospects for both the borrower/lessee, as well as the aircraft. Jurisdiction, aircraft age and type, the aircraft manager (if any), and proposed term of the financing or lease will all be considered as the financial institution makes its leasing or lending indication to the client.”
Global Jet Capital launched in 2014 and is capitalized by three global investment firms – GSO Capital Partners, a Blackstone company in partnership with Franklin Square Capital Partners*; The Carlyle Group; and AE Industrial Partners. In January 2016 Global Jet Capital completed the purchase of GE’s corporate aircraft lease and loan book in the Americas.
The company’s current management team and executive committee is composed of leaders from business jet manufacturers, maintenance and service providers and leading financial institutions who have served the private aircraft industry for a combined 200-plus years and have completed over 3,500 aircraft transactions.
(1) Based on Global Jet Capital’s own data and its analysis of 2016 – 2025 Bombardier Business Aircraft Market Forecast