Declining commercial loans margins for aviation financings are being boosted by the retreat in export credit financings as airline borrowers seek alternatives, says a leading aviation banker.   

“Due to the temporary shutdown of the US Export Import Bank and European export credit agencies (ECAs), we see more deal flow from airlines under either direct commercial loans or through sale and leaseback as alternatives to export credits,” says Jose Abramovici, the global head of asset finance at Crédit Agricole Corporate and Investment Bank (CA-CIB), in an interview with Airfinance Journal at ISTAT Barcelona. 

As a result, this increase in demand for commercial loan financings, in particular, has been “slowing down the decrease of margins”, which Abramovici reckons have fallen approximately 40% during the past three years.

Abramovici also observes “some increase of pricing” for large debt underwritings for lessors and for second-tier airlines.

“The margins are still tight for first-tier credits, including some US airlines, which have not tapped the commercial bank market for some time as they had ample access to EETC market,” he says, adding: “A number of aviation commercial banks are also mindful of the regulatory background with a likely rise in regulatory capital for long-term funding.”

While Asian banks are proving “very competitive" for top-tier credits, they are not "too keen" on lending non-recourse loans with asset risk involved on the back end of the financing transactions, he says.

Also, some of the Asian banks find it "more difficult" to offer competitive long-term pricings in US dollars, he observes.

In the case of China, however, he says certain local banks are able to lend at higher loan-to-value ratios than what CA-CIB could do under a senior debt scheme.

In addition to better margins, he also sees lease rate factors coming in due to increased competition among lessors for sale and leaseback activity.

The competition, he says, can be seen from established lessors that are looking to place "big orderbooks" as well new lessors, without orderbooks through 2017, that want to do more sale and leasebacks to grow their portfolios. 

Market activity

For the first eight months, CA-CIB arranged and co-arranged aircraft backed loans totalling $6.6 billion, excluding debt capital markets and securitisations. It also acted as a joint book runner ‎or co-placement agent for $5.15 billion worth of enhanced equipment trust certificate offerings, corporate bonds and private placement for airlines and lessors.

Between January and August, the bank also was “very active” in the Japanese operating lease with call option and French tax lease markets.

Aircraft lease portfolio lending accounted for 35% of its lending activity and another 10% focused on bilateral loans to lessors during the time. Its presence on export credit deals was less than 5% because of the halt in ECA funding.

CA-CIB kept 29% of the transactions it arranged on its books during this eight-month period, and sold off the bulk of the loans to traditional aviation banks as well as non-bank investors, including US or European insurance companies. Some leasing and trading houses, which are investing into loans, were also buyers. 

The bank is actively pitching asset-backed securitisation (ABS) refinancings to clients as another form of financing.

“We think that it is a good alternative of funding for either lessors, which do not have large access to the unsecured rated bond market or for those lessors that need funding against a midlife aircraft portfolio for which the number of active banks is still fairly limited,” says Abramovici.

ABS is also a “powerful instrument”, he says, in the case of a portfolio sale to private investors, which require non-recourse funding with a slow amortisation debt profile, as well as attractive advance rates through a combination of senior and junior notes issuances.

Abramovici dismisses more equity issuances for lessors in the near term “given the low price to book valuation of lessors today with the exception of a few names”, following two lessor initial public offerings (IPO) out of Asia this year.

Instead, he sees more private M&A deals in the leasing space.

In the airline sector however, he believes "some of the high-growth low-cost airlines" will always look to the IPO market as a means to raise funds to fuel their growth.

CA-CIB will be less active in the second half of 2016 as compared with the first half; however, Abramovici maintains the bank is still looking at new opportunities, including the refinancing of large aircraft leasing fleets.

The bank should end up with a total of aircraft arranged loans in excess of $10 billion, excluding the capital markets, but this will depend whether “one or two large transactions” materialise before year-end.