Jetrader - July/August 2010 - 13

Part 1 of 2

Funding Fundamentals
Defining the basics of asset-based financing
By Bert van Leeuwen, Head of Aviation Research, DVB Bank Part one of “Funding Fundamentals” will discuss a few of the basics of asset-based ﬁnancing. The follow-up in the September/October issue of Jetrader will answer the question of which types of aircraft are more or less suitable to serve as collateral in asset-based transactions. will require a signiﬁcant junior loan or equity contribution. Consequently, sourcing debt funding for so-called “naked” assets, aircraft on the ground with no employment, is generally very challenging. In most cases, ﬁnanciers rely on a mix of the value of the asset and the strength of the credit, the borrower. Although this is difﬁcult to substantiate, it seems that over the past two to three decades in aircraft ﬁnancing the emphasis has— slowly—moved away from the credit element to the asset. Looking at this from a slightly negative side, ﬁnanciers may have come to the conclusion that in this cyclical commercial aviation industry it is difﬁcult to rely purely on the strength of the borrower for the repayment of a loan. If once stellar airline names like Pan Am, Swissair and more recently JAL can go bankrupt, which airlines can be relied on, especially taking the usually longer terms of aircraft transactions into account? Looking at it from a more positive side, one may argue that ﬁnanciers have become more comfortable with commercial jets as collateral for their loans. With reality being a combination of asset-based and credit-based elements, one has to differentiate between the two major groups of clients, airlines and leasing companies. Some banks are less comfortable with a lessor as the borrower, amongst others based on the assumption that leased Asset-based ﬁnancing is one of the instruments for the commercial aviation industry, including both airlines and aircraft leasing companies, to secure enough funds to pay for the estimated USD 60-65 billion worth of new commercial jets that will be delivered during 2010. On top of this, a signiﬁcant amount will be required for used aircraft transactions. While the term “Asset-Based Financing” as such is fairly clear and accurately describes the principle of the business, in day-today reality, pure asset-based transactions are rare. What we are seeing is perhaps more “asset backed” than ”asset based” structures. In many cases, transaction “risk” can be expressed as a function of “probability” (of default) and “severity.” If there is a high probability of default because little or no comfort can be derived from the credit, the conditions of the facility will have to be very conservative to reduce the severity of the default. Almost by deﬁnition, the terms and conditions will have to be based on an assumed worst-case scenario where the bank has to take over the management and remarketing of the asset itself and all cost (monetary and in terms of man-hours, reputation, etc.) will have to be covered by the proceeds of the asset, but generally without the prospect of sharing in any “upside” or surplus value. Conditions for such a deal—especially in terms of loan-to-value ratio—most likely will be unattractive to the borrower as it

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A leasing company with a well-diversified lease portfolio, technical competence and proven remarketing power can solve—or even prevent— many problems for the financier.
Jetrader 13

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Jetrader - July/August 2010

Table of Contents for the Digital Edition of Jetrader - July/August 2010
