27/07/2016

Will banks and lessors finance Iran aircraft orders?

Will banks and lessors finance Iran aircraft orders?

Iran, through Iran Air, is in talks with Boeing and Airbus for up to198 new aircraft through direct orders. At least two big issues remain in place for either of the two aircraft order deals. The first is regulatory approval in the face of increasingly vocal US opposition in Congress towards selling aircraft to Iran and any involvement by the US Export Import Bank.

The other related but secondary concern is whether banks and lessors are willing to finance aircraft deals into Iran.

In addition, US EXIM still cannot approve any deals over $10 million with no quorum and Senior US Republicans are legislating to specifically prevent the North American export credit agency from being able to support any aircraft sales to Iran.

The Ishka view is that US political opposition to the order, while vocal, will ultimately prove pointless and will not prevent either a sale from either Boeing or Airbus if Iran upholds its own commitments. However, US EXIM support for aircraft deliveries for Iran Air is currently forbidden under Federal law.  Moreover it will remain politically difficult for the bank to offer support for several years at least.

Banks and lessors are waiting for permission to fund aircraft in Iran from the US Office of Foreign Assets Control (OFAC). Ishka anticipates that competition will be slow at first among the banks and lessors until the OFAC agreements are in place, but will quickly gain momentum due to the obvious commercial opportunities, especially among lessors looking to expand their coverage and win new sale/leaseback business.

Iran’s Airbus and Boeing order

Iran, through Iran Air, is in talks with many OEMs but especially with both Boeing and Airbus for up to 198 aircraft.

Iran Air has signed an agreement for 118 new aircraft with Airbus. The order agreement signed back in January 2016 includes 73 widebodies and 45 single aisle aircraft. The order includes pilot and maintenance training and support services.

The agreement spans Airbus’ single-aisle A320 product line – involving both current engine option (CEO) and new engine option versions (NEO) – as well as the widebody A330ceo and A330neo, the A350 XWB and A380. Deliveries could start as early as this year, according to Airbus. Covered in the historic accord are: 21 A320ceo Family and 24 A320neo Family jetliners, 27 from the A330ceo Family, 18 A330-900neo aircraft, 16 A350-1000s and 12 A380s. 

Boeing also has a prospective agreement in place with Iran Air for a deal which could involve up to 109 aircraft. According to Iranian officials talking to media agencies, the order is split between 80 direct aircraft sales and potentially up to 29 leased aircraft, aided by Boeing.

Iran needs new aircraft to replace it aging fleet.  Its current fleet has an average age of 26.4 years according to ATDB, but the planned scope of change is breathtaking. Iran Air has just 29 active aircraft and there is speculation that some of the aircraft could go to other Iranian carriers and hints at Iran’s wider ambitions to create a new aviation hub to rival Dubai.

House Republicans aim to scupper Boeing sale

Sales from both manufacturers are pending approval from the US before they can go ahead and both agreements have already faced political resistance from the US. When Boeing announced its tentative agreement with Iran it faced a quick backlash from several members of Congress uneasy about the sale of aircraft to Iran.

Congressman Peter Roskam, one of the most vocal opponents to any aircraft sale to Iran, states that the Iranian regime is using commercial airlines to send troops, weapons, missiles and cash to assist Syrian dictator Bashar Assad.  Roskam has succeeded in passing two amendments to the Financial Services Appropriation Act as well as a separate free standing bill – all designed to prevent and complicate the sale of commercial aircraft to Iran (see table below).

The Financial Services Appropriation Act, H.R. 5485, has passed the House, and includes the two amendments from Rep. Roskam to block the licensing of the sale of aircraft and to block the financing of aircraft sales. The Financial Services appropriation act still need to be passed by the Senate and receive Presidential approval.

Bills H.R. 5711, H.R. 5715, and H.R. 5729 have passed through committee, and are ready for consideration on the House floor, but have not received a vote yet and passed the House. They would need to pass the House, then be passed by the Senate and would still need Presidential approval

Impact of legislation

None of the recent bills designed to frustrate an aircraft sale are likely to pass Congress and become law in the immediate future. Much of the legislation geared to prevent aircraft sales to Iran has been confined to the House of Representatives. The Senate has the numbers to block consideration of such legislation, and even if it were to pass the Senate, the President is very likely to sustain a veto. 

Airbus also needs to win approval from the US Office of Foreign Assets Control before it can export aircraft to Iran as several of its key aircraft components are made in the US. The European Original Equipment Manufacturer (OEM) has been waiting since at least April 2016 for confirmation from the Office of Foreign Assets Control (OFAC) regarding its aircraft order. Sources familiar with OFAC explain that the usual timeline for an OFAC license application is between 3-12 months but that given the importance of Airbus and Boeing's sales to Iran the license approval is likely to jump the line. However OFAC only has a few dozen licensing officers and thousands of applications pending.

US EXIM still in the target sights

Some of the anti-Iranian legislation has also taken aim at US EXIM as a secondary measure to prevent any aircraft sales to Iran. The export finance bank is still being targeted by senior Republicans. Senators Ted Cruz and Marco Rubio co-signed a bill which mirrored the House Bill preventing US EXIM from participating in deal with Iran. Federal law prohibits US EXIM from financing exports to Iran as it continues to be designated by the US as a state sponsor of terrorism. Boeing’s Senior Vice President of Government Operations, Tim Keating in a letter to Congress has stated that it would not seek the bank’s support for the aircraft sale.

Even if US EXIM were capable of offering support, Ishka’s view is that US EXIM would be reluctant to be involved with any Iranian deal, unless strictly necessary, due to the controversial political nature of such a deal and the inevitable backlash this would generate among Republicans. 

Ambiguity continues around US dollars to Iran

One of the practical concerns is not the risk of new legislation but the ambiguity still surrounding Iran and US sanctions. Many restrictions on doing trade with Iran still exist, not least the limitations around Iran accessing US dollars.

Iran’s financial system has been labeled “a primary money laundering concern,” preventing any company from funding any Iran deal that goes through the US financial system. For this reason, financiers, and lessors, appear extremely reluctant to engage with Iran Air for a potential deal. One financier was skeptical of claims that Airbus has several French and German banks lined up to fund deliveries.

However, rumors continue to circulate around the number of banks looking to finance a deal. Ishka understands that several Asian lessors and a few European boutique lessors have made enquires about the possibility of arranging an Iran deal.

The Ishka View

The recent US Republican attempts to block an Airbus or Boeing commercial aircraft sale to Iran are destined to fail as they are highly unlikely to pass Congress. Even if they did, it could still be easily vetoed by President Obama. The only real risk to a sale would be a significant Republican win in the November elections combined with Donald Trump winning the Presidential election. Even then it is not clear whether a President Trump, who has previously stated he was open to selling aircraft to Iran, would support a bill blocking a sale to Iran.

The Ishka view is that most aircraft investors are still very wary about potentially funding aircraft into Iran, especially until OFAC gives the go ahead, and even then they will seek counsel’s considered opinions on the security of doing such deals. There appears to be some confusion among the aviation finance community as to which sanctions are still in place with regards to Iran. That being said there appears to be more interest, for now, among lessors contemplating Iranian deals compared to aviation banks.

 In the long-term, competition among lessors for sale/leasebacks seems inevitable given the value of the equipment potentially available. However, competition will only really materialise after the first deals are announced and after leasing companies and banks become more comfortable that they will not be breaking sanctions by funding these orders, and will have determined the mechanisms for aircraft recovery in the case of defaults.

 

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