26/11/2021

Aviation banks cautiously return for new deals

Aviation banks cautiously return for new deals

After a largely stagnant 18 months, with either severely reduced lending volumes or, in some cases no ability to lend at all, more aviation banks appear to be chasing mandates for new secured aircraft deals.

However, sources explain that competition from a receptive capital market for larger airline transactions and a robust sale/leaseback market is limiting opportunities for new debt mandates. Separately, the rise of several non-bank aviation lenders, including new aviation debt funds and PE-backed entities, has created competition for many of the smaller secured aircraft loan mandates popular among banks.

“I think that it’s a bit tough for banks,” confides one senior banker about deals in the last 12 months. “We know some banks haven't done any deals. We also know that some of those banks have bid on a lot of different deals and they've just lost out.”

 

A re-engagement of customers

 

Ishka hears from borrowers that there was a steady uptick in activity from several aviation banks in Q3 2021, compared to the same period 2020, followed by a notable rise since September 2021. Sources confide that several bank credit committees appear to be easing certain lending restrictions allowing banks to chase more deals.

“Several German banks are actively re-engaging with customers and even banks that were suffocated during the pandemic say they are bidding on more mandates,” explains one senior European lessor.

Talking to Ishka, aviation bankers insist that several commercial banks carried on lending throughout the crisis but admit that overall lending volumes dropped during the crisis. Ishka is aware of at least two banks that have not signed any new aviation deals in the last 18 months (see Insights: Aviation commercial bank lending down for some lenders by 80% last year). Other financiers confide that many recent bank mandates continue to skew towards stronger credits, such as lessors and top-tier airlines, or for deals with insurance attached either in the form of ECA guarantees or via commercial non-payment insurance.

Advance rates and  balloons
 

Banks face stiff competition from both new and established alternative lenders, many of which can often take a different approach to credit risk, confides one source, which can result in better terms, but not necessarily lower pricing, being offered to borrowers.

"As a bank, we have to look at the current credit and then look backwards and then think: ‘ok well, what's the worst that can happen?’ Whereas many of these new-money funds can take a view on how changing that credit is likely to develop… I don't want to say they're wrong because they're probably not, but it's a very different risk assessment."

"We are losing deals based on people either taking the view that they're going to go much higher on the loan-to-value versus half-life, or just saying: ‘oh, we believe this is a full-life return condition so therefore that 60% or 70% isn't off of a half-life valuation it should be for a full-life valuation’ and the advance rate changes accordingly’." One borrower confirms that some alternative funds are using different appraisal firms than banks, resulting in higher advance amounts despite bids sharing the same headline LTV figure of 75% for some secured portfolio deals. He adds that margins on offer from alternative lenders he is aware of have not gone below a 250bp floor.

Jennifer Villa Tennity, group head at new alternative aviation lender Ashland Place, stresses that focusing on risk-adjusted margin alone can be deceiving. Speaking at Ishka+ America's conference last month she stated one advantage alternative lenders have over banks is that they can structure deals to take into account the lease as collateral (as well when lending to lessors) which allows them to take greater residual risk in deals - "something which traditional lenders weren't [ready], or were unwilling, to do before the crisis." She agrees the amount of credit analysis banks are forced to perform makes it harder for them to do deals as "even the best airlines don't look good if you use a backwards-ratio analysis."
 

The Ishka View
 

The aviation finance landscape has evolved over the course of the crisis. Aviation banks are chasing more deals, say borrowers, but banks are also now in competition against established and newly-launched alternative aviation lenders.  Ishka notes there has been notable competition for secured limited-recourse deals for lessor portfolios between alternative lenders and traditional aviation banks, as well as transaction financing to support sale/leasebacks. As a result, sources indicate that the cost of secured debt for lessors has notably decreased since Q2 2021 allowing more lessors to chase deals.

The increase in the number of lenders has also resulted in some pricing tension (see table), with risk-adjusted margins tightening by roughly 75bp to 100bps in the course of the last 12 months for better airline names. Ishka notes that certain types of lenders appear to be clustered around certain specific transaction types. As an example, both alt lenders and banks generally perceive lessors as stronger credits compared to airlines. Banks also prefer lending to lessors because of the diverse nature of the underlying lessee credits and because there is an active asset manager in place in case an aircraft is returned.  However, banks and many alternative lenders are not necessarily always competing for the same type of deals, Banks are more willing to chase lower-margin deals with top-tier airline borrowers or deals with some element of supported financing with ECA guarantees or non-payment insurance cover. Similarly, alternative lenders do not tend to offer uncommitted financing structures such as revolving facilities or warehouse loans. In contrast, several investment banks have been actively offering balance sheet for this type of transaction since the start of 2021, especially after several aircraft ABS deals launched in January.

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