January 28, 2013
Credit: Credit: Emirates
Andrew Compart Washington
New rules on financing and lending by export credit agencies and commercial banks could have an impact in 2013 and beyond on new aircraft orders, the market and valuation for used aircraft, and the ability to start new carriers. But uncertainty remains over the staying power and interpretation of the new rules, how they will play out and whether new sources of financing will ameliorate the impact.
“Although it already costs more to arrange financing within the aviation industry compared to a few years ago, we expect the cost of financing could increase further as regulatory changes take shape,” says PwC in an aviation finance report released this month, after the firm interviewed CEOs and CFOs of airlines, aircraft lessors, European banks and other financial institutions in Asia, the Middle East and Europe. “Aircraft deliveries over the next three to five years will need to be financed at a time when liquidity is scarcer and risk is being repriced.”
Those regulatory changes include the full implementation of the Aircraft Sector Understanding (ASU) agreement on export credit agency (ECA) financing that was revised in February 2011 by the U.S., European Union, Canada, Brazil and Japan. The new rules had a two-year transition period that concluded in January, making this the first year that aircraft acquirers will feel the full brunt of the changes.
For example, the up-front percentage under the new rules now range from 8.01-17.92%, depending on the borrower's risk category, compared to 4-7.5% under the previous ASU. The new rules also tie the interest rates more closely to the private market.
The change in the cost is particularly important because ECA financing, once the method of last resort, often became the preferred method in recent years as commercial financing became more difficult to obtain—and, even when it was available, the ECA sometimes had a better offer.
In the years following the global economic downturn, ECAs of countries that produce commercial aircraft increased their support for new aircraft from approximately 15-20% of total deliveries to 30-40%, says Dean Gerber, who chairs the global transportation finance team at Vedder Price. Even some airlines with stronger credits, such as Emirates, Etihad Airways and Ryanair, have been able to make use of it, which was one of the driving factors behind the ASU revisions. In 2012, during the transition phase to the new rules, ECAs still accounted for an estimated 25% of aircraft financing, just under the 27% paid for with bank debt, according to PwC.
The bank support could be more difficult or expensive to come by, too, under new Basel III capital and liquidity standards for those institutions. The Basel Committee on Banking Supervision, with more than two dozen countries as members, issues the recommendations on banking laws and regulations.