August 01, 2012
The U.S. Export-Import Bank (Ex-Im Bank) is now approving pre-funded loan guarantees for aircraft purchases, a practice likely to become common since it enables foreign airlines to lock in preferential interest rates.
Latam Airlines Group, the recently formed parent company of LAN Airlines and Grupo TAM, is the first airline to use the facility to obtain loans for two Boeing 767-300ERs from capital markets through the Export Credit Agency (ECA), says attorney Joshua D. Gentner of Vedder Price, Ex-Im Bank’s outside counsel.
The ECA is the quasi-government agency that acts as an intermediary between the Ex-Im Bank and the exporter, in this case, Boeing, for obtaining the loan guarantees.
In the past, airlines applied for Ex-Im Bank financing guarantees after they took delivery of their aircraft, a process that exposed these carriers to variable interest rates. But under this new program, airlines can lock in advantageous rates before the delivery, Vedder says.
For airlines funding large aircraft purchases, acquiring financing is an ongoing process since each airplane is funded individually.
Vedder says he is working on four or five loans that are expected to close by the end of the third quarter; he anticipates about the same number in the fourth quarter.
Bank financing for aircraft loans has been under pressure as Libor (London Interbank Offered Rate) costs have risen, so rather than seeking bank financing, airlines have increasingly turned to the capital markets, where rates are below 2%.
Ex-Im Bank VP Robert Morin, who oversees all airline and other transport loan guarantees, saw the trend away from bank financing early this year and began discussing alternatives to the hard delivery-based loan system. The pre-funded approach came to fruition in late May and early June, Gentner says.