Capital markets increasingly sought after in aircraft financing

Singapore

CAPITAL markets are continuing to entice investors and they are matching up quickly to commercial banks, traditionally the main source of funding in the aircraft financing industry.

Boeing's Current Aircraft Finance Market Outlook 2017 report says new aircraft funding requirements are tipped to jump from US$122 billion in 2016 to US$126 billion in 2017, of which banks will account for 33 per cent, capital markets 31 per cent, cash 25 per cent, export credit 10 per cent and manufacturers one per cent of the funding. By 2021, funding requirements are forecast to hit US$185 billion.

The report added that the three main sources of funding - lessors, commercial banks, and capital markets - are projected to maintain or grow their overall volume this year.

"We forecast that lessors will rely on capital markets and bank debt for the bulk of their funding, with many commercial banks using lessor financing as an entry point into the aviation finance space," Boeing said.

Compared to 2011, funding from capital markets have risen by about 15 percentage points in 2017 while that of bank debt has risen by 6 percentage points.

Some of the reasons capital markets are becoming more attractive include tighter global bank regulations, lingering uncertainty around export credit in the United States and Europe, and a heightened risk of illiquidity due to regulatory reform and central banks' remaining capacity to stimulate, which Boeing says it is closely monitoring.

According to Keith Sandilands, banking and asset finance lawyer and head of aviation in Asia, Norton Rose Fulbright, there is increased capital adequacy and other regulatory changes affecting banks' balance sheets and hence, cost of funds.

"Debt capital markets offer an issuer access to a diverse pool of investors including insurance companies, pension and investment funds and even wealthy individuals targeting different yields and the possibility of rating a bond can improve pricing."

Mr Sandilands also added that the shortage of export credit backed funding in the US and Europe is giving capital markets a boost. Taking loans from export credit agencies became popular after the 2008 global financial crisis, since export credits provided relatively cheap finance when bank lending was limited. Now export credit volumes are at a low due to healthy commercial liquidity.

Pierre Briens, head of aviation, transportation sector, investment banking Asia-Pacific, BNP Paribas, said the aviation industry continues to grow its funding from capital markets.

"Aircraft is a USD-denominated asset with a long economic life. Therefore, it suits USD-based investors who seek to access longer term investments with some form of collateral or security, and who don't want to run a foreign exchange risk. In addition, in recent years, the trading of second-hand aircraft has grown quickly, led by a number of leasing companies, which has improved the liquidity and future value predictability of the asset class."

The current demand for new commercial aircraft is coming from a combination of traditional carriers along with low cost carriers that are almost entirely narrow bodies from the A320 and B737 family. Mr Sandilands said that over the years, orders from aircraft leasing companies have grown steadily.

About 40 per cent of the worldwide fleet is leased.

"Deliveries in Asia account for a significant proportion of all new aircraft delivered and (waiting) to be delivered. This is supported by Boeing's published forecasts that Asia's passenger growth will be above average and China's into double digits," he said.

In February this year, Singapore Airlines (SIA) said it was placing a US$13.8 billion order for 20 777-9 and 19 787-10 Boeing aircraft to grow its fleet, with their arrival expected from the 2020 financial year onwards. Scoot, whose parent company is SIA, currently has 14 Dreamliners that it fully owns. It has an additional six Dreamliners on order that will also be fully owned, with the last aircraft set to arrive in 2019.

Fuelled partly by a rising middle class, air passenger traffic continues to increase globally in the current year and analysts predict continued growth in 2018. With the upbeat outlook, future investments in aircraft financing are also on the rise.

BNP Paribas' Mr Briens said: "We've seen a demonstrable increase in investor interest in the asset class and we believe the stronger appetite is likely to continue."