Aircraft / Aviation Finance - Home - ICISA › wp-content › uploads › 2019 › 08 › ... ·...

ICISA Spring Meetings 2019, RomeAircraft Finance – Sascha Dear

Aircraft / Aviation Finance

ICISA – Spring Meetings, March 2019Rome

Sascha Dear Reinsurance Underwriter Surety Bonds, Trade Credit and Political Risk


1

Aircraft Finance

Disclaimer

13 March 2019

This Presentation has been prepared by the Author on condition that it shall be treated as strictlyconfidential and shall not be communicated in whole, in part, or in summary to any third party withoutwritten consent from the Author or R+V Versicherung AG (“R+V Re”). The views expressed in thisPresentation are solely those of the Author; they do not necessarily reflect those of R+V Re.

Neither the Author nor R+V Re is responsible for any errors or omissions, or for the results obtainedfrom the use of the information contained in this Presentation or the Presentation itself. All informationin this Presentation is provided "as is", with no guarantee of completeness, accuracy, timeliness or ofthe results obtained from the use of this Presentation, and without warranty of any kind, express orimplied, including, but not limited to warranties of performance, merchantability and fitness for aparticular purpose. In no event will the Author or R+V Re be liable to you or anyone else for anydecision made or action taken in reliance on the information in this Presentation or for anyconsequential, special or similar damages, even if advised of the possibility of such damages.

© 2019 Sascha Dear / R+V Re. All rights reserved.


2

Aircraft Finance - Introduction

Finished files are the re-sult of years of scientif-ic study combined with theexperience of many years

„

“13 March 2019


3


13 March 2019


4

Aircraft Finance – Introduction1

Finished files are the re-sult of years of scientif-ic study combined with theexperience of many years

„

“13 March 2019


5


Impressions

https://www.zeit.de/gesellschaft/2017-09/mekka-pilgerfahrt-hadsch-fs https://mazykidunya.blogspot.com/2014/09/khana-kaba-islamic-wallpaper.html

13 March 2019


6


Impressions

https://davidhertzfaia.com/747-wing-house/

13 March 2019



7

I. Market / Global Development of Demand for New Aircraft

II. Aircraft / Aviation Finance: Fundamentals, Purposes, Lenders and Finance-Structures

III. Aircraft Finance in the Insurance- / Reinsurance-Industry

IV. What if…?

Agenda

Contents

13 March 2019


8

RPK* more than doubled since 9/11, Number of aircraft will more than double until 2035: around 37,390 aircraft will be required (growth: 70% – replacement 30%) Total new deliveries 37,390, o/w 36,560 passenger and 830 freight aircraft (97,5%:2,5%) 42% of new aircraft will be delivered to the APAC-regions, 16% North America, 19% Europe

Narrow-Bodies will represent approx. 76% of deliveries and 54% of the value Wide-Bodies will represent approx. 24% of deliveries and 46% the value.

Part I - Market / Global Development of Demand for New Aircraft

source: ICAO, Airbus GMF 2018*RPK = Revenue Passenger Kilometres Number of revenue generating passengers x total distance travelled

Traffic Has Proven to be Resilient to External Shocks and Doubles Every 15 Years:

1967 20171990 2035

13 March 2019


9




IV. What if…?

Agenda

Contents

13 March 2019


10

Part II – Aircraft / Aviation Finance: Purposes, Lenders and Finance-Structures

Wide- vs. Narrow-Body: How to Distinguish?

Source: Marco Hoffleith, Aircraft Financing: Finanzmittelbeschaffung für Kunden durch Flugzeughersteller, 2013 + Ergänzung SD

13 March 2019


11


Aviation / Aircraft Finance: Provide financing for the operation / purchase of aircraftDefinition

Aircraft Finance vs. Aviation Finance – Definition and Difference

Difference

„Aviation-Finance“: operating costs ensure the maintenance of operations (maintenance-cost, start- and landing fees, ground power, salaries, jet-fuel-hedging, customs, etc. Main Finance-Instrument: RCF

„Aircraft Finance“ purchase costsAcquisition-Finance, Advance-Payments, Instalments, Bridge-Finance, etc. Main Finance-Instruments:

Syndicated Loan Facilities, Promissory Notes, Term Loans, etc.

source: https://www.q102.ie/news/dublin-airport-s-busiest-september-ever/

13 March 2019

https://www.q102.ie/news/dublin-airport-s-busiest-september-ever/


12


„Typical“ Structure of an Aircraft Finance Transaction

Source/related to: Marco Hoffleith, Aircraft Financing: Finanzmittelbeschaffung für Kunden durch Flugzeughersteller, 2013 – Translated by SD

13 March 2019


13


Collaterals Usually Applied in an Aircraft Finance Transaction

Aircraft Finance Transactions are usually very well collateralized (for example):

1st priority mortgage on the aircraft,

Assignment of shares in the SPV, which grants access to the cash flows and lease agreement,

Assignment of rights from the lease-agreements,

Assignment of rights / claims from insurance policies,

Additional guarantees may be required from the ultimate beneficiary owner, insurance companies, banks, ECAs, etc.

Financial covenants ensure a minimum financial performance of the borrower (min DSCR, min equity, min cash balance, etc.)

Non-Financial covenants (e.g. regular reporting requirements, dividend restrictions, mandatory prepayments, maintenance-requirements, Change of Control, Cross Default, etc.)

Assets / Rights

Covenants

13 March 2019


14


Since 2017: AFIC (“Aircraft Finance Insurance Consortium”) - Backed with a non-payment insurance policy through a commercialbank loan or capital markets structure, insurance companies found their way into the Aircraft Finance Market.

Boeing – Who are the Lenders?

source: Boeing „Current Aircraft Finance Market Outlook 2019“

13 March 2019


15


Lessors have a global market share of around 40%. Investment-Grade ratedLeasing Companies have access to ample liquidity through capital marketsat historically low rates.

Lessors prefer Narrow-Bodies over Wide-Bodies due to more remarketingopportunities and much lower reconfiguration time and expenses comparedto larger aircraft.

Leasing

source: google

source: Boeing „Current Aircraft Finance Market Outlook 2017“ source: KPMG – „The Aviation Industry Leaders Report 2018“ and „Flight Ascendend Consultancy

13 March 2019

http://www.aircraftinvestor.com/articles/news/aircraft-leasing-company-league-table/


16


Capital Markets and banks alsobenefit from the historically lowinterest rates.

Commercial Bank funding reachednearly USD 50bn in 2018.

Strong demand from the APACregion, as well as very low defaultrates encourage commercial bankswith high cash balances tostrengthen their footprint in thissegment.

40% of all bank debt will be providedfrom Chinese and Japanese banks.

Asia is expected to order more than15,500 aircraft until 2037.


Commercial Banks - Global Diversification of Aircraft-Finance Loans

13 March 2019


17

source: Boeing „Current Aricraft Finance Market Outlook 2018“

Export Credit Agencies (“ECAs”) operate on behalf of its local Government (and are backed by those) and offer credit default insurance to lenders that provide funds to their clients to purchase aircraft. The outlook for ECA-coverage was concerning in 2016, when, as a consequence of limited decision authority, the US-EXIM drastically reduced its aircraft finance transactions.


Export Credit Agencies („ECAs“) - Boeing‘s Global ECA Strategy

13 March 2019


18


US-EXIM-Bank = „Boeing-Bank“. Boeing the largest exporter in the US by dollar virtue In 2012, 82% of all Loan Guarantees issued by the US-EXIM were issued to support the purchase of Boeing aircraft and – parts Since 07/2015, US-EXIM only has 2 out of 5 acting Board Members, which limits their decision authority to USD 10m max. Required capacities were placed on the primary insurance market (incl. Lloyds) At the same time, the US-EXIM launched a program to reinsure the then existing loan portfolio to accommodate the US Senate

and the US tax payers (who are ultimately covering any loss within the US EXIM portfolio), which had triggered significant marketreactions:

source: Flight Global

source: Intelligent Insurer

Export Credit Agencies - Boeing Deliveries Supported by US-EXIM („Boeing Bank“)

US EXIM

13 March 2019

https://www.flightglobal.com/news/articles/ex-im-launches-aircraft-financing-reinsurance-progra-447317/

https://www.intelligentinsurer.com/news/xl-everest-liberty-complete-1bn-reinsurance-deal-with-exim-bank-15001


19


During 2010 and 2013 (Financial Crisis), US-EXIM was involved in more than 30% of Boeing’s annual deliveries Due to low interest rates and ample cash at hand, Commercial Banks entered this segment and gained market shares. In 2019, it is expected that the US-EXIM will continue to account for only a small share of aircraft financing, as markets are

expected to remain healthy and resilient.


Export Credit Agencies - Boeing Deliveries Supported by US-EXIM („Boeing Bank“)

13 March 2019


20



Insurance / Aircraft Finance Insurance Consortium („AFIC“)

Boeing Capital Corporation (“BCC”) engaged in a new market development to bring insurance risk capital to aircraft finance. The AFIC was established in 2017 and consists of a syndicate of highly-rated global insurance companies that issue aircraft

non-payment insurance (“ANPI”) to banks and capital market investors. The insurers do not provide funding themselves, but they assume the risk of default by providing coverage to lenders. In 2018, the AFIC financed more than 30 aircraft, twice the volume of its initial year of operation.

13 March 2019


21


Aircraft manufacturers are subject to industry-specific market factors that mitigate the financing risk:

Stable, resilient and (relatively) predictable market: RPK: Stable growth rates for decades with strong demand expected coming from Asia. RPK-rates increase on a global scale (2017: 8,8%, 2016: 6,6%, etc.). Increasing flight hours. No production „in stock“. Supply and demand are analysed closely to avoid any overcapacity. However: Freight: Strong dependency from the global economies.

Relatively low competition due to high entry barriers (compared to ship vessel manufacturing). Duopoly: due to high administrative requirements to obtain all permits, the market access for new players is quite difficult. In comparison: the establishment of a shipyard is associated with much less administrative effort than the planning, production

and operation of aircraft. Other countries may need between 20-25 years to reach a reputation and quality-standard comparable to Airbus and / or

Boeing.

Motivation for Lenders - Risk Mitigating Factors in Aircraft Finance 1/2

13 March 2019


22


Data with proven track-record and verifiable history Complete history of each and every single aircraft (maintenance-protocols, utilisation-rates, revenue-generation-capacity, Track Record over decades

Potential default only in case of a double trigger:1. Default of the buyer (Airline), which thus can no longer fulfil their leasing-/charter payment obligations, as well as the2. Lack of usability of the asset (market value of the aircraft) may put pressure on the market value, which then not any longer

covers the outstanding debt. The residual values are relatively well predictable due to long term experiences.

Motivation for Lenders - Risk Mitigating Factors in Aircraft Finance 2/2

13 March 2019


23


Default Rates are – Even During Times of Crisis – Very Low

13 March 2019


24




IV. What if…?

Agenda

Contents

13 March 2019


25

Part III Aircraft Finance - Insurance / Reinsurance

Reasons for coverage and risk appetite of insurers: 2018 was a record year for Boeing and Airbus, which delivered 806 and 800 aircraft, Low/zero capacities offered by the „classic“ providers, especially US-EXIM, Historically low loss ratios due to solid and proven collateral structures and borrowers of

high creditworthiness, Globally diversified asset (airlines and lessors), Such financings represent self-liquidating, asset-backed trade finance transactions, which

may be covered through the existing Trade Credit / Structured Trade Credit ReinsuranceTreaties without requiring any further request for Special Acceptance or amendment.

The consequence: Facilitated by low default rates, the low interest rate environment and the fact that such

collateralized transactions fit into the existing reinsurance treaties, insurance for default ofsuch transactions have increased significantly - especially in the London PRI-/STC CreditMarket - since 2016/17,

Buyers are usually banks (lenders).

Changes in the Market Opened the Doors for New Business Opportunities for Insurers (and Reinsurers)

source: https://aeworldmap.com/2010/01/05/lloyd%E2%80%99s-building-london-united-kingdom/lloyds-building/

13 March 2019


26

Part III Aircraft Finance - Insurance / Reinsurance

Buyer (Airline/Lessor) should have an investment grade rating, Best case: funding of Flag Carriers (or other domestic Key Players), where a governmental support may be expected, Support only for amortizing loans (perhaps with grace period), LTVs at begin should be in a range of between 70-75% of the purchase price (= market value), Tenor max. 12 years, Lenders retain a first-loss-piece, Claims Control through an internal team of specialists, or an external agency/bank with strong expertize, Sound recovery-potential? The aircraft has to be a highly fungible asset, because you should be in a position to offer that aircraft

to other airlines; if necessary. That also applies to spare parts: Can you perhaps rent the engines to support the debt service? Aset of four Airbus A380 Rolls Royce engines grosses approx. EUR 480,000 per month. (https://thepointsguy.com/news/a380s-being-demolished/)

Risk Mitigating Factors – Where to look at when insuring Aircraft Finance (personal view)

Personal Recommendation

13 March 2019

https://thepointsguy.com/news/a380s-being-demolished/


27




IV. What if…?

Agenda

Contents

13 March 2019


28

Part IV – What If…?

The Aircraft Valuation process is highly complex and depending from various factors like Aircraft Capabilities, end-of-life-options, OEM-support, global distribution, engine choice, perception of aircraft, replacement-options, etc.

The value is also (strongly) influenced by various macro economical and political factors. AVAC (Aircraft Value Analysis Company) considers 27 main factors that influence the value of a used aircraft, such as GDP,

inflation, interest-rates, load factors, engine types, replacement-options, production rates, MTOW (maximum take-off-weight, etc.)

Determination of Market Values as as Percentage of the New Aircraft Price:

Source: http://www.adventurousinvestor.com/890-aircraft-leasing-funds-flying-high-or-a-residual-nightmare

Source: https://leehamnews.com/2014/10/29/aircraft-values-of-end-of-life-a320737-families-to-neomax/

1989 20011999 2014

13 March 2019


29


Factors Impacting Aircraft Values: 4 Key-Facts to be Taken Into Account:

Age MTOW (maximum take-off weight) Interior Configuration Maintenance Status Flight hours

Engine Choice (e.g. NEO/CEO) OEM-Support Freighter Convertibility

Loading Factors / RPK Orders/Deliveries Airline Profitability Regulatory Changes

GDP-Development Oil Price Inflation Global Trade and Tourism Flows

Serial Number

Source: https://www.kisspng.com/png-boeing-747-400-airplane-airbus-a340-plan-view-1335251/download-png.html

Aircraft

Industry

Macro Economic

13 March 2019


30

Due to market changes, there is currently very little demand for A380s. The reasons for that – among others – are:

• High acquisition costs (approx. USD 400m)• High operating costs• Low flexibility due to take-off- and landing-characteristics• The concept of continental hub for international air transport and

logistics is being reconsidered• More focus on narrow-body-aircraft

In 2017/2018 the first leases of five A380 leased / operated by Singapore Airlines expired. SIA decided not to extend the lease agreements.

In February 2019, Emirates and Qantas Airways cancelled their orders, which lead Airbus to the decision to shut down the A380 production. The last A380 will be delivered in 2021


Factors Impacting Aircraft Values – Example Airbus A380

http://www.reisentutgut.org/das-besondere-andere-fliegen-mit-singapore-airlines/

https://www.telegraph.co.uk/travel/news/a380-hi-fly-leasing-delivery/

13 March 2019


31


Alternative Uses an Airbus A380

The Hajj is the annual Islamic pilgrimage to Mecca.

• The „official“ Hajj has to be undertaken at specific dates according to the Islamic Lunarcalendar, which occurs only once in a year.

• The Umra can be undertaken at any time of the year

• Depending on the origin of the source, between 1.9 and 2.5 million Muslims travel eachyear to Mecca, and the number is increasing.

https://www.zeit.de/gesellschaft/2017-09/mekka-pilgerfahrt-hadsch-fs

https://mazykidunya.blogspot.com/2014/09/khana-kaba-islamic-wallpaper.html

http://atwonline.com/airports-routes/malaysia-airlines-launch-hajj-a380-flights-saudi-arabia

https://www.aerotelegraph.com/airbus-a380-mit-bet-und-waschraum

13 March 2019

https://www.aerotelegraph.com/airbus-a380-mit-bet-und-waschraum


32


„Wet-Lease“: Hi Fly, a Portuguese corporation with an all-Airbus fleet has become the first operator of a second-hand A380. Hi Fly lease the aircraft and crew (incl. catering) to airlines like Thomas Cook or Air Austral, which, for example, need to replace a grounded aircraft of require additional short-term capacity to meet passenger demand also in peak season (summer vacation).

First flight was on August 1st 2018 for Thomas Cook (Copenhagen, Larnaca (Cyprus), Oslo, Palma de Mallorca).

Alternative Uses for an Airbus A380

https://www.aerotelegraph.com/a380-pendelt-zwischen-paris-und-indischem-ozean

https://www.webwire.com/ViewPressRel.asp?aId=226806

http://http://zozu.site/media/1837292143828352361

13 March 2019

http://zozu.site/media/1837292143828352361


33


Alternative Uses / Recycling Options

http://www.spiegel.de/wirtschaft/unternehmen/a380-airbus-will-rest-der-millionen-staatskredite-nicht-zurueckzahlen-a-1256834.html

13 March 2019


34




13 March 2019



35



source: http://www.jetenginetrader.co.uk/wp-content/uploads/2013/12/photo.jpg

source: https://mastershef.club/whirlpool-terrasse/whirlpool-terrasse-foto-von-sky-chair-stand-unique-engine-inlet-whirlpool-9u4-high-end-chair/

13 March 2019


36



source: https://i.cdn.travel.cnn.com/travel/article/recycled-planes/index.html?gallery=25

13 March 2019


37

Thank you for your attention!

Any further questions ?

13 March 2019

Aircraft / Aviation Finance - Home - ICISA › wp-content › uploads › 2019 › 08 › ... ·...

Documents

Transcript of Aircraft / Aviation Finance - Home - ICISA › wp-content › uploads › 2019 › 08 › ... ·...