Two years ago, if you were interested in purchasing an aircraft and wanted to finance a portion of the acquisition cost, the world was your oyster. Low down payments, extended loan terms of 20 years or more, minimal credit verification all added up to a great deal for buyers in a marketplace full of competition. Much like the home mortgage market or commercial finance world, capital was available and, seemingly, as long as you had a pulse, someone was willing to offer you a loan.
We all know what happened in October 2008: the financial world was turned upside down. Financial markets were faced with the imploding real estate bubble, commercial and secondary market capital providers like Bear Stearns, Merrill Lynch and many retail lenders, big and small, teetered on the brink of ruination. Many fell over the edge. In the aircraft world, lenders retracted and in some cases, exited the market place. Buyers retracted, watching the values plummet to record lows and waiting for the market to hit bottom. Some owners were forced to sell their aircraft whether they wanted to or not.
All of these and many more factors resulted in a fractured aircraft sales and finance market with a huge volume of aircraft for sale, few buyers and even fewer opportunities to finance acquisitions.
Now as we approach mid 2010, we see that the worst of the economic storm seems to have passed and the world of aircraft sales, purchases and financing seems to be returning to a calmer state. I do not mean that these markets have returned to the craziness of 2008 but the phoenix does seem to be rising from, or at least poking its head out of, the ashes.
Aircraft prices seem to have bottomed out and some sources even indicate that the single engine aircraft actually seem to be gaining value (up from the 30% or 40% loss of value that took place in 2009). Finance opportunities are rebounding as well. Although there are far fewer banks and finance companies willing to write aircraft loans, the ones that remain seem to be willing to extend credit, and here is the big difference, provided that more stringent underwriting criteria are met.
The entities that are willing to underwrite aircraft loans generally fall into two categories: 1) Small or medium sized financial institutions who, as a general rule, did not suffer from a high volume of non-performing aircraft loans or 2) Large financial institutions for whom aircraft finance is a less significant portion of their credit related business and who, thanks in no small part to the stabilizing impact of TARP funds, had the ability to absorb them more easily. Regardless of which of these two categories they fall into, the number of aircraft finance entities in the market in 2010 is dramatically smaller.
So, let’s say that you have been watching the aircraft sales market and carefully shepherding your capital for the last eighteen months waiting for the perfect price on the aircraft of your dreams. Having found your prize, you now are interested in financing a portion of the purchase price. What should you do and what should you expect?
You can use an aircraft finance broker or, in some cases, go directly to the actual lender. Some industry groups have associated finance plans and the internet can be a useful tool in determining who to talk to. You will likely find that you will need to make a down payment of at least 15% of the value of the aircraft (more if you anticipate any commercial use of the ship, that the duration of the loan will not exceed twenty years and that you will need to have a strong credit score (FICO), good liquidity and good cash flow. Lenders will look long and hard at financial statements, tax returns, credit reports and/or other documents so it is in your best interest to have all these types of documents ready and know where you stand financially before beginning the loan application process.
If you have not recently checked your credit score, do so. Most states allow you to obtain a free credit report annually. Personally, I think it is a good idea for most of us to check our credit score with all three major credit-reporting agencies at least once a year. In this day of potential identity theft, it is wise to make sure that the only person affecting your credit score is you. If, during the course of your personal credit review, you uncover something that is or appears to be incorrect, address it immediately with the credit agency. Remember, financial institutions occasionally make errors when they report to the credit agencies but it is up to you to see that they are corrected. Historical delinquency issues related to mortgage and installment debt payments are now critical issues impacting financing of luxury items. You should be prepared to expound on any delinquency circumstance that may be reflected on your credit bureau. Such items may not turn out be an automatic disqualifier but will likely impact any finance terms if offered. If you are disputing any creditors reporting, have that documentation available in advance.
Make sure that you can demonstrate to the lender that you will be able to repay the loan, even if unforeseen circumstances arise. Cooperate with them by doing what is needed to demonstrate your credit worthiness for the loan requested and ability to repay it in accordance with the agreed upon terms. After all the financial woes we have been through, lenders are not likely to offer you a loan based solely on your winning smile and steady pulse.
Whatever you do, use common sense. Ask friends and colleagues who have recently (within the past few months) financed an aircraft who they used. Call finance brokers and/or lenders and ask questions. Make sure you are comfortable that the individual and entity you are dealing with has experience in lending, can help you through the transaction efficiently and, most importantly, deal with you in an honest and helpful manner.