Liquidity - too much of a good thing?
The funding of aviation assets has changed forever says MICHAEL NOSBUSCH, head of aviation at KfW IPEX-Bank. What had been described as a funding gap in aviation in the years following the global financial crisis has now become in two years an environment characterised by an abundance of liquidity, depressed margins and deteriorating borrowing standards as evidenced, for example, by higher-than-healthy LTVs. NOSB?SCH looks at how the market has changed and what that means currently and in the future.
Michael Nosbüsch
It is interesting to note that these words were actually said by Mr Carney, the new governor of the Bank of England, in a speech held in late October of this year, and - with nuances - most of the major central banks would agree. Global money supply is surging, trickling down into our market and creating what some describe as an environment characterised by an abundance of liquidity, depressed margins and deteriorating borrowing standards as evidenced, for example, by higher-than-healthy LTVs. Or so the story goes. “Easy money can produce new hazards” read a recent headline in a major international news publication, predicting an unavoidable and violent exit by investors in any number of asset classes, following a flood of money into just such asset classes. A comment by an aviation banker at a recent industry conference in Asia as reported in the press struck the same note: A sudden exit by new and inexperienced players who burned their fingers because they financed aircraft too cheaply and with too high a leverage may eventually hurt the whole industry.
Global money supply is surging, trickling down into our market and creating what some describe as an environment characterised by an abundance of liquidity, depressed margins and deteriorating borrowing standards as evidenced, for example, by higher-than-healthy LTVs.
It is, however, not quite so straightforward. Historical evidence in our industry shows that virtually all of the exits of aviation banks that could be witnessed in the recent past, i.e. around 2009 and 2010, were not caused by losses in the aviation portfolio of those banks but rather by much, much bigger problems elsewhere in the banks’ balance sheets. Did it hurt anyone? Those who were left to respond to RfPs back then may agree with a banker who was recently cited as having felt “like a kid in a candy store” at the time, referring to higher-than-normal margins. And some of us bankers may still feel this way. As an airline or lessor, try to finance your PDPs or an aircraft that is considered an “old” aircraft (meaning 7 to 10 years in operation or even fewer), for example, and it won't take you long to be reminded of the past discussion about a funding gap.
It would of course be futile, if not quixotic, to speak of a funding gap today - but no less so to characterise today’s market as the opposite of a funding gap or to try to picture the entry of new players as something of a temporary and easily reversible phenomenon. The simple reason is that the world has moved on and the market has in fact irreversibly changed - a lot. It is true that the GFC has caused some of the players in aviation finance, in some cases even big players, to drop out of the race. And it is equally true that those few have been replaced by many more. Much has been said in this column and elsewhere about the growth and in some cases resurgence of interest in aircraft financing by banks in places as diverse as Australia, Canada, China, Germany, Japan, Malaysia, Singapore, South Korea, Taiwan and the US – each with their own focus and priorities. Not to mention an increasing and increasingly diverse stream of the type of financings Mr Carney called for in general, namely “markets-based” transactions, where banks are still involved in aircraft financings, albeit not as lenders but as arrangers of capital market issuances.
Clearly, the aviation finance world is currently undergoing deep structural change, creating a much more inhomogenous market than before, along with the need for variety and innovation in the ways aviation financiers approach the market
Gone are the days when not so long ago apart from a few capital market issuances in North America, the supply side of aviation finance was akin to a relatively homogenous club of specialised banks where it was easy for airlines or others seeking finance and competitors providing finance alike to point the finger to “the market”. Combine this new-found diversity on the supply side of aircraft financing with an increasing tendency for diversity on the demand side, and you start to scratch your head about how to pocket the million dollars. Be it fundamental changes both in airline ecosystems and business models where, for example, the lines between legacy and low cost, between short-haul low cost and long/medium-haul low cost, between traditional and new types of airline alliances blur; be it the type of once-in-a-lifetime changes in the number of relevant aircraft manufacturers and in aircraft and engine technology we are currently observing and which many agree will have further profound impacts on established business models for manufacturers, airlines, lessors or other players, let alone on aircraft and engine values and the factors that determine them.
The result of all these changes will be much more diversity in approaches to aviation finance than what we were used to seeing in the good old pre-Lehman days. Clearly, the aviation finance world is currently undergoing deep structural change, creating a much more inhomogenous market than before, along with the need for variety and innovation in the ways aviation financiers approach the market, and calling for what some call tailor-made approaches with the ensuing investment in business models, customer relationships and resources. At KfW IPEX-Bank, we welcome this change as it plays to our strength. From our early days in aviation finance some four decades ago, we have been promoting a sector focus of our lending in aviation, creating value by accumulating deep industry knowledge, enabling us to understand and respond to our customers' needs in any situation in an ever-changing market.