Financing Tips for an Overheated Used Jet Market

In today’s overheated market, older and harder-to-finance business jets are being offered at unusually robust prices — and are still being snapped up quickly. Chris Kjelgaard asks what buyers can do to enhance their chances of obtaining financing in this market environment.

It is clear in the early months of 2022 that the Covid-19 pandemic is continuing to fuel intense market demand for used business jets, whatever their age and category. Many people now purchasing used business jets are first-time buyers who lack experience of dealing with the many complications inherent in investing in, and owning, such sophisticated assets.

One major complication (perhaps the most important one for many buyers) is ensuring that adequate and suitable financing is in place and available at short notice in order to close the aircraft purchase, in a market environment in which sellers are calling the shots. Many sellers are insisting buyers close deals quickly, and some sales are being unwound when the transaction encounters even short delays.

Some sellers are even advertising sales as being “as-is aircraft condition, which could mean ‘first come, first served, and high bid wins’,” says Christopher Lee, Vice President – Aircraft Division in 1st Source Bank’s Specialty Finance Group.

Some sellers advertising such sales are insisting that buyers do not conduct pre-purchase inspections of the aircraft on offer, he says — a requirement that experienced buyers would consider an absolute deal-breaker.

In such an environment, having financing already in place and being able to move rapidly to close the aircraft purchase is paramount. However, just as important for the buyer is not to rush into an ill-advised purchase which could cause significant financial and operational headaches after the closing.

Business jets are too expensive to buy, to operate and to maintain for new owners to risk ‘buyer’s remorse’ lightly (not to mention lumbering themselves with potentially unsellable assets). So what can buyers of business jets, particularly firsttime buyers, do to be able to move quickly on a potential deal and at the same time try to ensure they’re not buying a lemon? Involve your Bank from the Start

The most basic piece of advice experienced aircraft financiers have for buyers in today’s very hot pre-owned aircraft sales market is “come very early in the process” to your chosen financial institution to source the loan required in order to buy the aircraft.

It behooves buyers to seek out institutions which are very experienced in financing business aircraft, who will know all the potential pitfalls that could aircraft purchase transactions, and can advise buyers how to avoid pitfalls that could occur. But even if a buyer is pre-approved for financing before agreeing to purchase a specific aircraft, in today’s market the inventory of available used aircraft is lower than it has been for a long time.

As a result, there is considerable pressure on buyers to close their purchases quickly before sellers are influenced to cancel transactions in order to accept new, higher bids from elsewhere.

Even after obtaining pre-approval for financing, “You still need to close quickly,” says Lee. “Even timing can be the edge on securing a deal. You need a lender who is quick to act”, he advised, adding that his company’s speed has helped a number of customers in the past 12 months.”

Come Prepared, and Seek Expert Help

Would-be buyers should approach financial institutions fullyarmed with extensive documentation of their personal financial situations and asset holdings, for the bank to examine.

“Ultimately, every potential buyer is going to have to present a complete financial package,” says Keith Hayes, Senior Vice President and National Sales Manager for PNC Aviation Finance. “They should present this material proactively, and include as much detail as possible, so that the financial partner can offer the best rates and most aggressive structure” for the financing.

At the same time, each buyer should seek to “assemble an entire team of aviation experts” to support his or her efforts to secure the right aircraft, Hayes adds.

Experienced aviation financial institutions such as PNC Aviation Finance and 1st Source Bank’s Aviation Division will assist the buyer in this process, advising the buyer first as to who might be a potentially suitable aircraft broker to source a suitable aircraft.

Other Experts you Need

The buyer’s advisory team should also include an experienced aircraft technical inspector, a specialist aviation attorney and a tax professional who is highly familiar with the particular taxation regulations and implications for aircraft sales transactions, says Hayes.

This team will ensure that the buyer doesn’t make elementary mistakes, such as allowing the purchase to go ahead without the technical inspector having closely examined the aircraft and its maintenance documentation in a pre-purchase inspection (PPI). Buyers shouldn’t accept ‘as-is’ transactions purely on the seller’s say-so regarding aircraft condition.

Only by having an expert technical inspector conduct a full PPI can the buyer become aware of any past damage history attached to the aircraft, the state of its maintenance records (it can be hugely expensive to rectify maintenance records if they are incomplete), and the extent of any metal corrosion affecting the aircraft.

“All [metal] aircraft have some corrosion,” says Lee. “Ideally you will be able to identify any meaningful corrosion in the prepurchase inspection.” What inexperienced buyers most need to know is if the aircraft has advanced corrosion, and by conducting the PPI an experienced technical inspector will find if this is the case.

In terms of both money and time, advanced corrosion can be prohibitively expensive to repair, greatly increasing the buyer’s required financial investment in the aircraft and also potentially reducing the aircraft’s resale value, even after repairs are completed.

Typically, the aircraft most at risk of incurring advanced corrosion are those which are based or stored near the coast or which do a lot of operations near bodies of salt water, according to Lee.

Despite the market being overheated, “the days of good deals haven’t ended — they’re just getting farther apart,” Lee explains. However, “in a seller’s market, you have to be more careful regarding due diligence.” In this regard, the buyer’s specialist team — and particularly the financial institution — will be highly helpful, all the more so if the buyer is a first-time purchaser.

“We will provide sound advice that gets [the buyer] to ask the right questions,” he says. “We do this simply by asking questions, to protect the client as well as the bank.”

Bank Requirements and Restrictions

Every buyer’s chosen financial institution will quickly make the buyer aware of the various restrictions and requirements it has for the particular loan or lease in question.

The buyer should realize up-front that every bank treats every business aircraft financing transaction as a unique, one-off deal: “The amortization [of any loan the bank provides] is dependent on that particular aircraft,” says Hayes.

When deciding the amount of financing it will offer the buyer, the amount of time over which it wants the loan to be amortized, and the proportion of the overall purchase price it will provide to the buyer in debt financing, the bank considers various important factors. Some are specific to the aircraft and 

"For the bank to advance any funds... the aircraft’s engines must be covered by an hourly maintenance plan."

some are reflective of the market conditions pertaining at the time the buyer purchases the aircraft, according to Hayes.

In reaching its financing decision PNC Bank, for instance, always takes into account the aircraft’s age; its cabin size; its previous operating, damage, and corrosion history; whether the aircraft is currently in production; where and for how many hours annually the buyer plans to operate the aircraft; and the particular use(s) the buyer is planning for the aircraft.

However, when considering requests to finance business jets, all financial institutions today have one common, virtually nonnegotiable requirement to which their customers must agree for the bank to advance any funds. This is that the aircraft’s engines must be covered by an hourly maintenance plan.

Some experienced aviation finance lenders — 1st Source Bank is one such — are willing to finance aircraft which have a deferred-maintenance plan when the buyer has budgeted enough in the way of reserves to pay for the engines’ next major maintenance event, according to Lee.

Experienced lenders are also usually willing to finance aircraft which require the purchaser to pay a buy-in amount in order to activate for the new owner the engine-maintenance plan in place under the aircraft’s previous owner.

From the bank’s viewpoint, the required engine-maintenance plan needn’t be a fully comprehensive one, notes Hayes. The aircraft “can be on a light engine-maintenance program — we’re OK with a partial program.”

But in almost every financing PNC Bank agrees, the purchaser of the aircraft must agree to have an engine plan in place. “It is all-but a requirement: The vast majority of planes we finance are either [already] on [a plan], or are put on it at closing.” Current Market Conditions

Every financial institution has its own unique parameters in judging whether or not it will agree to finance a given aircraft. For instance, while PNC Bank is generally unwilling to finance business jets which are to be used purely for Part 135 charter operations, it is okay with financing aircraft for owners who intend to charter the aircraft out occasionally to redeem some operating costs. Likewise, it may be more difficult to finance aircraft which are to be configured and used for special missions, though 1st Source Bank says it is comfortable in financing both of those categories of aircraft.

Ultimately, today’s market is overheated, and at some point it will experience some market correction, says Hayes, who notes that at present used-aircraft prices are inflated anywhere from 10% to 25%, depending on the aircraft.

Many banks are adopting a conservative approach to their financing offers, in terms of the percentage of the overall purchase price they are prepared to advance as a loan, and the period over which they will make the loan available.

In PNC Bank’s case, “We work with clients to ensure that they have some type of equity in the aircraft on Day One,” Hayes says.

Additionally, while a client might seek a very long-term loan, and a loan advance amount that represents a very high percentage of the total aircraft sale price, the fact that today’s high prices will be adjusted downward at some point means “the plane might not have significant-enough [resale] value to retire the loan when the client sells it,” he adds.

As has happened in the past, “inflated values will come back down, and if you don’t amortize it in anticipation of the market correcting, you could be in a position where the value

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of the airplane would be less than the amount owed on the MORE_POSTCARD_4-1/4x6.indd 1 loan,” says Hayes.

On average, most business jets are resold or re-financed every 42-to-54 months, so “we do our best to structure each transaction so the debt can be retired in four years.”

Experienced aviation finance lenders, such as PNC Aviation Finance, will adjust the amount they will advance for an aircraft purchase based on factors such as how the buyer plans to use the aircraft, and for how many hours annually the buyer plans to fly it.

Banks will advise each would-be buyer on how a pre-approved financing can best be structured both to meet the bank’s required amortization profile, and also to provide the buyer with as much flexibility as possible in terms of aircraft choice, to maximize the pool of used aircraft potentially available.

For instance, says Lee, 1st Source Bank might advise a buyer to put more equity into the purchase if the customer chooses an aircraft with a larger cabin than they were originally considering.

Enhancing Your Options

Customers shouldn’t view the restrictions — such as a hard aircraft age limit and a hard annual usage limit — negatively. These are restrictions many banks impose on the aircraft they are willing to finance, according to Lee, and they can actually benefit customers by effectively limiting the pool of aircraft from which they can select, making their choice easier.

But if a would-be buyer wants to maximize his or her chances of obtaining bank financing for the purchase, it is important for the buyer to be “realistic with the expectations of the collateral”, says Lee.

Buyers shouldn’t be so blinded by a particular aircraft’s charms that they ignore (for instance) its age, operating history, damage history and production status.

Wherever possible, buyers should remain flexible in terms of the aircraft size and type they are willing to consider, and in today’s over-priced pre-owned aircraft market they should even leave themselves open to considering buying a new aircraft if they can afford it, says Lee.

In a market where off-market deals are common and customers must move fast to close purchases, he says would-be buyers should also be willing to “get creative and work to find an alternative lift solution”, such as fractional ownership, a jet card, or an owner partnership, to give them more time to find the right aircraft to buy, at the right price, with suitable financing in place. ❚

4/10/13 12:21 PM

CHRIS KJELGAARD

has been an aviation journalist for 40 years, with a particular expertise on aircraft maintenance. He has served as editor of ten print and online titles and written extensively on many aspects of aviation. He also copy-edits most major documents published by a global aviation industry trade association.

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