How to Choose the Right Aircraft Finance Lender

You might get an offer of financing for an aircraft purchase, but does that automatically mean you’re a good fit for the bank or vice versa? What are some of the questions you should ask to find out? Rohit Jaggi asks the experts.

Finance - BizAv

Rohit Jaggi | 05th February 2020

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Rohit Jaggi

Rohit Jaggi holds airplane and helicopter licenses and frequently conducts flight tests of airplanes...

Bombardier Private Jet in Aircraft Hangar

What do business aircraft buyers seeking financing need to ask when searching for the right lender? Rohit Jaggi interviews those in the know for some key tips and pointers…

Brave is the aircraft buyer who goes with the first offer of financing that he or she can find. Brave or foolhardy. It’s worth remembering that the borrower and the lender, while they both might want a transaction to work, are not actually on the same team. The borrower wants cheap funds. The lender wants to make a loan with the best return.

The two sides can agree on some things, i.e. that neither want a loan so unfavourable and costly that the buyer defaults (the world of pain that comes from a failed loan is good for nobody). But short of that, the field is open.

Leading aviation lawyer Paul Jebely points out that all lenders are not equal. “Business aircraft financiers look in varying degrees to credit risk, and to asset value and asset preservation – including factors such as jurisdictional and repossession risk,” says Hong Kong-based Jebely (who leads the private wealth and asset finances practices of Pillsbury Winthrop).

The important thing is to choose a lender that is the best match for your individual requirements – not just the first one to agree to lend you the money.

That means first working out exactly how much of your own cash you want to put down; what aircraft you are looking to buy; what you want to use it for; where you will base it; and how you will maintain it. Only then can you work out who the right lender is.

Brendan Lodge, UK-based aircraft acquisitions specialist with Jet Support Services Inc, notes, “The lenders have become incredibly faddy in terms of the niches where they want to lend. At the point where liquidity became restricted, the banks became fussier: They were able to lend all the money they could get their hands on, then they became less willing to do the donkey work.”

Where to Begin Your Search for Aircraft Finance

Jebely says a good starting point is a bank you have an existing relationship with. But he adds that the search shouldn’t stop there.

Even if you have the money to pay cash for the business aircraft you want, it may make more sense to finance the aircraft and put the money to use where it will earn a better return. That is especially relevant now, when interest rates are “bumping along the bottom”.

If you’re in the happy position of not needing to borrow, but still want a loan, the options are likely to be much wider. Nevertheless, you should look at other conditions. Some lenders (who may be after your funds much more than wanting to lend to you) could require as much money as the loan to be deposited with them, possibly obviating the reason for taking a loan in the first place.

The size of the loan will also steer you towards, or away from, specific lenders. And you should ask yourself how much transparency and disclosure you’re comfortable with. A complicated trail of ownership will rule out some lenders.

“Line of sight to the ultimate beneficial owner, and transparency around the identities and source of wealth of all obligors, is absolutely critical,” says Gary Crichlow, director of London-based finance brokerage and advisory firm Arc & Co. “Clients with ties to certain jurisdictions – nationality, residence, assets – can be more challenging, but financiers are a global community, and appetite varies.”

How and Where Will the Aircraft be Used/Based?

The planned use of the aircraft is also key. Some lenders are more comfortable about the regulatory environment for only partly chartered aircraft, for example. It’s important to find a lender that understands what you want to do with the airplane.

And the use of the machine may determine where it’s based, and on which register it’s placed. But, again, make sure your lender understands the specific rules of the Lithuanian register (for example) or the Isle of Man register.

Any lender who knows what they are doing should be able to work out for themselves that lenders, borrowers and aircraft need to be a good fit in this respect.

But it is more important to you, so don’t scrimp on that research. “All of the domestic lenders are comfortable with the IoM register,” notes Lodge. “The issue with less well-known registers is that the bank may not have any experience of that register. In order to structure a loan or a mortgage it may first have to seek legal advice, taking time and money. So it makes sense to research which lenders are already comfortable with that register.”

Aoife O’Sullivan, partner with The Air Law Firm, says the main consideration is flexibility to choose the regulatory regime that best fits the intended use and operation of the aircraft.

“For example, aircraft flown commercially or on charter must be placed on the same register (with some exceptions) as the aviation authority of the chosen operator or AOC holder,” she outlines. “Aircraft flown privately are not as restricted in choice.”

“Small deals can work particularly well when the client, the aircraft and the financier are all based and registered in the same jurisdiction,” Crichlow highlights.

“The ultimate beneficial owner's identity and finances are straightforward, and the financier has a standard suite of contractual documents that the client is happy to sign up to with a minimum of negotiation.”

Jurisdiction is also important for lenders to make sure they can collect on their loan if it all goes wrong. Your reasons for choosing the jurisdiction probably won’t include the lender’s ease or difficulty in reclaiming their security – but where the deal is based will be a factor in who you can approach for a loan.

How Will the Aircraft be Maintained?

Maintenance is another issue – some lenders want all-singing, totally comprehensive service contracts that could be financial overkill for your intended use of the aircraft.

That’s another good question to ask before going far down the road with any particular lender. As Crichlow says, “A low-rate financing offer that demands a high-cost operation may not always be the optimal overall deal.”

Help is at Hand…

All these factors add up to the need to do a lot of homework on how you want the loan to look, and who would fit your bill to provide it. But there is help at hand: Lodge points out that a good broker is worth his or her weight in aircraft grade titanium here.

“If you can find a broker who knows which bank to go to for the particular type of borrower you are, and can then polish the proposal so that the bank doesn’t have to do much work,” he concludes, “that is the best way of improving your chance of getting the right kind of loan, with the right kind of structure, from the right lender.”

It may not be your first choice, or even your first offer – but this way there’s at least a chance that everyone can win.