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Government Support in Financing the Aviation Market Elizabeth Evans Andrew Steinberg September 15, 2010 UBM Aircraft & Engine Finance & Leasing Conference.

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Presentation on theme: "Government Support in Financing the Aviation Market Elizabeth Evans Andrew Steinberg September 15, 2010 UBM Aircraft & Engine Finance & Leasing Conference."— Presentation transcript:

1 Government Support in Financing the Aviation Market Elizabeth Evans Andrew Steinberg September 15, 2010 UBM Aircraft & Engine Finance & Leasing Conference

2 Overview Aircraft Finance NextGen Finance Andy Steinberg advises airline, aerospace, and travel technology companies on strategic and regulatory issues before the U.S. government, including the Federal Aviation Administration and the Office of the Secretary of Transportation. Liz Evans concentrates her practice in aviation, project, and satellite finance as well as in equipment leasing and related transactional work, including private placements of debt and equity, structured finance arrangements, asset-based financings, and leveraged leasing.

3 AIRCRAFT FINANCE

4 Background on Export Credit Finance Export Credit Agency (ECAs) Institutions, private and/or governmental, that provide financing to support exports of various aircraft and engine manufacturers in the host country. The precise terms and conditions of the financing support available from the individual ECA differ. Broad parameters governed by the Aircraft Sector Understanding (ASU) (effective July 1, 2007) under which the ECAs of the U.S., EU, Japan, Brazil and Canada agreed to guidelines for financing to provide fair and balanced competition of aircraft exports. Key ECAs Export-Import Bank of the United States (Ex-Im) Export Credits Guarantee Department (ECGD) in the UK Compagnie Francaise dAssurance pour le Commerce Exterieur (COFACE) in France Consortium of Hermes Kreditversicherung Aktiengesellschaft and C&L Deutsche Revision (HERMES) in Germany) Export Development Bank of Canada Brazilian Development Bank (BNDES); EXIM Brasil Agéncia Crédito á Exporta çāo do Brasil S.A.

5 ECA Financing in Todays Market ECAs have been a traditional aircraft financing source for over thirty years. In 2009, ECA support for Boeing and Airbus increased from 20 to 40% of deliveries. In 2009, Ex-Im authorized $8.6 billion of aircraft financing (as well as $980 million for exports of other small-transportation related equipment). This compares with an average of $4.4 billion for each of the past several years. Likewise, the European ECAs substantially increased their support for Airbus deliveries. From The Wall Street Journal August 13, 2010

6 Ex-Im Products Offered To accomplish its mission, Ex-Im offers the following products: 1.Direct loans at competitive, fixed interest rates to foreign buyers of U.S. exports. 2.Export credit insurance, protecting exporters against the failure of foreign buyers to pay their credit obligations. 3.Guarantees to commercial lenders, providing repayment protection for loans to foreign buyers of U.S. exports. 4.Guarantee of bonds limiting the impact on bondholders if the issuer of the bond goes into default. 5.Working capital guarantees, encouraging commercial lenders to make loans to small companies with export potential who need funding for production/ marketing.

7 Ex-Im Finance Lease Structure Most Ex-Im supported aircraft transactions use a finance lease structure. 1. A special purpose company (SPC) is established to act as both borrower under the Ex-Im guaranteed loan and lessor (or purchaser) under a finance lease (or conditional sale agreement) to the airline purchasing the aircraft 2.The airline assigns its rights under its Boeing Purchase Agreement to the SPC in respect of the aircraft being financed.

8 Ex-Im Finance Lease Structure (cont) The Guaranteed Lender(s) make a loan to the SPC towards the purchase price of the aircraft pursuant to a Guaranteed Loan Agreement (the Guaranteed Loan Facility). Under applicable regulations, the amount borrowed under the Guaranteed Loan Facility cannot exceed 85% of the net-net invoice price of the aircraft. The rent under the finance lease (or installment under the conditional sale agreement) covers the debt service owing pursuant to the Guaranteed Loan Facility. As the amount of the Ex-Im financing is limited, the remaining 15% of the aircraft purchase price is often financed by a commercial loan. Secured but subordinate to Guaranteed Loan Facility. Standstill period (often up to 180 days) during which junior debt is prohibited from proceeding against the aircraft or any joint collateral.

9 Ex-Im Bank Typical Finance Lease Structure SPC Lessee Ex-Im Guaranteed Lender Manufacturer Loan Agreement Debt Service Purchase Agreement Purchase Agreement Assignment Assignment of Lease Rents Lessor Lease Export Credit Agency Guarantee

10 Aviation Companies Use Export Credit To Access The Capital Markets A significant innovation in aviation financing is the export credit bond. On October 8, 2009, Emirates airline priced the first US bond offering guaranteed by Ex-Im. The bonds were issued by Amal Limited, a Cayman Islands special purpose company, which acquired 3 Boeing ER aircraft from Emirates using a loan provided by Calyon. Amal then issued 12 year 144A registered bonds 100% backed by triple-A rated Ex-Im. The first European export credit bond issued by AerCap closed this summer guaranteed by ECGD. –It is unclear what the European capacity will be as US government entities have simpler regulations than the Europeans, COFACE and HERMES are not set up to guarantee bonds (and did not participate in the AerCap offering), unlike Ex-Im, ECGD is not a bank.

11 Ex-Im Capital Markets Fundings * Issue DateAircraftAmountPricing October 8, 2009 *1 st public bond offering backed by US Ex-Im guarantee 3 x ER $413mm 12 yr MS + 55 bps Coupon 3.465% October 29, x $59mm 12 yr MS +50 bps Coupon 3.613% November 5, 2009 *1 st lessor to issue bonds backed by US Ex-Im guarantee 3 x $115 mm 12 yr MS + 47 bps Coupon December 9, x ER 12 yrMS + 47 bps January 12, x $88.5 mm [12 yr] MS + 45 bps Coupon 3.65% * This information is based upon previously published public information. Reflects initial pricing only.

12 Ex-Im Capital Markets Fundings (Continued) Issue DateAircraftAmountPricing January x $126 mm 12 yr MS + 49 bps Coupon 3.55% March 11, x x $298 mm 12 yr MS + 49 bps / L + 29 bps Coupon 3.547% March 15, x $59.2 mm 12 yr MS + 47 bps Coupon 3.580% May 19, x $74.3 mm 11.5 yrs MS + 52 bps Coupon 3.281% June 18, X s$190 mm 12 yr MS + 60 bps Coupon 3.35%

13 European Export Credit Bond Issue DateAircraftAmountPricing June 2010 * 1 st European export credit bond 2 x A330$151 mm 11 yr Coupon 3.795%

14 NEXTGEN FINANCE

15 NextGen– What is It? Fundamental long-term transformation of how aircraft are operated and airspace is managed Shift from air traffic control to air traffic management with aircraft as nodes in a network Modern communication, navigation, and surveillance (CNS) technologies supporting the transition from: Ground-based navigation aids to satellite-based (think: GPS) Analog to digital communications (think: texting) Disparate systems to integrated IT (think: the Web)

16 1.ADS-B: Satellite navigation system designed, along with other navigation technologies, to enable more precise control of aircraft during en route flight, approach, and descent. 2.SWIM: Information management architecture for the NAS managing surveillance, weather, and flight data, as well as aeronautical and system status information, providing the information securely to users. 3.DataComm: Digital communications link for 2-way exchanges between controllers and flight crews for ATC clearances, instructions, advisories, flight crew requests, and reports. 4.NNEW : Weather support services – using airborne sensors to create common weather picture across the NAS. 5.NVS: New voice switches provide foundation for all air/ground and ground/ground voice communications in the future ATC environment. Major Systems Within NextGen 16

17 NextGen– How Much Will It Cost? (The real answer: no one knows) Official cost estimates vary: currently in $40 billion range or significantly more according to DOT Inspector General Several of the new systems are highly dependent on avionics Roughly split between public and private sector FAA: R&D, acquisition of infrastructure, deployment = $20 Billion Operators: equipage, training, and related costs = $20 Billion SWAG: retrofit could cost from $1 to $2 mm per aircraft

18 Obstacles to financing avionics Immature regulatory framework- no certification or approval mechanisms for certain privately developed services The incentivization conundrum Market mismatch: infrastructure spending determined by federal budget; equipage by private sources Mobile assets: new avionics are installed in the assets of others but can they be effectively securitized? Government monopolies Civil aviation authorities and state-controlled air navigation service providers control many of largest commercial opportunities, affecting both procurement and sales of NextGen equipage. To what extent can third parties sell services/products directly to aircraft operators historically provided by the agencies themselves?

19 What Sources of Financing Work for Avionics? 1.Equity 2.Bonds 3.Lease Financing 4.Vendor Financing 5.Public Subsidy (e.g. grants, research funding) 6.Debt (private sector) 7.Debt (public sector): e.g. World Bank, European Investment Bank, U.S. Ex-Im Bank

20 Infrastructure Bank? Most US airlines' reluctance to spend on equipage has cast doubt on how fast and effectively NextGen can be deployed President Obamas Infrastructure Bank -- part of the $50 billion spending plan -- would leverage private and state and local capital to invest in projects that are most critical to our economic progress. US DOT Secretary LaHood: "there is an interest" at high levels of the administration in using federal money to equip aircraft with NextGen technology But no specific pledge on aircraft equipage -- funds invested as part of the infrastructure plan "will help both the FAA and airlines to install new technologies."

21 21 Thank you


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