New banking rules could spell problems for aircraft leasing

Tough new banking rules could spell problems for the Republic’s aircraft leasing industry which generates more than €20 billion worth of transactions every year.

Multinational ratings agency Fitch, which ranks businesses' ability to repay debts, says that proposed Basel IV reforms could increase the amount of cash banks would have to provide against the risk of an airline defaulting on its payments to aircraft lessors.

Such a move would make borrowing from banks to buy aircraft destined to be leased more expensive, and potentially reduce the number of institutions willing to lend money for this purpose, sources say.

The Republic is a key centre for aircraft leasing, with big players such as Gecas, SMBC and Avolon based in Dublin and Shannon. Basel IV's proposed changes, which would apply to assets such as commercial airliners and ships, could have an impact on their activities.

One source familiar with the Irish industry said that the change could mean that companies could have to seek some funds from the capital markets, that is insurers, life companies, investment firms, rather than banks.

“As long as you have the capital markets, then everything is fine, but if you were to have a situation like the crisis in 2008 where capital markets stopped functioning, then you could have a problem,” he said.

Bad news

Ryanair’s former head of finance

Howard Millar

described Basel IV as “very bad news” for the leasing industry. “Banks are going to need to have so much more set aside to cover their risk assets that it is going to be very expensive for them to lend to aircraft lessors.”

Mr Millar recently joined forces with finance group Stellwagen to establish an alternative to leasing. His company will use a system similar to mortgages on homes and commercial property. It will loan the money to the airlines to buy their craft and secure the debt against the individual planes until it is paid off.

He pointed out that recent changes in the EU and US have also closed off export credit finance, another avenue for funding aircraft, limiting the choice available to leasing companies and airlines.

While he anticipated the Basel IV changes, Mr Millar pointed out that aircraft have proved to be one of the safest types of assets against which debt can be secured. A recent report by US-based Kroll Bond Rating Agency, show s that over the last 20 years lenders lost just 0.1 per cent to 0.3 per cent of debts secured against aircraft. This was far lower than the rate at which airlines were bankrupted over the same period.

Own money

Aircraft lessors typically borrow 75 per cent of the cost of the aircraft that they buy and use their own money to cover the remaining 25 per cent. They then use the rent paid by airlines to repay the debt to their banks.

The debt is secured against the aircraft itself, and the lessors have the right to repossess aircraft where airlines default on their rent. The Republic is a signatory to international treaties which allow these companies to enforce their rights across borders.

Banks are expected to provide about $34 billion (€30bn) of the $127 billion (€115bn) that buyers are set to spend on new aircraft this year, and put up a similar amount in 2015 when manufacturers sold $122 billion (€111bn) worth of new aircraft. Much of this was loaned to lessors, which then supplied the craft to the airlines.

Around 40 per cent of the world’s aircraft are paid for in this way rather than being sold directly to the carriers. The Republic’s industry finances and leases craft to airlines around the world.