Anatomy of Aircraft Financing

Transcription

1 Anatomy of Aircraft Financing Benoit Debains SVP Finance Airbus Emmanuel Feld Global Head of Aerospace and Shipping Finance Credit Agricole Indosuez Jean-francois Ginies Partner Ernst & Young Global Investors Forum Munich 28 th /29 th April Agenda I. Sales Financing Environment II. Principles of Aircraft Financing III. Avion Capital IV. Contract Terms and Conditions V. Airbus Customer Financing Policy VI. Impact on Financial Statements 2 1

2 Sales Financing Environment Annual commercial deliveries demand from Airbus, Boeing, Embraer, and Bombardier estimated approximatley at bn USD. Operating Lessors Approx 25% Approx 20-30% Approx 50% Global Secured Financing Secured Bonds Export Credit Agencies Aircraft/Engine Manufacturers Self financed by airline cash flows Commercial Banks 3 Sales Financing Environment Global aircraft financing funds about one half of all new deliveries. Major sources are: Export Credit Agencies: Gov t backed institution which provide credit garantees in support of exports, i.e. Hermes, Coface, ECGD, EXIM Bank; this represents about 5 Bio $ bn USD per annum. Commercial Banks: Providing secured/unsecured loans. Secured Bonds: Market debt instruments, freely traded and liquid, benefiting from the underlying asset as collateral. Aircraft / Engine manufacturers: Atypical. In 2002, from a total of 20 bn Airbus aircraft revenues, only 600 mio net additions of finance exposure. 4 2

3 Sales Financing Environment Market trends... Operating Leases: Market emerged in last 15 years. Major players: ILFC, GECAS, CIT,... Benefits to the customer include: 100% Financing Smaller security deposits Off-Balance sheet treatment EETC & Aircraft Portfolio Securitization: Liquidity reduces cost Benefits of risk tranching allow: Access to large investor base Long maturities and mostly fleet flexibility 5 Principles of aircraft financing Asset value is important as A source of protection for the lender: Secured Financing 100 A source of upside to the operating lessor / owner High Value The economic life of an asset is from years. Low Value Age 6 3

4 Principles of aircraft financing In a secured loan The borrower is the economic owner, while the asset serves as security Examples of secured financing Senior: first claim on the asset Mezzanine/junior : intermediary / last claim on the asset EETC & Aircraft Portfolio Securitization: Tranches of debt with different rights to claims (US bond market) Finance lease : Lessee acquires title at the end of the lease through exercise of bargain Purchase Option. Allows better & cheaper financing conditions than airline credit rating would otherwise permit - Collateral security enhances credit worthiness. 7 Loan to value : senior loan Risk ECA loan amortisation profile most probable asset value Age 8 4

5 Loan to value : senior & junior loans Junior 85 Senior Age 9 Loan to value : senior & junior loans Balloon Age 10 5

6 Loan to value : senior & junior loans Age 11 Loan to value : extended terms for senior & junior loans Age 12 6

7 Loan to value : rated tranches BB A AA Age 13 Principles of aircraft leasing In an operating lease The lessor retains risks and rewards of ownership of the aircraft. The lessee receives usage of the aircraft over a finite period. The purchase option at the end of the lease is at market value Tax leases allow the lessor To accelerate the depreciation of the asset for tax deduction purposes Leveraged leases allow the lessor To finance part of the acquisition price with non-recourse debt. 14 7

8 Lease Purchase Option Age 15 Lease and value guarantee value guarantee Age 16 8

9 Operating Lease 100 Lease Rentals Lessor s Book Value Age 17 Avion Capital A new source of available financing and services to Airbus customers Airbus 25 % CAI CIT KFW 25 % 25 % 25 % Avion Capital SPC 1 a/c 1&2 SPC 2 a/c 3 Lessee 1 Lessee 2 Syndicate 1 Syndicate

10 Avion Capital CEO: Colin Thaine 30 years aviation experience Former head of aircraft finance of Denton Wilde Sapte Beyond its underwriting ability, Avion Capital pools diverse resources Portfolio Management Syndication Paying Agency Security Trust Back Office Remarketing Negotiation 19 Contract Terms and Conditions Prerequisite analysis: Airline creditworthiness, track record and competitive position, & state of market for financed aircraft! Loan to value ratio - the lower, the safer: Depending on the credit worthiness of the airline, senior lenders finance 70% to 90% of price. Junior lenders trade higher yield for lesser claim against the asset. Maturity: - the shorter, the safer: Aircraft with an economic life span of 20 or more years command 10 to 15 years of financing. Payout: Full payout - amortization to zero required for the longer maturities. However, a balloon payment is permissible for shorter maturities

11 Contract Terms and Conditions Security package: Ownership title of the aircraft is best security widely enforceable packaged with assignement of insurance proceeds, pledged deposits, etc.; mortgage acceptable alternative in certain jurisdictions. Assignment of revenues? Impractical - Because revenue for a specific aircraft within a fleet hard to isolate. Maintenance: Aircraft maintenance key to safety, asset value, etc. Lenders require proper maintenance on a regular schedule, and may levy monthly maintenance reserves for upcoming costs. Installments - the more frequent, the safer: Semi-annual or quarterly. Monthly installments allow monitoring of weaker credits. 21 Contract Terms and Conditions Payment denomination: USD, in line with second hand aircraft market. Only most creditworthy airlines where collateral asset value is less important may finance in other currencies matching their revenues. Fixed or floating rates: Unless underwriten by export credit agencies, fixed rate financing for 10 to 15 years available only to most creditworthy airlines, due to potential funding breakage costs. Risks: All operating risks and costs associated with Aircraft (operation, maintenance, insurance, etc.) to be borne by airline. Yield: Depending on airline rating; senior secured loan ~0.75% to 1.75%; junior secured loans may range from 3% to 6% 22 11

12 Airbus Customer Financing principles Customer financing issues are critical for the manufacturer, they require close involvement But they cannot be pursued as a business 23 Ability to offer financing is critical when few third parties can provide solutions To win business : Customers want guaranteed availability of financing guaranteed structure/maturity lowest monthly cash cost To deliver aircraft : crisis management tool Asian crisis /11 To protect customer base NWA LBO US Airways chap.11 Because financing is arranged at delivery not at contract signature: commitment period too long. When temporary market shortage needs to be bridged

13 Customer financing cannot be a business Financing compounds manufacturer s exposure to market cycle Financing raises conflicts of interest Internal goals: finance vs. commercial With other customers (leasing companies) With economic targets (sales recognition) 25 Customer financing cannot be a business Airbus s attitude: Customer financing in support of core activity if, when, and only as long as necessary Provision policy: Internal model, external benchmarking Factored in contract profitabilty analysis Priority is liquidity of exposure: Hold and sell policy No specific funding attached, only corporate funding Agreed contractual rights Sell down whenever possible 26 13

14 Risk management Matching sales to production is a key process to identify and manage pre-delivery risks Management of exposure follows specific internal approval process with shareholders 27 Airbus Risk Pricing Model (ARPM) Used for : Decision making on issue of Sales Finance, buy back, operating lease or guarantees are envisaged. Provisions and impact on Margin calculations (impact of Sales financing) Validated by experience, reality, benchmarks : Contract Review Sell-Downs Appraiser Data (RV model) In line with financial industry practice and EADS requirements : ARPM regularly checked against other models (banks, engine manufacturers, ) ARPM validated against 2001 accounts through audit

15 ARPM Risk assesment and valuation Size: Airbus exposure is equal to the maximum cost on the transaction (outstanding principal of a financing, aircraft value guaranteed, amount paid for a buyback, ) Event: If a customer stops paying (probability of default) or exercises an AVG (asset risk) Calculation: Comparing the Gross Exposure at different points in time with the assumed Realisable Value. The Airbus Risk Pricing Model is based on a probabilistic approach. 29 ARPM Finance lease application The average risk is the difference between Exposure and Realisable Value multiplied by the probability of default US$m Average Risk if airline defaults in Jan-2001 Area of Risk in Jan Gross Exposure covered by average Realisable Value 0.0 Gross Exposure = Principal Outstanding Realisable Value Average 30 15

16 ARPM Operating Lease application Cumulative lease rentals M$ months downtime Aircraft Residual Value (Lease target) 10.0 TV today 0.0 TV at end of lease (AOG) Remarketing Costs Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Date 31 ARPM Asset Value Guarantee (AVG) application Average assumed aircraft Residual Value US$m ± 1 standard deviation 20.0 AVG slice (0 to 41M$) 0.0 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Date 32 16

17 The law of averages : the confidence level Taking the average is not safe enough, you need to know how much you can be wrong 33 Gross Exposure definition + Amounts due by customers post-delivery Used aircraft (operating leases and AOG) Finance leases Loans (senior/ junior) + Guarantees issued US tax leases (NPV of headleases) Others (DG, LOC) Counter guarantees (deposits /LoC) are not subtracted from our definition of exposure

18 Impact on Financial Statements Core principal: When, pursuant to a financing transaction, the risks and rewards of ownership of the related aircraft reside with the customer, the transaction is characterised as a sale giving rise on the balance sheet to either a loan or a financial lease receivable (financial assets). By contrast, where the risks and rewards of ownership remain with EADS, the transaction is not characterised as a sale and accounted for as an operating lease (fixed asset stated at production cost, less accumulated depreciation, the operating margin being deferred over time). 35 Impact on Financial Statements How does finance exposure impact the financial statements Financing exposure as of 31/12/02 Total exposure unadjusted mitigating factors (323) Exposure Exposure adjustm. Provisions balance sheet notes (Mio $) (MioEuro) (Mio Euro) (Mio Euro) Gross Finance Exposure (1.520) Aircraft on Balance sheet (459) (11) / (24) Finance lease (148) 639 (12) / (24) Loans (265) 633 (12) / (24) Others 91 (60) (31) - On Balance sheet financing exposure (903) Head lease financing commitments 864 (597) Guarantees and others 27 (20) Off Balance sheet exposure (net of mitigating factors) 891 (617) (18c) / (24) Estimated transaction value (2.061) Net exposure Provisions (1.520) Residual exposure

19 Impact on Financial Statements Mitigating Factors: Mitigating factors are related to US Tax leases, where EADS is technically exposed to Stipulated losses if the lease is voluntarily ended before its original maturity. As long as EADS is the only decision maker in that field, Stipulated Losses are not to be considered as a component of the gross financial exposure. Adjustments: Distinction between sales transactions (sales-type leases) and transactions without margin recognition (operating leases); Transactions characterized as operating leases (fixed assets included at cost on balance sheet and depreciated) where EADS is only potentially liable for its equity at stake ; 37 Impact on Financial Statements Provisions: When the risk derived from exposure is considered probable, provisions are accounted as write-downs of the related assets (PP&E and financial assets) when the aircraft are accounted for an the balance sheet, or as aircraft financial risk reserves when it is only captured as an off-balance sheet commitment

20 Exposure for Airbus and ATR (50%) categorized in millions, as of year-end 2002 Nature of exposure Loans Operating leases Sub-leases Value guar. Financial leases Guarantees Buy-back Recorded as Fin. assets PPE TOTAL Off-balance TOTAL AVG GRAND Financial Statements note ref on-balance 24 excl. AVG 11 and 24 TOTAL = (i) Net book value reported Book Value before write down of which 100%Airbus of which 50% ATR Gross exposure(ii) (iii) 280 of which 100%Airbus of which 50% ATR Net exposure (iv) Provision in accruals Assets Write-Down (Airbus) Net expo. after provision & write-down (i) Represents the transactions for which AVG exceeds 10% of the ac price, and thus that are reclassified as leased ac (ii) Gross exposure differs from accounting value namely because it represents the net present value of future payments instead of nominal value (off-balance sheet) and it excludes a transaction non-recourse to EADS (operating leases) (iii) This amount represents the average gross exposure per year over (iv) Net expoure is the difference between the gross exposure and the estimated value of aircraft used as collateral 39 Impact on Financial Statements With regards to Asset Value Guarantees ( AVG ), EADS considers that the related exposure does not relate to customers credit risk level, but to the future market value at the first window period. EADS reviews all transactions giving rise to AVG and assesses whether such transactions meet all of the criteria of IAS 17 : Distinction between sales-type leases and operating leases ( 1,709 at cost as of December 31, 2002) ; Net exposure on AVG is reduced to 0 through a 526 million aircraft financial risk reserve

21 Anatomy of Aircraft Financing Back-up Global Investors Forum Munich 28 th /29 th April Exposure vs market share (revenues) % % % market share exposure 42 21