Aviation Finance Facts Part 2:
Understanding Aviation Lenders
There really is a method to the madness.
At Arc & Co., our primary function is to help our clients to structure and close aviation finance deals that work for them. A key part of facilitating the right structure is helping our clients understand and navigate the motivations of the lender on the other side of the table. When it comes to aviation finance, the main motivation for the lender on the other side of the table can be summed up as follows:
A lender’s primary concern is keeping his or her team’s licence to operate.
The funding that a lender uses to complete deals is not free. Every lender has to meet the expectations of the providers of that funding: it might be that they have to compete internally with other business units of their firm for access to their institution’s balance sheet; or externally for third-party investor funding; or a combination. The key point is that every lender needs to win, and continuously justify, the funding – and the mandate – to deploy against aviation assets. To do this, a lender must demonstrate to his or her funders an ability to put deals on the books that generate an attractive return, while keeping risk manageable. It is a critical balancing act: too risky, and the lender will lose credibility with the funders when things go wrong. Too risk-averse, and the lender will not be able to generate sufficient returns to compete.
What this means for clients seeking finance is this:
1. Your financing proposition needs to justify the lender’s time and effort
Lenders constantly weigh up the opportunity cost of their time: every minute that they spend on one deal is a minute that they cannot spend on another. Furthermore, there is a certain amount of effort that is required no matter how small the deal is. The reason that lenders will often dismiss outright an opportunity below a certain size, or in certain jurisdictions, is because they judge the time and effort involved is insufficient to justify the potential risk and/or return. This is where Arc & Co. can help: our knowledge, based on longstanding relationships across the industry, can help target your proposition to those lenders who are most likely to be interested, avoiding a waste of everyone’s time.
2. The earlier you can demonstrate commitment to and seriousness about a deal, the better
It follows then that lenders will strongly prefer potential clients that can demonstrate upfront that they have already done their homework and are ready to commit: they have identified the aircraft, they have placed a deposit, they have their financial documents ready to go, etc. Regardless of where you are in the process, Arc & Co. can assist you in assessing, firming and presenting your proposition so as to attract the most interest.
3. You must allow the lender to clearly evaluate your proposition’s risk
Each lender will have certain red lines; certain must-haves around their ability to properly assess and manage the risk of a deal. It is the reason that lenders require financial disclosure, proof of identity, details of a client’s source of wealth, and a full review of the asset: in order to satisfy themselves that they have a clear understanding of, and can manage, any credit and asset risk. Arc & Co. can act as your trusted partner, helping to ensure that you provide the right amount of information to facilitate the sensitive but necessary conversations around your deal.
To discuss your aviation finance needs, please contact Gary Crichlow.