Essay The Bank Liquidity Crisis and Aircraft Finance

4217 Words Apr 1st, 2011 17 Pages
The Bank Liquidity Crisis and Aircraft Finance: A Sector Review
By Ronald Scheinberg
Fewer lenders, higher pricing, yield protection among results of the worldwide liquidity crisis. The liquidity crisis in world financial markets precipitated in fall 2008 by, among other things, the collapse of Lehman Brothers, has continued unabated. This crisis has affected the extension of bank credit to every industry, with banks reluctant to make loans so as to preserve their capital, especially in anticipation of deteriorating performance of existing customers/borrowers in the face of the worldwide recession. One industrial sector particularly hard hit by the crisis is the financing and refinancing of commercial aircraft for both airlines and
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Boeing’s finance arm, Boeing Capital, has funded transactions over the past three years in amounts between $25 million and $250 million, in contrast to the $2.97 billion and $2.82 billion it financed in 2001 and 2002, respectively, in the aftermath of 9/11.
Accordingly, unless the capital markets revive, the acquirers of aircraft are looking primarily to the bank market to supply the necessary fi nancing for their purchases. Banks are already a major source of financing. In 2008, for example, commercial banks provided about 40 percent of all aircraft financing. The bank financing market in the aircraft finance sector has been dominated by European banks, primarily French, German, English and Dutch banks. U.S. banks hardly participate (other than in arrang¬ing or capital markets capacities), and Japanese banks largely exited this sector in the late 1990s.
There are two very distinct bank markets in aircraft finance. The first are traditional asset-based lenders (asset banks). While there is some credit component to financings in this sector, the primary focus of these banks is on the assets, that is, the aircraft and engines that they are financing (and which serve as collateral security). The second are banks (ECA banks) that provide financing based on the support of export credit agencies (ECAs). The ECAs of the United

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