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Financing a Business Jet in Today’s Volatile Market

Like many others in the private aviation field, bank officials had cautious expectations for 2022. After all, the hot business jet market had to cool off at some point. Yet, as of this writing, supply-chain problems, various economic woes have all failed to halt the ravenous appetite for acquiring aircraft. 

The increase in demand vis-a-vis supply lately appears to have resulted more from the pandemic than from the tax benefits of bonus depreciation. “We continue to see strong interest among high-net-worth clients seeking to buy aircraft and avoid the airlines,” says Peter Bullen at Key Equipment Finance. Jet prices have increased simply because the number of people wanting to own them, charter them, and purchase shares in them has dramatically increased.

Business jet financiers are secured lenders that view the aircraft as loan collateral. Unlike houses, which in good neighborhoods have steadily appreciated over decades and indeed centuries, aircraft are, ineluctably, wasting assets. Over time, their technology becomes outdated, they wear out, and their value declines accordingly. They reach a point where virtually no one wants to buy them for transportation and the most they are good for is to be sold for parts. 

Historically, the value of business jets has been a function of what buyers are willing to pay for them and how much sellers are willing to sell them for. In a normal market, aircraft lenders can make reasonably safe estimates and assumptions regarding the value of their collateral and how fast it is likely to decline, but nothing about values seems safe right now. 

Instead of going down, jet prices have been rising. Lenders all have stories about being asked to finance the purchase of an aircraft at a price that is 20 or 30 percent higher than it was a short time ago. Can a jet really be worth that much more than it was last year? And if so, how much of that value can it hold onto and for how long? As Keith Hayes, senior vice president and national sales manager for PNC Aviation Finance, remarked, “One of the biggest jet financing questions today is: What will the value of the jet be when the loan matures?” 

Lenders have traditionally relied on professional appraisals of preowned aircraft they are asked to finance, but appraisals are generally based on actual transactions. If prices in these transactions are overblown, or if there’s a danger that inflation, a recession, or other economic calamities will cause the value of business jet collateral to plunge, the aircraft could easily be worth less than the outstanding principal amount when the loan comes due. This is not only a problem for the bank; it puts the borrower in a difficult spot because it won’t be able to pay off the loan by just selling the aircraft. 


Aircraft lenders have various strategies for dealing with this situation. Some have pulled back somewhat from assuming that purchase prices agreed to by buyers and sellers reflect actual values. One banker I spoke with identified three levels of value: the pre-pandemic antiquated value (too low), the prices at which jets are currently selling (too high), and the value of business jets in a “low inventory” market where demand exceeds supply (a middle ground). He suggested that his bank is often basing its lending decisions on the middle ground, which recognizes legitimate “low inventory” reasons for higher values without assuming that a jet must be worth what the client is paying for it. Thus, if you pay $20 million for the aircraft, the bank might lend 90 percent of, say, $16 million, if it thinks that represents the “low inventory” market value.

 Another option is for the bank to adjust advance rates and require a larger downpayment, thereby reducing the loan amount. Advance rates of only 75 or 80 percent of the purchase price are not unusual today. The lender may also want a shorter amortization schedule (10 years isn’t uncommon now), thereby causing the principal to be paid back more quickly. (But not too quickly; lenders continue to seek prepayment penalties for the first three or four years of the loan term, typically five to seven years these days). 

Note that advance rates and amortization are connected: the lower the advance rate, the longer the amortization schedule banks can tolerate. For buyers who are flexible regarding advance rates, PNC still offers asset-based jet financing. Keith Hayes reports that a large percentage of PNC’s jet financings in 2022 still involve non- or limited-recourse loans with no financial disclosure.

Aircraft loan agreements also often have loan-to-value covenants that apply periodically, and in the current market, this could be an annual event for some banks. The covenant can require that if the aircraft’s value falls below what the covenant requires, the borrower is obligated to provide additional collateral or pay down the loan principal until the covenant is satisfied. Needless to say, this is not a right that banks look forward to enforcing, and at least one bank told me it is no longer using loan-to-value covenants on aircraft financings.

Supplemental financing is also a possibility. One bank I spoke to has provided separate financing for the gap between the (presumably inflated) actual purchase price and the (more realistic) price the institution was willing to finance. The gap financing would likely have a short amortization fuse—a couple of years, say, allowing borrower and lender to revisit the situation when the gap loan comes due. Finally, for especially creditworthy borrowers and for banks focused on credit rather than collateral, the lender can simply rely on the borrower’s ability to pay and not worry that the asset may go under water. 


Of course, if the borrower fails to prepay an aircraft loan, the lender has the option of having recourse to the collateral. Thus, another concern for lenders in the current market is the condition of the aircraft. Traditionally, a retail jet purchase included a comprehensive prebuy inspection at a manufacturer or manufacturer-authorized service center—a Level III or IV Prepurchase Evaluation at Bombardier or a standard or premium-package Aircraft Records and Condition Survey at Gulfstream, for example. 

In the current market, however, many buyers have agreed to cut back on the prebuy, often drastically, or to forgo a prebuy altogether. This may be acceptable to the purchaser, but it is unlikely to be acceptable to the bank. As several bankers mentioned, dispensing with a prebuy is unacceptable. A lender may not require the most comprehensive prebuy imaginable, but for most banks, some reasonable due diligence on the aircraft is a must. 

Buyers testing the waters with their bank before cutting a deal on an aircraft should understand its expectations in this regard. Where closing quickly is important, some banks have also been open to permitting prebuys to occur after closing, especially if there is a purchase price holdback to cover the cure of discrepancies. 

The need for a prebuy disappears when you’re purchasing a factory-new aircraft from the manufacturer, though of course, you should still conduct a delivery inspection. But like sellers of preowned aircraft, business jet makers have been affected by the strong demand; prices have gone up and delivery dates have been pushed out. You will often have to wait two to three years to take delivery of an aircraft that is completed to your requirements.


This year, inflation has been a source of worry for both aircraft buyers and banks as it steadily drives up interest rates and shows no sign of stopping. Here in the U.S., LIBOR has generally been replaced by SOFR (secured overnight financing rate), an improved published benchmark based on actual transactions, as well as other indexes like BSBY. SOFR has risen from about five basis points at the end of 2021 to close to 150 basis points as of this writing, putting floating rates in the 3 percent range. Fixed rates, on the other hand, are currently in the 4 or 5 percent range. Accordingly, whereas almost all aircraft buyers chose floating rates last year, as Ford von Weise, head of aircraft finance at Citi Private Bank notes, fewer jet buyers are doing so today. 

The continued availability of 100 percent bonus depreciation still motivates business jet buyers. However, you can take depreciation for tax purposes only on an aircraft you own, which rules out an aircraft lease if depreciation is important to you. However, the bank or leasing company that acts as an aircraft lessor can generally use the tax depreciation (including bonus depreciation) on most U.S. aircraft in its leasing business and can take this into account in setting lease financing costs. This also saves the lessee from having to worry about satisfying the requirements for tax depreciation, in the first year and going forward.

In this market, leases offer another advantage to the lessee: the opportunity to walk away from the aircraft when the lease terminates. If the value of your leased Falcon 7X plunges before your lease ends, that won’t be your problem. Banks are still haunted by the 2009 recession, which caused a dramatic drop in aircraft prices, leaving many bank lessors with overvalued business jets. That could happen again soon, which is why lease rate factors are reportedly up 10 to 15 percent this year. As a result, leases may be more expensive for the lessee, but they still pass the residual value risk on to the lessor.

An issue many lessees have with an aircraft lease is getting out of it. Aircraft financed by loans can be sold and the loan paid off at any time, though there are usually penalties for doing so in the first few years. A lease may have one or two early-buyout options, and many can be canceled pursuant to monthly termination values on a schedule to the lease, which would typically not commence until three years after the loan begins. However, termination values aren’t exactly designed to be good deals for the lessee. Still, owning a business jet is unlikely to be the best investment a business jet owner ever makes, so it’s a good idea for most buyers to consider letting the bank put up the cash so they can invest their own money elsewhere.


Lenders do report initial signs that the business jet market is changing. Steve Day at Global Jet Capital, for example, is seeing corporate clients taking a more cautious stance in the face of high jet prices and seeking flexible interim solutions to their short-term planning challenges. Jim Crowley at BciCapital (City National Bank of Florida) is also witnessing price corrections, generally model-specific, and a slowing down of the jet acquisition process. A saner market may be in the offing.

Given the complex situation today, buyers seeking to finance a business jet purchase should reach out to banks they have a relationship with, but obtain additional proposals as well. They should also seek professional acquisition assistance to help them buy the right aircraft at the best price.


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