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Aircraft Financing Market Update

Thursday, September 17, 2009

After the high levels of activity at EAA's AirVenture Oshkosh in July, activity has continued to strengthen in the marketplace. AirFleet participated at Flying's Parade of Planes in Lawrenceville, Georgia (www.paradeofplanes.com) on August 12-15, and a continuation of high quality activity seems to have followed.

One of the top online sources of aircraft listed for sale, www.Controller.com reflects a slight but continuing decrease in available aircraft (inventory), now down 6% from the high-point in mid-April 2009. UBS Bank confirms this as reported in their August Business Jet Monthly, that used aircraft inventories have finally started to dip lower. While it's a very small dip - we're looking for any evidence that the trend is reversing.

Working in our favor; the 3rd Quarter tax incentive which expires on September 30th. The 3rd Quarter is often an excellent time for an aircraft purchase, as a buyer can write-off 20% of the purchase with only 3 months' expense remaining in the calendar year (for closings on September 30). But in addition to this base tax incentive, the stimulus program is offering another 50% bonus in depreciation in the first year. This is a real incentive to new aircraft buyers, and should stimulate strong qualified activity through the end of the 3rd Quarter.

The aircraft lending market, while having seen some changes in the past year, remains strong in support of qualified buyers. To catch you up, a couple of the changes in the aircraft lending market are outlined below:

1. You may need to search harder to find an aircraft lender. Through August 2009, 14 nationwide aircraft lenders have either ceased supporting aircraft financing or have restricted capacity. However, Google is your friend - a quick Google search will display those still active (and the sponsored searches show who's spending advertising dollars in support of the aircraft lending market).

2. Down-payments have for the most part increased. In most cases, the minimum down-payment has increased from 10% to 15% for private-use aircraft, and commercial use (i.e. leaseback or charter aircraft) terms start with 20% down. 10% down terms may still be available for small loans, but may also have additional stipulations such that the bank is only underwriting the highest credits with these terms. However, if an underwriter perceives risk with the credit package, one of the best ways to overcome any deficiencies is to increase the down-payment. If a company had poor financial performance in 2008, but has strong credit and net worth and can verify 2008 was a blip, it may need to consider a higher down-payment for their aircraft purchase (i.e. 30-35%).

3. Underwriting time. In recent years, it was common to expect a decision in less than a day on loans up to $1MM. However, with the extra attention to detail in today's market, underwriting is taking 1-2 business days - still much faster than financing a home. For larger loans, the rule of thumb of 3-5 business days applies up to about $2MM, after which it may take 7-10 business days for larger ticket financing.

4. Underwriting documentation. In today's environment, aircraft loans require full documentation (i.e. tax returns, bank statements). Most aircraft loans are cash-flow driven, so traditionally the finance companies have requested 2-3 years Federal Tax returns and/ or Audited Financial Statements. However, in 2009 "Cash is King". You should be prepared to provide verification (i.e. bank statements) of any cash or marketable securities (i.e. public stocks) that you list on your Personal Financial Statement. While standards for cash flow analysis have not changed in 2009, banks are looking much more closely at personal and corporate liquidity.

5. Rates remain exceptional. Rates often vary depending on the size of the loan, down-payment, type of aircraft, and intended utilization of the aircraft, but an individual or company buying a new aircraft in September 2009 may expect an interest rate between 6.3% and 7% (with exceptions for higher or lower rates).

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