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Asset-backed securitization (ABS) is the financing mechanism that most respondents believe will increase in 2022, as players seek to unlock the value tied to their aircraft and aircraft engines. ABS is a popular choice for EMEA-based respondents, with 91% expecting asset-backed securitization to increase and none expecting it to decrease.
Slightly fewer respondents expect commercial bank lending to increase in 2022. Indeed, 10% of EMEA-based respondents expect it to decrease. With the exception of senior credits, commercial banks have become markedly more cautious about lending to the aviation sector since the start of the pandemic. “Project funding has been withdrawn by banks due to insolvencies that have been reported over the past two years,” notes a managing director of a US-based private equity fund.
91%
respondents based in the EMEA zone
expect an increase in asset-backed securitization
The COVID-related contraction isn’t the only factor making banks think twice about backing aviation. The managing director of an EMEA-based bank says: “Investing in global markets is quite risky. There are many geopolitical tensions between countries and this could affect the earnings of each sector differently. We invest in assets whose we can get out within a shorter time.”
Respondents most likely to report an increase in lending from commercial banks are those based in North America (88%) and Asia-Pacific (87%), where regional banks have a strong track record in financing the aviation in their national markets. Export Credit Agency (ECA) funding, a critical element for the aviation sector in difficult times, is expected to increase by 84% of EMEA-based respondents, but only 68% of those based in North America.
Funding from alternative capital providers (non-bank lenders, including private equity) is expected to increase by 78% of North American respondents and 77% of APAC respondents. Meanwhile, capital markets funding is generally expected to grow less strongly than other sources in 2022. This view is most notable among EMEA-based respondents, of whom only 50% expect capital market financing is growing – the lowest proportion of any region or country. source of funding.
So far, various funding sources have played an important role in helping the aviation sector overcome the COVID-19 crisis.
But what if access to the debt and equity markets shrinks?
So far, various funding sources have played an important role in helping the aviation sector overcome the COVID crisis.
Respondents in EMEA most often say they would be more likely to replace capital market financing with loans from financial institutions (53%), followed by sale-leaseback financing and loans from other capital providers. Private equity is increasingly active in this area. “Investment in new European markets has proven to be favorable, and we want to find new opportunities in 2022,” says a partner at an EMEA-based private equity firm.
Half of APAC respondents also expect them to look to loans from other capital providers, but they also see ECA-backed financing as a likely avenue (47%). The last of these options is the most popular route chosen by the majority of North American respondents (52%). Meanwhile, respondents from EMEA are more likely than respondents from APAC or North America to look to JOLCO (Japanese Operating Rentals with Option to Own) transactions, which give tenants the possibility of purchasing the aircraft during or at the end of the lease.
Unsecured financing is another avenue that most respondents are exploring. Globally, 84% of respondents plan to seek unsecured financing in the next 12-18 months. Digging into the data, respondents in EMEA are the most likely to tap into unsecured finance, with 88% of respondents seeking to seek sources of unsecured finance, with 56% looking to use both unsecured debt guarantees and unsecured equity.
The aviation industry is also increasingly using new types of guarantees to unlock finance. A majority of respondents say they will seek or provide secured funding through mileage programs or slots/gates and routes within the next 12-18 months. Banks and export credit agencies were the most likely to do so, with 100% of respondents in both categories responding that they plan to seek or provide financing using one or both options. Funding secured by slots/gates or routes was particularly popular with private equity funds and other alternative capital providers: 50% planned to engage in this type of funding in the next 12-18 months , and a further 40% planned to engage in secured funding. by mileage schedules and slots/gates or routes.
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Facing headwinds
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