New analysis from Global Jet Capital, a global
provider of financing solutions for corporate aircraft, suggests that between
now and 2025, 146 mid to large private jets worth as much as £5.7 billion could
be needed to the UK.
It estimates that 30 could be bought by
British public companies, 68 by private enterprises and 48 by individuals.
Global Jet Capital, which has over $1bn
(£794m) to lend to clients purchasing mid to heavy business jets, says
the bulk of these purchases will be based on leases and loans. The company
currently finances over 200 business aircraft for clients.
Chief Operating Officer of Global Jet Capital, said: “There is often a
misperception that high net worth individuals and corporations mostly pay in
cash for large private aircraft. Even if the cash resources are at hand, often
the preferred approach is to lease or finance assets of this nature. If a new or
pre-owned aircraft is acquired for cash – costing tens of millions of dollars
–that’s a lot of capital tied up in an asset that typically depreciates.
“Funding the acquisition of a new or pre-owned
jet with cash is 100-percent equity financing – equity capital that the
individual or corporation could use to make other investments. Many conclude
that the investment in their business is probably a better bet than buying into
an asset that will likely lose value each year. The decision that most
businesses reach is that it’s most efficient to use third-party capital to fully
or partially fund the acquisition of the private aircraft they wish to use.”
A brief description of third-party capital
In an operating lease the private aircraft
(new or pre-owned) is purchased by a third-party financial institution (the
lessor) and then leased to the operator (the lessee) for a stated term and rent.
The lease is documented as a contract between lessor and lessee with both
parties having certain obligations to each other, primarily regarding the
operation and care of the aircraft. Title to the aircraft resides with the
lessor, and the lessee enjoys the use of the aircraft as if it were their own.
The alternative to an operating lease is to
retain ownership of the aircraft and use third-party financing for a portion of
the acquisition cost. This could be a senior secured mortgage loan or other
financing structure, such as a finance lease.
In a typical loan structure, the third-party
lender advances between 50% and 85% of the aircraft value to the borrower by way
of a secured loan. The difference in advance rate may be a result of the
borrower’s credit status, the age or type of the aircraft, or other factors. The
security interest is typically a mortgage interest in the aircraft, giving the
lender a first-priority security interest in the aircraft. This security
interest is designed to offer the lender protection in the event of a default by
borrower. Proceeds from liquidating the aircraft after a default are intended to
repay the aircraft lender ahead of other creditors. Other loans may be
available, particularly for individuals that have a substantial private banking
relationship with a lender. In such instances the underwriting of the loan may
focus as much on the financial assets held by the individual as the aircraft in
determining the nature of the financing.
Title to the aircraft typically remains with
the borrower in the secured-loan structure. The loan is usually repaid over a
multi-year period to a balloon amount (a lump sum payment at the end of the loan
repayment schedule). The loan, including the balloon payment at the end, is
usually recourse to the borrower, meaning any deficiency the lender incurs (post
default and sale of the aircraft) will still be owed by the borrower. In certain
non-recourse or limited-recourse loans, the borrower will have fewer obligations
of this nature, but typically at a higher rate of interest.
An alternative to the senior secured loan is
the finance lease. Unlike an operating lease, the lessee does not return the
aircraft to the lessor at lease expiry. In a finance lease, the operator makes
scheduled lease payments along with a final balloon payment at the end of the
multi- ear finance lease term. When the final payment is made, title to the
aircraft (which had been held by the lessor) will transfer to the borrower. At
this point in time the aircraft is fully owned by the lessee and there are no
further financial obligations to lessor.
Dave Labrozzi said: “In either the buy or
lease scenario, the operator will need to work with a third-party financial
institution to enter into a lease or loan agreement. This multi-week process
will afford the provider of third-party capital a chance to review the aircraft
collateral and assess the credit profile of the lessee/borrower. The lease or
debt rate offered by the financial institution will reflect the prospects for
both the borrower/lessee, as well as the aircraft. Jurisdiction, aircraft age
and type, the aircraft manager (if any), and proposed term of the financing or
lease will all be considered as the financial institution makes its leasing or
lending indication to the client.”
Global Jet Capital launched in 2014 and is
capitalized by three global investment firms – GSO Capital Partners, a
Blackstone company in partnership with Franklin Square Capital Partners*; The
Carlyle Group; and AE Industrial Partners. In January 2016 Global Jet Capital
completed the purchase of GE’s corporate aircraft lease and loan book in the
The company’s current management team and
executive committee is composed of leaders from business jet manufacturers,
maintenance and service providers and leading financial institutions who have
served the private aircraft industry for a combined 200-plus years and have
completed over 3,500 aircraft transactions.
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