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Recent news and events

The market continues to be relatively flat although there is other activity taking place.  Buyers are moving forward albeit cautiously in the U.S. however foreign buyers do not appear to have these same reservations.  When looking at several of the recent press releases from aircraft manufacturers, many new aircraft are being exported.  This is not really news until you couple this information with what other brokers and dealers are seeing.  It appears that even used aircraft are leaving the U.S. to satisfy the needs of foreign growth in emerging aircraft markets such as Brazil, China and Russia and this activity coupled with other observations could have an impact on aircraft financing.

A recent article published by the Cessna Pilot's Association involved several well known aircraft financing companies and indicates that banks who have been financing in the past are seeing their activity remaining stable or on the decline.  Part of this has to do with the reluctance of U.S. buyers but it also has to do with the bank's ability to finance outside of the U.S. and their current financing policies.  There are a couple of interesting statements that caught my attention.

One observation by the writer was that bank policy appears similar to the policies of 1995 regarding the ability to obtain financing along with the terms and conditions of the loan itself.  In 1995 this may have been a reasonably good strategy but when thinking back to 1995 any advantages the banks had at that time no longer exist.  Consider that the internet was just being understood as a marketing tool and social networking was nonexistant.  Blogs had not even been thought of and many banks still relied on printed ads, their reputation or word of mouth to generate business.  The marketing landscape today is VERY different and it continues to evolve.  As an example, in today's marketplace any business that does not have a website is not viewed as "legitimate" and may as well not even have a telephone.  Of course, social media is an evolving channel to obtain new customers that is still being developed by businesses.  The problem?  Banks still move at glacial speed when it comes to policy changes.  So when the time comes to move back into the 21st century, it may take months or years to accomplish.  That type of delay is a lifetime in today's marketing channel.

The other interesting point indicates that banks continue to use publications as their primary value reference even though these publications have been proven to be unreliable.  One comment from the CPA article was - "There are two valuation documents used by lenders.  The oldest, Aircraft Bluebook tends to provide higher valuations than VRef, the new comer in the game."  The article goes on to say - "The spread between the two publications is troublesome for lenders.  Especially when a seller gets his valuation from the BlueBook and the lender is using VRef."  Given this quote, let's put this perception into perspective.

If both publications are believed to be tracking market value (which they don't), then why would there be ANY significant difference between them?  Other situations have more to do with the way in which the number (not necessarily the aircraft's market value) was derived more than the publication itself.  Key value points may be misrepresented or outdated/limited information may be used.  However with all of the data and analysis from the borrower, why would ANY bank choose to simply gloss over the collateral itself and use an unreliable number in a publication as their primary reference?  One reason may be cost of course but the cost of any errors or the reliability of the published data does not appear to factor into use of the publications whatsoever.  Furthermore, the cost of a single error can be measured in years of subscription costs.

Here's the point.  Analysts believe that 2012 will be a year of recovery.  The quality and quantity of that recovery is still a mystery but other emerging markets appear to be well underway and these markets are not utilized by many of the current aircraft lenders.  As a result, the availability of "good" aircraft is becoming more and more limited as these aircraft continue to be exported.  Therefore, once the aviation market begins to pick up in the U.S., many lenders will still be using 20th century policies and their ability to adapt to newcomers such as credit unions or banks who want to get into this market, will be slow in coming about - especially in this age of information so the competition for ANY customers will most likely be fierce.  When these organizations do begin lending again, they will continue to use the same unreliable sources they used before the collapse in 2008 even though there are better and more effective solutions available.  Unless a faster and more reliable approach is taken in the aircraft financing industry to address credit policies and collateral management, there should be no expectation for meaningful results - now or in the future.

The hidden problem

Banks may be choosing to ignore a serious problem with their collateral - and in some cases, they may be contributing to the problem unnecessarily!  Avoiding the current market value of aircraft has serious implications now as well as in the future when financing and insuring the aircraft.  In a nutshell, it is a mismanagement of the collateral that is unnecessary.  Banks and bankers operating at the "next level" in their aircraft financing efforts, know that it is a good idea to check their portfolio periodically to understand the how the value of the asset is changing to avoid being exposed due to market changes or unknown impacts to the aircraft itself.  Setting minimum insurance levels too high from outdated or inaccurate information may also force owners to overpay for premiums but it can also impact the bank's collateral in ways they may not have considered. 

This month, I have an article that is submitted by guest contributor - Steve Johns of LL Johns & Associates Insurance (www.lljohns.com).  I have known Steve for some time and trust his opinions and those of his staff.  This particular article came about from a discussion at this year's National Aircraft Finance Association (NAFA) meeting and it focused on the needed to understand the current market value of the bank's collateral in their portfolio for insurance reasons.  Banks or bankers may set a minimum insurance level as part of their policy or simply leave the insurance up to the owner but doing so has an impact on the bank's risk level.  As an insurance broker, Steve sees many situations that can easily be avoided with a little planning in the early stages of financing along with routine checks of the aircraft's market value during the life of the loan - which would be consistent with proper risk management and collateral management.

Aviation Consumer also published a related article geared more toward the piston market.  The concepts are the same but it comes down to a "fix it" or "total it" decision if damage occurs - and the damage event may be related to the aircraft being in the wrong place at the wrong time (think weather related issues here).  Like Steve's article, there is an emphasis on having the aircraft professionally appraised.  The reason is fairly straightforward because an on-site examination of the aircraft and records addresses many questions and doubts about the current market value of the aircraft.  In other words, a certified appraisal is based on an analytical analysis of the aircraft and records and not a published number alone.

The Aviation Consumer article also referenced a recent article about evaluating aircraft which is included and I also included my article (on the same topic also published by Aviation Consumer) for reference as well.

Banks that set minimum insurance requirements are contributing to their own problem if the level is based on unsupported data - and this may also be forcing owners to overpay for premiums.  Owners who are free to select their own insurance levels may find it helpful if they have factual data to use in their decision making instead of an unsupported number.

A Question for the Appraiser

Q:  Is 80% Loan to Value sufficient if liquidation of the asset may be involved? 

A:  The answer really depends on the type of aircraft involved, the liquidation timeframe the bank would require (normally 90 days) and how the bank determined the value of the aircraft to begin with.

If the bank is not using an appraisal report that involved an on-site examination of the aircraft and records, then they are most likely well over the 80% level to begin with.  I say this based on almost 20 years of experience appraising various types of aircraft and I have seen many "head to head" comparisons of the exact same aircraft using an analysis based on third party information (a spec sheet and a publication from a broker, dealer or buyer) versus an appraisal report involving an onsite examination of the same aircraft and its records.  In my experience, there was NEVER an instance where the appraisal report's value came in above the previous analysis and in many cases, the certified appraisal report was substantially less than the original evaluation the bank was using.  Surprisingly, this had less to do with the source data (NAAA market data versus published data) and more to do with discoveries found doing basic research - something that anyone would miss if little or no research was involved in the analysis. 

I will agree with those who suggest that an appraiser is called in when the bank or banker is suspicious of the aircraft, the deal itself, the supporting data or any combination of these and this would skew my observations and experiences.  However, I have to wonder how many of these deals slip by every day wherein no one was suspicious?  I would submit that those who are really successful at bank fraud (and this is really what the bank is facing) are good at avoiding suspicion. 

Bank fraud aside, those who submit evaluations to the bank tend to have a connection to the deal and the aircraft's value tends to be inflated due to all of the positives (mods, avionics, etc.).  However, negatives such as previous repairs from a damage event, missing log books, airframe mods without supporting documentation, miscalculated airframe times, etc. can be missed by any evaluator because only a superficial analysis was completed which in no way involved an examination of the aircraft and records.  The end result can be substantial such that a bank making (what they think) is an 80% loan to value may be actually making a "loan to value" decision that exceeds 100% of the aircraft's market value.  The true discovery of this situation occurs only when liquidation of the asset is involved and a formal appraisal is required.  I continue to be amazed at the number of situations that NEVER involved a formal appraisal of the asset at any point in the process.  When confronted with the question of the "appraisal on file", the banker usually falls back on the position that it was a "good" customer or they looked at his ability to repay the loan.  A position that may now be costing the bank hundreds of thousands of dollars and in extreme cases, millions of dollars - this is no exaggeration!  And, this situation could have been addressed with effective collateral management which would include periodic evaluations.

If the estimated value of the aircraft is low (think about the $50,000 single engine piston aircraft), then most banks can absorb this error.  However, if the aircraft is a more recent year model or a turbine aircraft then the issue becomes more complex due to the level of financing involved, changes in the market over time or negative changes to the aircraft itself, then the bank is less likely prepared for this result.

Timeframe is also a critical issue.  Most piston aircraft sell in about 90 -120 days if priced correctly (in alignment with the current market).  Turbine aircraft can take much longer even if priced correctly because of the current inventory.  If the bank needs to liquidate in a very short timeframe, it can put significant downward pressure on the liquidation value.  Other market factors may certainly become a factor of course but if the average "days on market" for a business jet is 400 and the bank has a need to liquidate in 60 or 90 days, then the bank will find that the 80% LTV is woefully inadequate.

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Key Items to Note

 

Have Questions or need immediate assistance?

 

virtual office phone

 

View Mike  Simmons's profile on LinkedIn  

other information

Call 800-895-1382 for more information or to see how Plane Data, Inc. can help you.