Will COVID-19 Signal a Return for Airlines to Traditional Sources of Credit?
02 June 2020
The COVID-19 pandemic has and will continue to have a massive impact on the aviation industry, from aircraft manufacturers to airlines, aircraft and engine lessor to airports and regulatory and supervisory bodies.
The list of challenges facing us is readily apparent and already well publicised. Commercial debt, unsecured debt and other investor funding is likely to be impacted and less readily available to aviation industry participants given the uncertainty surrounding passenger traffic for the remainder of 2020. The airlines are the oxygen that gives this industry life as the buyers or lessees of aircraft manufactured throughout the world. Airlines seeking to manage their fleets with phased retirements, renewals and replacements; and possible diversification in aircraft type may have limited leasing and financing options and sources of funding available to them in order to sustain their business from the perspective of working capital and capital expenditure.
Export credit agencies (ECAs) as governmental or quasi-governmental bodies provide necessary support for the export of goods, including aircraft, aircraft parts and aircraft engines manufactured in their home country. The ECAs provide support through a variety of means including direct lending, guarantees and insurance products.
The availability of ECA financing products is important to support a global workforce involved in the aviation sector from manufacturers of aircraft, aircraft parts and engine production as well as airlines and airport operation. The question now is will ECA supported credit be available and accessible post Covid-19 with so many competing industries seeking such support?
ECA supported financing – current issues
For airlines who currently have the benefit of ECA supported financing, their position as the lenders should not be materially different from other funders. Lenders are seeking information on cashflow, scheduling, load factors, operational restrictions and airlines are requesting payment moratoriums, holidays and deferrals and other amendments.
Lenders and borrowers who have participated in ECA-backed loans and other products, will have to review and take into account the particular terms and conditions of their funding arrangements and supports. For ECA supported loans, the lenders must carefully review and assess the terms of their credit guarantee or insurance and make a commitment to comply with those terms. Any and all actions against defaulting operators, including revisions and restructuring, is likely to be effectively controlled or at a minimum closely monitored by the relevant ECAs. Lenders will be anxious to adhere to all ECA terms to ensure efficacy of the guarantee and insurance arrangements.
The ECAs supporting the aviation industry have a wealth of knowledge and experience amongst their teams. This is due to the fact that they operate throughout the world and in all economic environments. This knowledge bank should ultimately assist the lenders in addressing the challenges and difficulties that are imminent for all industry participants.
Unfortunately ECAs, just like other lenders, will encounter difficulties in repossessing aircraft, following which they will undoubtedly face difficulties in attempting remarket assets for sale in a depressed market not operating to its capacity.
The future of ECA supported financing
In the past, ECA supported credit was one in a diverse pool of financing options available to airlines and lessors. Post COVID-19, access and availability to this funding will take on renewed importance.
In recent years, there has been a decline in ECA supported aircraft financings. There are many reasons for this, including issues internal to the manufacturers, as well as a competitive market and availability of investor funds at a low cost to airlines and lessors. Pre 2020 the aviation sector benefitted from high levels of liquidity from commercial debt and investor appetite for yield via capital markets. This is reflected in the percentage of ECA supported aircraft financings which were in the region of 30% to 40% of all deliveries between 2009 and 2012. These figures have dropped to as low as 5% in more recent times.
Some airlines and lessors may continue to have access to ECA supported credit based on grandfather provisions and where prudent treasury officers have maintained diversified funding base. We will be interested to see whether there will be increased volume of activity during 2020 particularly as manufacturer production has effectively ceased from mid-March but expected to resume albeit in a limited manner in the Summer of 2020.
Given the uncertainty and risk outlook in the aviation sector, the non-traditional sources of funding may not remain in this market and are a ‘flight risk’. This may mean that the aviation industry will have to revisit and reapply to all available and diversified credit sources. We anticipate that the ECAs will increase activity in all areas of export trade including support for the aviation industry which is a core part of the vital transport infrastructure to ensure and restore connectivity of people and businesses on a global basis.
For more information on successfully sourcing credit for your contemplated transactions, contact a member of our Aviation & International Asset Finance team.