Expert Opinion: Trends in Corporate Jet Financing in Asia: an offshore perspective

CJI Expert
By CJI Expert August 7, 2018 10:10

Expert Opinion: Trends in Corporate Jet Financing in Asia: an offshore perspective

Danielle Roman is a Partner based in the Hong Kong office of Mourant, which advises on the laws of the Cayman Islands, BVI, Jersey and Guernsey. She is an experienced banking and finance specialist and has particular expertise in asset finance, acting for major financial institutions, lessors and investors on the financing and leasing of commercial aircraft, corporate jets and other related assets, including engines and helicopters, in a variety of structures.

In this article Ms. Roman looks at recent trends in financing corporate jets in Asia, as well as where aircraft are being registered offshore.

Introduction

Players in the corporate jet finance industry are consistently trying to predict whether the upcoming 12 months will prove to be a promising year. They scrutinise socio-economic and political conditions and reflect on market activity over previous years to form an opinion about trends and what to expect next.

We have analysed the last 100 corporate jet financings which we have acted on in Asia and the data has revealed some interesting statistics and trends. Lenders will be interested to know whether loan-to-value ratios have changed over the years; operators and OEMs will benefit from understanding which airframe manufactures have been the most popular, and aircraft owners will be keen to know which jurisdictions are most popular for aircraft registration.

A quick health warning on the data: Mourant advises on the laws of the British Virgin Islands (BVI), Cayman Islands, Guernsey and Jersey. Our statistics will, therefore, be somewhat skewed to those transactions which involve one of these jurisdictions.

Airframe Manufacturers

Based on our data over the last 5 years, 37% of corporate jet aircraft acquired were manufactured by Bombardier and another 37% were manufactured by Gulfstream. Dassault came in as the third most popular aircraft manufacturer, followed by Airbus, Boeing and Embraer. While on the face of it Bombardier and Gulfstream appear have to be equally popular in Asia over the last 5 years, the statistics show that financings of Bombardier aircraft fell significantly in 2017, when Gulfstream accounted for over 70% of all Asia acquisitions. The Gulfstream G650 model was particularly popular; its unrivaled speed and distance at that time made it an ideal model to accommodate the increased need for international corporate travel for expanding Asian businesses around the globe.

According to The General Aviation Manufacturer’s Association, Bombardier’s business jet deliveries fell 16.4% in 2017 compared to 2016. The most popular Bombardier models were the Challenger 350 and the Global 5000 and 6000, which are unable to offer the same ultra-long-range travel offered by Gulfstream’s G650, (which continues to set speed records, clocking a Tokyo – New York trip in under 11 hours). Bombardier’s president and CEO, Alain Bellemare, has said that 2018 “will be a pivotal year for Bombardier”, with one of the largest contributors to future growth being the new Global 7000 which is set to enter service later this year. While the G650 has helped make Gulfstream the most profitable private jet manufacturer to date, Bombardier’s plans to ramp up production of its Global 7000 could again challenge the G650’s production and popularity.

In April 2018, in response to the Trump administration’s imposition of tariffs on imported Chinese goods, China announced a 25% tariff on imports of certain US manufactured aircraft, including Boeing and Gulfstream models. The effective date of this tariff is currently unclear and much will depend upon developing geo-politics. Bombardier’s Global 7000 is targeted at the Greater China and Asia Pacific market, so it will be interesting to see what impact the US-China trade war will have on our data and the market in the coming year and beyond. It will also be interesting to see whether the arrival of this model will spur an increase in the number of new aircraft being financed over pre-owned aircraft, as buyers look to finance their purchase of the new Global 7000.

New or Pre-Owned Aircraft

Back in 2012 a much greater number of new rather than pre-owned aircraft were being financed in Asia, largely driven by Chinese ultra-high net worth individuals. Over the last 5 years the statistics suggest an evening-out to show an overall healthy split between new and pre-owned financed aircraft, with 52% being new aircraft and 48% being pre-owned.

In 2017, we saw a particular increase in the number of pre-owned aircraft being financed. According to Asian Sky Group, operators in Greater China added 39 second hand aircraft in 2017 compared with only 19 in 2016. There could be a number of reasons for this: First, following the austerity measures in China, ultra-high net worth individuals purchased less aircraft, though pre-owned aircraft continued to be purchased by charter companies. Second, over-supply in the corporate jet market in Asia has made it difficult for manufacturers of new aircraft to compete on pricing and value for money. Corporate jet manufacturers have recently responded to this by offering substantive discounts to new buyers, enabling them to compete in a market where prices for used planes have also fallen. The market regards the acceptance of pre-owned aircraft in Asia, particularly by Chinese beneficial owners, as a good sign that demand for corporate jets are returning in a maturing market.

Nationality of benificial owner

Unsurprisingly, over a third of beneficial owners were Chinese citizens, with nearly another third from Hong Kong. The remaining third were divided among India, Taiwan, South Korea and South East Asia, including Indonesia, Malaysia and Thailand.

However, over a 5 year period the picture is more complex. In 2012 and 2013, Chinese buyers accounted for 50% of Asia based acquisitions. This dramatically halved to around 25% between 2014 and 2016. The number of Hong Kong beneficial owners also dropped by similar percentages over the same period. The business aviation market was particularly challenging in China during this period, partly due to the Chinese government’s anti-corruption crackdown measures and partly due to fears about China’s economy and a crash in the stock market.

However, 2017 saw a return to positive growth, with a swift increase in the number of beneficial owners in both China and Hong Kong, accounting for around 42% each of all acquisitions. At ABACE in Shanghai April 2018, sentiment about the recovery of China’s business aviation industry was equally positive. Solid economic growth in China has led to a healthy and rational need for business aircraft. The Chinese government also appears to be supportive of the wider aviation industry, building infrastructure to accommodate growth, including 200 new airports and beginning to open up its low altitude space. Optimism remains for China’s continuing growth for the second half of 2018 and into 2019.

The graph below reflects the trends in the nationality of beneficial owners of corporate jet aircraft in Asia over the last 5 years.

Average loan size

A buoyant Asia corporate jet market has enticed a number of private bank and non-institutional lenders in the region to offer financing options for buyers. While some lenders in Asia are willing to provide finance leases, the vast majority of transactions we advise on involve a loan facility. The average loan size on the corporate jet transactions over the 5 year period has grown from around US$20 million to nearly US$34 million. This is reflective of a region in which larger jets have been increasing in popularity.

The loan to value ratio (being the ratio of the loan’s principal balance to the fair market value of the aircraft) has consistently remained between 72% and 78%. To protect the value of the collateral, lenders will typically require that the borrower pays down the loan (or provide further collateral support) if the aircraft value falls below the specified threshold.

Jurisdiction of borrower/lessee

In relation to structuring the acquisition, financing or leasing of corporate jets, the BVI is overwhelmingly the jurisdiction of choice in Asia. BVI incorporated corporate jet borrowers and lessees accounted for 93% of Asia acquisitions. The Cayman Islands accounted for 4%, with Mauritius and Bermuda accounting for 2% each.

The BVI is widely regarded for providing economic, political and legislative stability. Consequently, participants in the corporate jet market have developed a clear understanding and confidence in a tried and tested jurisdiction. Further, the BVI is a tax neutral jurisdiction, and there are no BVI taxes, fees or charges payable in respect of the acquisition and financing of an aircraft. It has a modern and flexible legislative framework based on English corporate and common law principles. The cost of incorporation and on-going corporate administration of a BVI company, as well as BVI legal fees, are extremely competitive when compared against other leading financial centres. For financiers, the BVI is creditor-friendly and offers protection through a register for statutory priority of security. For these reasons, we expect that BVI will continue to be the jurisdiction of choice for corporate jet owner and lessee vehicles in Asia.

Choice of aircraft registry

The jurisdiction in which to register a corporate jet is not necessarily determined by the nationality of the beneficial owner of the aircraft or the country in which the aircraft will be used. There is a wide variety of options from which beneficial owners in Asia can choose when it comes to aircraft registries. However, the data indicates that the Cayman Islands and USA are by far the most popular aircraft registries for Asia beneficial owners over the past 5 years, together accounting for 60% of the market. Other popular registries include the Isle of Man, accounting for 14.5% and to a much lesser degree, San Marino, Luxembourg, Hong Kong and PRC.

There are more corporate jets registered in the United States than anywhere else in the world, so it is not surprising to see a substantial number of N-registered aircraft. The United States FAA is reputable and there is a well-established body of case law regarding the priority and enforceability of security over aircraft, which makes the US an attractive registry for financiers.

The Cayman Islands has long been recognised as a leading jurisdiction for cross-border aircraft financing and aircraft registration. The Civil Aviation Authority of the Cayman Islands (CAACI) is well known for its commitment to high standards of service and responsiveness. The efficient framework within the Cayman Islands for the registration of aircraft and aircraft mortgages, with a longstanding history of effective safety oversight which adheres to international standards of compliance, aircraft maintenance and airworthiness, is underpinned by the jurisdiction’s political stability and its highly developed, flexible, English law-based legal system. The Cape Town Convention was extended to the Cayman Islands in 2015, further reinforcing the Cayman Islands’ commitment to the aviation industry. Statistics for the first half of 2018 indicate that the Cayman Islands registry continues to be a popular choice for corporate jet owners in Asia.

Other trends

The number of financed aircraft has grown year on year, with 2017 being a bumper year. There has also been an increase in the number of loan refinancings in 2017 and the first half of 2018, as existing facilities approach their maturity dates and owners look for better deals in an increasingly competitive financier market. As a result, a number of lending banks, who have historically played only in the commercial aviation space, are now looking to grow their corporate jet financing capabilities. There has also been increased interest from Chinese leasing companies looking to build up their business jet fleet and offer finance lease solutions to customers.

During the last eighteen months we have observed a substantial rise in the number of changes to aircraft operators and/or managers. The growth in the Asia corporate jet market has encouraged new operator and manager entrants who are ambitious and hungry for business. They are offering new and flexible service models for clients, eroding market share from the more traditional fully inclusive fixed service models offered by aircraft management companies. Some popular operators over the last two years include Bellawings, Hong Kong Jet, Deer Jet and Sino Jet.

Our predictions

The Chinese government’s commitment in its 13th Five-Year Plan to developing infrastructure for aviation, as well as to opening up more low-altitude airspace, brings optimism for the future of the corporate jet market in China. Alongside Mainland China, growth should continue in Hong Kong and Taiwan. However, such optimism is tempered by the uncertainly around a US-China trade war. The number of transactions seen from elsewhere in South East Asia such as Malaysia, Indonesia and Singapore do not suggest big growth in these regions over the coming years, but rather a slow and relatively steady climb in fleet numbers.

The Asian Business Aviation Association (ASBAA) has been a powerful advocate for the corporate jet industry in Asia. It has been active in promoting the interests of the business and general aviation industry across the region to government, transport ministries and the media. It has also been proactive in developing talent in the industry through educational courses and internships. As difficulties facing the corporate jet industry in Asia (such as infrastructure and government focus on aviation) are alleviated with help from associations such as ASBAA, there is huge potential for growth in the corporate jet market in Asia.

CJI Expert
By CJI Expert August 7, 2018 10:10

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