French Bank Retreat Raises Aircraft Finance Fears

The global aviation industry faces growing uncertainty over financing due to Europe's debt crisis and worries surrounding French banks, lenders and airlines were warned.

Despite record numbers of aircraft leaving the production lines at Airbus and Boeing to fuel ever-growing demand from rising economies, doubts are spreading as to how the growth will be financed.

French banks play a key role in the global aircraft financing market and represented about 31 percent of transactions in 2010 followed by Germany, Ryanair finance director Howard Millar said.

"The French banks have scaled back significantly. There will be less finance available and any finance will be more expensive," he told an industry conference.

Societe Generale and BNP announced plans to scale back lending in the aircraft market last week as French banks moved to sell assets and reduce lending.

"In the past few months things have got worse. French banks are effectively closed for new clients," Millar said. "We are in an ivory tower -- we are heading for a little bit of a car crash in terms of financing."

French banks are fighting to restore confidence after suffering a sharp summer sell-off, driven by fears they are too dependent on wholesale market funding and would be ill equipped to cope with the fallout from a Greek debt default.

Some banks are finding it hard to obtain dollar funding for periods of longer than a few days as US money market funds and other traditional dollar lenders become increasingly nervous about the threat of a Greek debt default, which could destabilise markets throughout the region.

European bank stocks have lost a third of their value since July.

Aircraft are sold in dollars and their second-hand value is tied to the US currency, so participants rely on dollars to grease the wheels of one of the world's most capital-intensive export industries.

Banks are also grappling with wider problems which have a knock-on effect on the availability of financing for aircraft, Ron Wainshal, chief executive of US lessor Aircastle, said.

"I think it will get worse before it gets better. There is a short-term challenge, particularly in Europe," he said.

Banks are also squeezed by tougher capital adequacy regulations under the Basel III accord.

Boeing, Airbus and smaller manufacturers deliver a total of up to USD$80 billion of new aircraft a year.

Production is rising to meet demand from emerging markets and most recently a wave of orders to renew older and inefficient fleets in the United States.

Airlines order aircraft years ahead and pay upfront deposits but nearly all the value is paid on delivery. A great deal of that is financed shortly before the handover.

French bankers have been squeezed by a shortage of dollar deposits from US investors due to fears concerning their exposure to Greece but they sought to allay concerns about liquidity.

"We'll be here. We'll do our share the best we can," said Christian McCormick, chief executive, Natixis Transport Finance, adding German banks were not hampered by the same dollar funding concerns.

Of the USD$73 billion of aircraft to be delivered next year, about USD$41 billion needs to be financed by banks in dollars, he said.

In the 2008 credit crunch, US and European credit agencies stepped into the breach as funding dried up by providing guarantees to assist aircraft exports at lean financing rates.

But the export/import agencies have significantly increased their fees and their room for manoeuvre may be constrained as the debt crisis spreads to sovereign assets and ratings, bankers said.

The shortage of bank financing has created uncertainty over 2012 deliveries but so far there is no serious evidence of a funding gap, several lessors and bankers said.

"It is more difficult from a pricing and availability standpoint. Banks are willing to do business but are reluctant to lock in for the long term," said Madhu Vijay, senior vice president of US lessor Aviation Capital Group, part of mutual insurer Pacific Life.

There are fewer doubts over the financing for new aircraft deliveries than over the market for second-hand aircraft, he said. Second-hand values are important to the industry because they influence the appetite of lessors to buy aircraft. Lessors control about a quarter of the world fleet.

The market uncertainty comes at a time when US insurer AIG is preparing to float its ILFC leasing unit and Royal Bank of Scotland seeks buyers for its RBS Aviation business, but is not expected to scupper the sales, sector bankers said.

Source: http://news.airwise.com/story/view/1316607635.html

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