registerme
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Post by registerme on Oct 27, 2015 10:19:16 GMT
We lend in GBP. Planes are presumably bought(?) in USD. They seem to often be leased to emerging markets, which presumably(?) get local currency revenue for them, eg MYR. Now, in terms of default I am reasonably comfortable with the assets being forfeited / returned / seized. But, in effect, these are foreign currency loans to emerging markets so there is local currency risk in terms of their ability to meet the repayment schedule.
Am I barking up the wrong tree, or is this something that should be considered?
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pikestaff
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Post by pikestaff on Oct 27, 2015 12:20:49 GMT
Planes generally are bought and sold in USD, but that is not the same thing as saying that the value is determined in USD. The price/value of a secondhand plane is determined by supply and demand, which for most aircraft is fairly global. Having said that, a large part of the market for aircraft is in the US, and I suspect that the volatility of prices expressed in USD will be less than that in prices expressed in GBP. If so, there is some additional risk but probably less than you might think.
You are right about the FX risk to the local airlines, but this will arise regardless of whether the loan is in USD or GBP. Some local currencies are pegged to the USD, and one or two airlines may price their tickets in USD anyway. In either of these cases the risk vs USD is still there but hidden. The peg may break (often catastrophically) or customers may be unable to afford the hard currency price.
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james
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Post by james on Oct 27, 2015 17:05:22 GMT
In the case of the Ablrate loans the borrower has been the leasing company via a special purpose vehicle sub-company, not the company that operate the planes. It's the SPV that has the obligation and the SPV can seek another company to lease to if the first one finds itself unable to pay and cancels the lease. The lease agreement probably also has significant penalties for early termination that would discourage termination. There isn't direct foreign currency risk to us for our payments when the SPV is paying us in Pounds. That risk goes to the SPV, which is obliged to pay the correct Pound amounts. If the SPV can't pay then that would be covered by sale of the asset, ultimately, though in practice for reasonable currency variations I expect that the parent leasing company would choose to make up any shortfall to avoid that sale. If the Pound was exceptionally high and a default happened early that could create a situation where the security for the loan had a value below the loan balance, or for lower increases, where the LTV wasn't very good. So the risk to us is one of potential default not covered by the exchange rate linked value of the asset used as security. And that risk might be hedged, maybe ablrate can say?
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Post by ablrateandy on Oct 27, 2015 20:54:17 GMT
Points above are correct (and thankyou!).
Leases are almost exclusively in USD, especially so because a lot of our clients are multi-nationals or governments. The risk is borne by the SPV but obviously Phoenix are responsible for the FX risk ultimately.
My main comments would be :
1. There is generally SO much cushion between the lease rate and the repayments that any move that is conceivable would be easily absorbed
2. Quite often we haven't financed a whole aircraft, so the risk of a GBP/USD move is spread across a much larger amount than the loan size (ie. say a USD5mio aircraft may have only GBP1mio in sterling loans and the rest is USD)
3. We do discuss hedging on each transaction and certainly wouldn't put something up where we thought that a small (ie < 10%) move would endanger the viability of repayments
The guy at Phoenix has a lot of experience in negotiating and is comfortable with the FX exposure. Just as an example, we were looking at a lease to a SE Asian government recently and refused to do it unless we got a hard currency lease rate. They were fine with that. In addition, we do have FX lines with a couple of guys so can advise him to hedge if we felt that the viability of loan repayments could come under threat from a move.
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registerme
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Post by registerme on Oct 27, 2015 23:09:45 GMT
Thanks james and ablrateandy, I wouldn't say I was concerned so much as I hadn't seen it discussed / thought about, so thought it worth broaching. I'll find another tree to bark up .
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