james
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Post by james on Jul 31, 2014 6:40:34 GMT
What happened to the reliability of leasing customers during the period from late 2001 through 2004, the period of severe economic troubles for airlines following the September 11th attacks? What happened to default rates and ability to reuse aircraft with other customers? What would be the anticipated impact of a similar period on your own lender customers?
I'm asking in part because like shipping, an area I have a little familiarity with, I believe that the air business is highly cyclical. A great way to lose a fortune is to buy lots of ships during a boom period.
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Post by ablrate on Jul 31, 2014 15:38:14 GMT
What happened to the reliability of leasing customers during the period from late 2001 through 2004, the period of severe economic troubles for airlines following the September 11th attacks? What happened to default rates and ability to reuse aircraft with other customers? What would be the anticipated impact of a similar period on your own lender customers? I'm asking in part because like shipping, an area I have a little familiarity with, I believe that the air business is highly cyclical. A great way to lose a fortune is to buy lots of ships during a boom period. Hi james The cyclical nature of the airline industry has, of course, a certain symbiosis with owning the aircraft and leasing it, however the lessor does own the aircraft and where a default occurs the aircraft will be repossessed and can be released and so there is a definite differentiation between the airline industry and aircraft industry. I couldn't answer this point in full here, but will be doing a series of posts on the site to help lenders understand material aspects and I have posted links to certain studies elsewhere which we will be collating on the site. Having said that, let me give it go and try and explain as much as I can here briefly. Below is a chart, from Ascend, that does give a good overall idea how the market has been affected in volatile times: (click to enlarge)  The black line showing aircraft returns against other assets is remarkably smooth. The dips in the curve after the recessions of 2001 (and the 9/11 tragedy) and 2008 are small compared with the steep falls for other indices, while the growth for the rest of the period is noticeably stable and devoid of any sudden rises. This suggests a low volatility of returns provided by the underlying aircraft leasing portfolio. Of course, this is based on a portfolio of aircraft ,and it is based on a passive strategy of buying and leasing for the long term and Ascend go into great detail about how they come to these figures. It does show, quite well I think, that although there is a inherent correlation with the airline industry, that the volatility of owning aircraft is much less than that of airlines (if you use their share price as an indicator of health - the green line). As you mention shipping, below is a chart which shows aircraft alongside other assets, including shipping:  Another aspect to the aircraft we deal in as that we will be attracting borrowers in the regional aircraft space. The deals that we favour (and would be more likely to approve) are those which have a certain credit profile. That profile is more likely to be established airlines that are, or are backed by, either national carriers or large corporations. You would be fair in assuming that these types of entities would not have to pay 10% for any part of a transaction, however, the lessor to get the deal away, will look at his blended rate of finance... the reason that they will offer our lenders 10% is what we like to think of as a 'lenders premium'. Which essentially is efficient access to capital that does not require giving up a share of the RV - which a typical equity investor would want from the lessor. The aircraft used in the regional space are also in demand and have a track record of predictable residual value curves over a long period including those in times of recession, financial shocks and global tragedies. These aircraft are also limited in production to around 75 aircraft per annum for the ATR for example, so the pre-owned market for these aircraft is buoyant, especially as they are 30% more fuel efficient than their jet cousins (which is an obvious positive factor if volatility drives up oil prices). This may be a long winded way of answering your questions, but the bottom line is that this sector has faired well in times of volatility and as an asset it is demonstrably less volatile than perhaps the perception is. With a 'lenders premium' and an arbitrage opportunity between actual risk and perceived risk, we think its a pretty good investment. Having said that, I would not want to play down the risk of any investment. The equity crowd funding sector has its own special risk, unsecured lending at FC and elsewhere has its risks too and we are no exception to the rule when it comes to risk. Investing in aircraft is a risk like everything else, we do our best to assess the loans, along with our sponsors and partners, and make a judgement whether they should be allowed on the platform, it is up to you as investors to asses that risk and price the loans accordingly by either investing or not investing. Anyone considering an investment with us or anyone else should assess the risk of doing so and we encourage you to do your research thoroughly. We love the aircraft and capital equipment space as it's our thing, but we are fully aware that its not everyone's cup of tea (although we aim to convert as many of you as possible  ) Hope that helps Regards Ablrate
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Post by elljay on Jul 31, 2014 16:00:42 GMT
What happens if the aircraft were to be in a hangar and storage fees are owed to the hangar owner? This has happened on another P2P site recently and the lenders were unable to get hold of part of the security on the loan (the aircraft) as the hangar owner wouldn't release the aircraft until outstanding fees were paid.
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james
Posts: 2,205
Likes: 955
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Post by james on Jul 31, 2014 19:26:45 GMT
We love the aircraft and capital equipment space as it's our thing, but we are fully aware that its not everyone's cup of tea (although we aim to convert as many of you as possible ) Oh, it's interesting. That's one reason I'm asking questions as they occur to me, I haven't already decided not to use your product.  Thanks. I'll look forward to reading more as you write it. You know that rule about investing, try to invest in only what you think you understand.
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Post by ablrate on Aug 1, 2014 9:00:08 GMT
What happens if the aircraft were to be in a hangar and storage fees are owed to the hangar owner? This has happened on another P2P site recently and the lenders were unable to get hold of part of the security on the loan (the aircraft) as the hangar owner wouldn't release the aircraft until outstanding fees were paid. Thank elljay I don't know the particular transaction you are referring to but I suspect it was a private aircraft or an aircraft that was not on lease. With commercial aircraft that are on lease the lessor has the right to take possession of the aircraft at any time in default. This particular right is enshrined in the 'Cape Town Treaty' on moveable assets which applies to aircraft with over 8 seats, cargo aircraft that can carry over 2750 kilos of cargo and engines which produce more than 1750 pounds force. The legal aspect of this... and forgive me for getting lawyerly... is that 'the quiet enjoyment of the aircraft by the lessee is subordinate to the rights of ownership of the lessor'. The standard lease terms, backed up by Cape Town, do not allow the lessee to create, or have placed, liens on the aircraft, because they don't own it. If, as I suspect was the case in the other p2p deal, the aircraft was owned by the company then it is part of their assets and a legitimate lien can be placed on it. In fact as part of the lease terms there is a clause that requires the airline to place a small plaque in the cockpit that says 'This aircraft is owned by XYZ (the lessor)'. Think of it this way, if you rent your car from Rent-a-Cars R Us and get a lot of parking fines the courts cannot clamp your car and refuse to remove that clamp if Rent-a-Cars R Us turn up to repossess it. This is because it is their car not yours, you are just renting it. If you had borrowed the money from the bank personally (or a p2p platform), gone out and bought that car yourself, then got a bunch of parking fines... then your car could be forfeited or a lien placed upon it as part of your assets... I am simplifying for sake of example. One of the affects this particular issue has on transactions is that we will look unfavourably at any transactions where the aircraft would be operated in a jurisdiction where the Cape Town Treaty has not been ratified, unless that jurisdiction had similar rights enshrined in law. There are extra levels of security which are standard in many aircraft transactions, which in some cases provide an early warning system to a lessor and in others provide comfort that fees incurred by the airline will be met and paid. The first of these is that the lessor will regularly check with local authorities that fees are up to date (e.g landing fees etc). If fees are materially late, this would trigger further investigation with the lessee. Secondly, the lessor will levy 'maintenance reserves'. These are paid each month and are based on the cycles and hours the aircraft has done and can be as much as half of that which is being paid on the lease (or more). These payments are accumulated for scheduled maintenance and drawn down when the maintenance has taken place. This ensures that the lessee is not going to have any liens from maintenance facilities as these fees will already be on account. It is not to say that liens are never placed on leased aircraft despite all this, or there is never a dispute over unpaid fees, but the legal process is a well trodden path and if you are dealing with clients who are well respected airline operators, the likelihood of problems of this nature are limited. If it does happen the risk is a 'void period', that where the lease is not being paid, the aircraft is being repossessed and re-leased. With correct systems in place a potential default can be spotted with adequate time to minimise void periods, and remember it is the lessor that is borrowing the money, not the lessee, so their obligations to pay lending members stay in force. Hope that answers your question. Regards Ablrate
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