11% for 3 years on our latest loan secured on an aircraft

Thankyou  

We have a rather decent pipeline of aircraft and a few other bits and pieces but we like to line up the ducks correctly so that we are happy that they get done! Lots of our stuff has leases attached too which not only secures the cashflows but also lifts the value of the aircraft way above the unencumbered value, something that the Ascend valuation can never take into account. 

We look forward to the Minibeasts' inheritance being invested!

That's a perfectly fair question and I will try to answer in a way that is clear . However, if I don't cover it to your satisfaction then feel free to drop me a mail or give me a call!



Aircraft are slightly unusual compared with other assets in that there is an established independent authority called Ascend who provide future valuations. They provide two valuations on the date that you query, called the "Half Life Base Value" and the "Half Life Market Value". The HLBV is based on a standard depreciation rate that changes little from year to year. So, on the day of the valuation certificate (which is on the site), we can see both values - the HLBV being the value that their computer model expected the value to be and the HLMV being the value that the aircraft would currently fetch in the open market.

However, because the HLMV is the actual value right this second, they do not predict the future market value of the aircraft because they don't want to predict data. Personally (and I have invested in the loan!) I would expect the value of the aircraft in three years to be above the HLBV. At the moment, the HLMV is about 30% higher than the HLBV so I would expect the value of the aircraft to be 15-20% above the HLBV. By showing the HLBV, we are just being absolutely honest with investors and saying "this is the expected worst case".

A few things that I would note are :

1. With property, your LTV is based on a constant valuation and doesn't take into account market fluctuations. Our LTVs take into account worst-case fluctuations and still remain over-collateralised.
2. The lessor, Phoenix, would not enter into this transaction if they didn't anticipate having very strong equity in the aircraft at the end of the transaction
3. With loan payments at £49,000 and interest payments at under £23,000, we would not have a difficulty re-financing and re-leasing the aircraft (from a bank if necessary) - there is a lot of wiggle room there if at the end of three years no-one wanted to buy the aircraft from us!
4. Regional turboprops are ace . They are workhorse aircraft and always in demand. We can always find customers for them.
5. Whilst I am making a big statement by saying that I expect the market value to remain well above the base value, there are a few reasons behind this :
(a) There is a very limited production line in the sector (I think 70 airframes per year?)
(b) Regional air travel is very fast growing and our customers (mainly LatAm and SE Asia) are in very high growth areas so demand is very high
(c) Historically, HLMV have out-performed the base values on turboprops. I will find a document to prove that when I am back in the office


Hopefully you will see our honesty as it is - we don't want to mislead by giving you our "anticipated future value" of the aircraft - which to be honest we could very legitimately have done! We want to lay out all of the facts of what we, and an independent valuer, see as the worst case scenario and allow you to make an informed choice. Our opinion, and that of Phoenix, is that we are very comfortable on the capital repayment and that we see the HLBV as a worst-case scenario that we have covered.

I would add:


If we revalued the final residual on the basis of the current premium in the market the residual would be around $4.5 million (or around £2.93 million) the cash accumulating would be £432,000 so a value of £3,362,000. That would be coverage of 73% LTV.



There are also accumulating maintenance reserves which, while essentially a zero sum (as they are periodically paid out for maintenance) do accumulate at periods further reducing the LTV until a maintenance event. This may seem irrelevant but in the event of default these are very important to cover void periods. Assuming an annual maintenance draw down we would have accumulated in month 11 £320,000 in maintenance reserves.



However, when putting together a loan we want to project a conservative scenario which gives lenders the opportunity to assess risk better. The FCA have been vociferous on 'down playing risk' so we try to be cautious when accepting what transactions are on-boarded.

Regards
Ablrate

..and here is your MV/BV chart. The quality is not so great as its from a scan.. sorry.. 

The black dotted line is median Market Value tracked against the Base Value (the red triangles) and the blue is 'best and worst' values within that range.

Normal world finances fly out the window (groan!) when aviation gets involved, as anybody who has been remotely connected would agree. Asset depreciation hardly exists but it is replaced, and then some, by maintenance costs. Each £100 unit you buy on one of these turbo props might actually entitle you to say you own a part of that aircraft, but you'll probably actually be owning a tyre valve or something else just as small and insignificant. Just one seat belt on a small four-seater Cessna can set you back $1000 so imagine the price of the parts for the bigger ones.

As long as they're well looked after with some TLC and shed loads of cash (as these on offer appear to be), IMO they will hardly ever go down in value by a massive margin, and might even go up.

Thanks mike for looking again. I am very happy to show a full cashflow prediction etc offline if you mail me (not sure if I can post an email on this board but you can find me on our site and my e-mail is andy dot lastname at ablrate dot com . We model up valuations based on the Ascend HLBV, an interpolation of their market value and our own estimate. Good point on the loan information packs too. I'll discuss with The Boss tomorrow as we are just starting to standardise some things and that is on the hit list.


Thanks baz657 for the vote of confidence too. Very good points all round in that post. These assets generally depreciate far less than expected because they are mid-life and well looked after in a strong demand sector. Our lessee in this case is effectively a government-owned airline and so there is an element of national prestige involved in keeping them outwardly ship-shape. In terms of their inward ship-shapliness (I'm patenting that word!), the lessee pays us a monthly maintenance deposit which goes towards servicing with the intention of maintaining the condition of the aircraft at a constant condition. Generally, this is over-estimated so that there is always a pool available for expected and unexpected maintenance. We just received back a condition report prior to handover in the office yesterday and the detail that is taken is quite remarkable - I fully expect to see how often the engines have been cycled but didn't expect to see that one of the rubber handgrips needed replacing and 200 other things that wouldn't get checked on a car MOT . We are careful not to oversell just how well we expect them to hold their value but we are always happy to show more information if requested on the state of an individual aircraft. 


And thanks duck . You probably know more than me

The interest is paid in GBP at the lessor's risk and in this case we are working with a couple of institutions to put on a hedge if the lessor chooses to do so.

Regards
Ablrate