Natixis Investment Managers (Natixis IM) International Private Debt has provided loans for two aircraft deals in North America. The first loan deal was to supply a 787-9, Boeing’s latest wide-bodied aircraft – commonly known as the Dreamliner – to a national flag carrier. The second loan deal was to supply an Airbus A320neo, currently the world’s best-selling narrowbody aircraft, to a low-cost airline.

Natixis IM International Private Debt has now completed three aircraft financing deals during the last twelve months, with spreads on average 285bps above the inter-bank lending rate. To achieve comparable yields pre-Covid would have entailed doing deals with smaller, high-risk airlines, at a high loan-to-value (LTV). “Now we are able to work with some of the world’s best airlines, which have robust balance sheets and great brand names, and get excellent yields,” said Aymeric Angotti, Head of Aircraft Finance, Natixis IM International Private Debt.

The structure of the deals has been relatively advantageous too, with an average LTV of 73% at acquisition, compared to 85% before the pandemic. “The current conditions won’t last long,” added Angotti, “but they are very attractive right now and we envisage further deals.

Thanks to these improved conditions, illiquidity pick-up has increased: whereas Natixis IM Private Debt’s average aircraft financing spread is around 285bps, comparable liquid corporate bonds currently pay around a 30bps1 spread. The current 255bps illiquidity pick-up compares with just 100bps in July 2019, a few months before the pandemic hit. “The yield pick-up was great in 2019, but clearly much better today,” Angotti noted.

For its two latest aircraft loan deals, the team focused on the North American market, which has recovered faster than other regions from the impact of the pandemic, due to a strong and resilient domestic market. Airlines credit is also better partly due to strong government support in the worst phases of the crisis. The low-cost domestic aviation market in particular is now seeing passenger volumes which are close to their pre-pandemic peaks.

The US market provides robust security for aircraft financing, even during continuing uncertainty, because domestic legislation is mature and the relevant laws are comprehensive. “This means we are able to repossess an aircraft quickly in case of a default, and sell it to a new buyer,” Angotti said, meaning few or no losses. The process of repossession and resale is more efficient still for new and latest-generation aircraft, which have greater liquidity. The value of old-generation aircraft, on the other hand, declined significantly relative to newer aircraft in the wake of the crisis.

Risk mitigation is important given the lingering effects of the pandemic. The high recovery rates on aircraft loan defaults contributes to the yield pick-up versus comparable listed debt. Angotti said: “In addition, the airlines we are working with are strong – we are paying close attention to their liquidity, which boosts their chances of performing well during difficult markets with reduced traffic.” Low-cost airlines in particular, can adapt to changing markets rapidly and add new aircraft for promising routes.

We are pleased with the overall diversification in our portfolio,” said Angotti. “We are providing loans secured on assets operating in both Europe and the US, the most dynamic regions post-Covid. And we are also well diversified by the types of aircraft and carriers.

The pandemic has shown the value of an aircraft financing asset class for investment portfolios, he added. The main advantages of aircraft debt are long-term and predictable cash-flows, true portfolio diversity linked to real assets, yield pick-up linked to the illiquidity of the asset class, and volatility reduction in the wider portfolio.

For Further Reading:
1 5Y A rated US Corporate Option Adjusted Spread on October 5, 2021

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