The collapse of 2008 caught many financial institutions that had funded aircraft unprepared. Many lenders quickly realized how vulnerable they were to deteriorating asset values. Numerous unexpectedly returned aircraft had to be placed in storage or simply parked, without serious effort to keep maintenance conditions current or to prepare for long periods of idleness. In some instances as a consequence, asset values were further compromised by both maintenance defaults that triggered mandatory overhauls and warranty program defaults. Over a critical twenty four hour period these defaults resulted in unnecessarily reduced market values of some newer aircraft by over a third. For some older aircraft the same defaults necessitated complete write-offs, as the cost of maintenance required to bring them back into compliance was greater than their market value.
In 2008, few lending institutions had drafted and “baked in” operating stipulations with monitoring programs in their lending documentation to ensure a measure of asset control through the currency of an aircraft lease. Leading up to the 2008 decline in values, lenders were primarily focused on credit quality in a generally bouyant market. They were less concerned about aircraft pricing and apparent “airballs” in borrowings when compared to reasonable aircraft values, which indicated lower pricing would be appropriate in the event that future recourse against the asset might be necessary.
Today many lenders are generally more diligent in their valuation of the aircraft and take steps to ensure rudimentary monitoring of maintenance currency through the duration of a lease. This lowers asset risk and is in many cases also a valuable service component for their borrowers who may not be familiar with aircraft values or the complexities of purchasing and managing an aircraft.
The Aviation Home Office team can assist in implementing systems to help lenders prevent avoidable residual deterioration and ensure timely alerts to instances of maintenance default which may indicate financial distress of a borrower or operator. At the end of the day, appropriate lender safeguards are a matter of lender business judgment. For most financial leaders, being aware of the risk of preventable asset deterioration is a helpful piece of the puzzle whenever a default might be at risk.
In most circumstances, as soon as an aircraft financing is being considered, timely advice to borrowers and lendors alike regarding aircraft operational requirements and aircraft management options will go a long way to protect the future interests of all concerned.
The Aviation Home Office’s broad range of services can assist in reducing the risk component of any aircraft lending portfolio.