Questions Aircraft Loan Underwriters Ask - Aircraft Information (Part 5)
Thursday, December 03, 2009
As part of securing an aircraft loan, an underwriter will need to review the following: 1.) Credit Application, 2.) Credit Report, 3.) Cash Flows, 4.) Net Worth, and 5.) the Aircraft information itself.
As a part of an educational series, we are addressing each of these components separately and reviewing some of the questions the lender tries to answer through analysis of a client's credit package. This should provide some insight into what a loan officer is trying to accomplish by requesting certain information.
In this article, we'll discuss aircraft information and how that affects underwriting and loan programs:
- Why do we need a spec sheet? In order to finalize a financing approval, an aircraft needs to book out (based on current market value as represented in Bluebook or VRef software). We will use the spec sheet as a means of gathering all of the necessary information and making our book value as accurate as possible. Year/make/model, engine and airframe times, dates of upgrades, and damage history should all be recorded so that we may accurately reflect these in the final value.
- How does type of aircraft affect financing? AirFleet Capital offers financing programs for various types of aircraft - jet, turboprop, piston, sport, helicopter and experimental. Due to the unique nature of each category, terms will vary for each one. Standard terms are available on most jet, turboprop and piston certified aircraft (15% down for 20 years) since they have a history of market acceptance. Sport aircraft are slightly more restricted (higher down payment and shorter term) since it is a new market comparatively and banks are still getting comfortable with market acceptance and resale values. Experimental aircraft are the most restricted as there is no valuation guide. Helicopters are a different beast altogether and generally require 20% down for terms to 10 years (sometimes longer).
- How does age of aircraft affect financing? In general, the older the aircraft, the shorter the financing term. Depending on the type of aircraft, the age limit will vary. Piston aircraft 1975 or newer, terms are 20 years; older than 1975, terms are 15 years. Turbine/Turboprop aircraft have tighter guidelines - generally 1980 or newer for turboprops and 1985 or newer for turbine aircraft. Also, aircraft with over 10,000 hours will limit the program options we have.
- How does price/value affect financing? In general, as the loan amount increases, the rate decreases. In addition, you will often find that the lower the loan-to-value (loan amount relative to the book value aka LTV), the better the rate - often with the lowest rates at 70% LTV or better. Lenders are also interested in the aircraft value to ensure they aren't financing more than a percentage of fair market value.
- How does aircraft utilization affect financing? As the utilization of an aircraft increases (leaseback or commercial use), the depreciation of the value of the aircraft is accelerated. The increased wear and tear of a higher utilization environment coupled with the increased engine and airframe time will accelerate the depreciation, particularly when compared to aircraft of similar make and model in a traditional utilization profile (private use). In order to offset the effect this will have on the value, financing terms are set to protect both the customer and the lender by tailoring the down payment, term and rate to utilization. As annual utilization increases, the loan programs will require higher down payments and shorter terms.