Aircraft Financing – Interest Rate Update

Interest rates remain very attractive for aircraft buyers.  That, coupled with great values, makes for a uniquely buyer-friendly market that hasn’t been seen in recent history and may not be duplicated for years to come.  It’s a wonderful time to purchase!

In the past 90 days, we have seen relatively level underlying rates; a slow, softening in rates through December and January was met with a slight uptick in February.  However, rates remain lower today than they were in early 2011, and have been hovering at this low-point for about 7 months, as illustrated with the chart below (Source:  Treasury.gov – using the 3-year Treasury rate in this example from January 2011 through February 2012).

While the FED has committed to keeping rates low through the next 12-18 months, we are likely to see increased pressures on the underlying rate market if fuel prices or inflation tick-up more aggressively.  The general sense is that we might start to see some increases as we move further into 2012, but the increases are expected to be minimal at most, likely keeping rates at or below averages seen over the past 24 months.

AirFleet offers a selection of fixed and variable rates to match a client’s particular rate-risk desire.  Please call us at (800) 390-4324 to get a specific quote for a fixed-or variable-rate product.

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Rates to Rise Soon?


By way of background, aircraft lenders adapt their cost-of-funds to a variety of metrics, but one we keep our eye on is the 5-year Treasury. We watch this rate more closely it helps us see what’s coming.

In early November 2010, the 5-year Treasury hit a low-point (roughly 1.17% on November 1st).  At that point, our aircraft lending rates hit a low-point too, which overlaid well with year-end closings.  However, the 5-year Treasury rate increased to 2.02% on January 3, 2011, and has since continued to climb 1.16% since the low-point – hitting 2.33% as of yesterday (February 9th).

Below is an article link that explains a little more of the background, and some of the factors leading to these increases (courtesy of the Wall Street Journal/ Marketwatch): Article: Underlying Rates

Our rates have not changed in the past 90 days, but the underlying advances would lead us to think that rates are close to rising on the aircraft lending front.  It would be a great time for clients to lock-in pre-approvals at today’s lower rates, which would give them 30 days to shop for an aircraft (and rate protection during that period).

As a final note – the Federal Reserve announced in October/ November that it would buy short-term debt over the following 6 months, in an effort to continue to stimulate the economy through lower interest rates.  In this time, 5-year treasuries have nearly doubled, in part due to the healing economy.  Consider this – are these underlying advances  being held-back by the Fed action?  If so, could we have a situation where rates would “pop” once the buyback ceases sometime in April/ May?  Either way, the rate “bottom” seems to be here today.

Rates Have Edged Down!

For the past year, rates have been at a relatively low level, but remained stationary for the most part.  Though projections earlier in the year assumed rates would gradually increase to stem inflation, we have not seen that effect yet, in fact, the opposite.  Over the past 2 months, the aircraft financing rates dropped for the first time since early 2008.

This is partially an indication of the overall market factors not supporting rate increases; however, in terms of aircraft financing, it also demonstrates an increase in lender appetite.  Underlying rates have been quite low for the past 2 years, but banks were enjoying healthy margins to make up for losses sustained and increased insurance demands, etc..  The focus was more on managing repossession activity and in a sense, waiting out the storm, rather than bringing in new business.  Now that a large percentage of that loss activity is behind them, lenders are getting increasingly hungry and as such, more competitive with rates which is great news for the customer.  Please call AirFleet Capital for our current rates and terms today!

Whats up (or down!) with the rates?

Despite the recent fear of looming rate increases due to all of the money that was injected into our market last year, it appears that inflation is remaining a non-issue for the time being. For the first time since March 2009, prices fell in April and analysts say inflation has pretty much disappeared. Because of this, the FED is more motivated to keep interest rates low to continue to spur economic activity.

What does this mean in terms of aircraft financing? For qualified buyers looking at purchasing large assets, including aircraft, this is great news. It is the perfect time to lock in low, fixed rates on new long-term debt. Despite the slowdown over the past 18 months, these low rate projections should help ease buyers’ fears and provide some motivation to buy now.

Though it was initially projected this period of low rates would be short-lived, it appears that rates will remain low for at least the next 12 -18 months. As consumer confidence returns, these extended low rate conditions should bode well for a ripe buying environment!

AirFleet Introduces New Financing Product for Aircraft Lending

In AirFleet Capital’s most recent e-newsletter, we announced our new 3 year adjustable interest program.  In summary, this program is intended for customers who want a long amortization (and low monthly payment), want the best rate possible, and are likely to upgrade in some form in 3 years or less.   There is risk with a variable interest rate due to the uncertainty of the rate in the future; however with our Adjustable Rate program the rate changes every three years, not three days.

This model could work for many interested in financing because the average customer upgrades or moves up in aircraft every three years, using the timing of this program to their advantage.  If you think you will need to refinance to overhaul your engine in the next three years, this might be an excellent program as well.

This program is indexed to the Federal Home Loan Bank’s (FHLB) 3-year Classic Advance rate.  Below are some of the highlights of the program.

3-Year Adjustable @ 5.50%

Loan Amount: $250,000 or more, to a ceiling of $4MM
Down Payment: 20% minimum
Amortization: 20 Years
Term: 20 Years
Interest Rate Term: Rate adjusts each 3 years of the 20-year term
Interest Rate Basis: 3-year FHLB + 3.50%
Interest Rate Floor: 5.50%

http://www.fhlbboston.com/includes/classic_pop.jsp – Scroll down to the 3 year rate to see what it is today and then add 3.50% to that figure, but again note that there is a “floor” of 5.50% on the financing product.

You will first notice that there is a floor of $250,000.  It also has a slightly higher down payment requirement of 20% as compared to the standard 15%.  This program is not designed for aircraft of lesser values.

The real substance here is the adjustable feature of the loan.  Once every 3 years, the rate will adjust 3.50% over the 3 year FHLB rate on the third anniversary of your loan date.  This repeats for the life of the loan.  The 5.50% floor means that no matter what that FHLB rate is, the interest cannot go below 5.50%.  As of last week when we priced the above rate, it was at the best rate possible.

As always, please leave any comments or questions, we will be more than happy to address them.

The Variable Rate Conundrum

When rates are low, the perception is that it’s a great time to consider a variable rate loan product for your purchase.  The reality is that this is arguably one of the worst times to take a variable rate loan.  Variable rates offer the advantage of a temporary lower payment for a short period of time to help get someone into their purchase (be it a home, auto, or aircraft).  However, evaluating such a program requires careful consideration of the additional risks of a variable rate.

1.  If a client is considering a variable rate, the client assumes the additional rate risk normally reserved for the bank.  The risk stems from rate market instability.  As we all know, the economy is subject to large swings and what may be a low PRIME rate today (also referred to as New York Prime) could increase 2 or 3-fold in a relatively short period.  As an example, the last time our economy was in somewhat similar shape, rates increased from 8% to 20% in a period of 27 months.  Although no one can guess where rates will go in the upcoming months and years, customers need to balance their short term gains over the risk of longer term rate increases.

2.  Variable rates offer a low payment today, but there’s no magic here – with a variable rate product the rate risk also shifts the risk of cash flow to the borrower.  Although fixed rates may be slightly higher in the short term, comparatively they are still well below the historical average of 9.25%.  Given what we’ve seen with rate volatility, a customer should ask, “Would I finance a 30-year mortgage on a variable rate, even if it was 2% below what a full-term fixed rate today would be?”  Many would argue that these are the programs that contributed to our current Real Estate crisis. In some cases, the variable rate will make sense (i.e. short-term borrowing) … but in many cases, and in light of recent news, customers may want to place a higher value on the peace of mind that comes with a low fixed-interest rate product.

3.  The best time to secure a variable rate product is in a decreasing rate market.  As rates have for the most part bottomed-out, you may be safer with a fixed-rate alternative today, locking-in the currently low longer-term rates.   Variable rates are likely only going up from here, and history shows us that many companies who locked-in variable rate loan structures in the late 1970s were out of business by the early 1980s when their rates were in the 20%’s – the last time a parallel can be drawn on the state of the economy.

Finally, the one caveat we would mention is that if you are accustomed to short-term borrowing this type of structure may make sense for you.  For example, in measuring the economics of only owning the asset for a year, you may come out ahead with a short-term variable rate product.