Profiles of Airbus Financial, Boeing Capital

With the capital market crunch, Airbus and Boeing each said it is prepared to step up and help with customer financing. Below are two stories we did for Commercial Aviation Online, a subscription-only service, about Airbus and Boeing financial arms. Each is reprinted here with permission. The stories appeared on CAO’s website November 3.

Profile: Boeing Capital Corp.

Industry officials and observers fret that the capital market crunch will make it difficult for airlines to finance airplanes through the rest of this year and well into next. Accordingly, analysts predict that OEMs will have to step up next year with $5bn in financing support.

The Boeing Co. said its Boeing Capital Corp. (BCC) finance arm stands ready to provide $1bn in financing next year. Airbus, engine makers and regional airliner producers can be expected to pick up the rest of the OEM, based on history.

BCC’s federal 10Q filing with the US Securities and Exchange Commission shows that BCC has $1.9bn in financing commitments for 2009 out of $9.5bn in total on its books (see Table).

Boeing officials are clear that they want BCC to be the lender of last resort for its customers, and BCC officials are pounding the pavement looking for financing for its customers so BCC doesn’t have to step up.

The pressure on BCC is building, however. BCC received “a number of requests from both domestic and foreign airlines to reduce lease or rental payments or otherwise restructure obligations,” the company said in its 10Q filing. BCC did not provide any details, other than agreement to restructure the terms on 16 717s leased to Midwest Airlines. Midwest is hanging on by its flaps, returning these 16 airplanes to BCC and downsizing by contracting with regional airlines to operate the Embraer 170 jets. All 717s are to be returned by the end of this year.

BCC has $1.5bn available to it from Boeing’s committed revolving credit agreements. “In addition we have a Support Agreement with Boeing under which Boeing has committed to us if our fixed-charge coverage ratio…falls below 1.05:1 on a four-quarter rolling basis.”

James Bell, chief financial officer of The Boeing Co., said during the earnings call 22 October that additional terms and conditions have been included in financing commitments “to protect the corporation.” He did not elaborate on the earnings call and Boeing declined to elaborate when queried by CAO for this article. Speculatively, these may include Material Adverse Change and Cost of Funds language, two elements financiers say are showing up now in recent deals.

Boeing, exclusive of strike impacts, delivers between 450-500 or more airplanes a year. Officials have said 80% of these are eligible for ExIm Bank financing support and that backstop financing represents only about 3% of the backlog. The 737, 777 and 787 are aircraft for which backstop financing is committed. “Most carry low probability of funding,” BCC told analysts at a recent presentation, noting the possibility of ExIm funding and that the backstop is for “high quality airlines.”

BCC had slightly more than $6bn in assets at 30 September, about half that of a few years ago. If included in CAO’s Lessor Rankings by asset value, BCC would rank sixth among all lessors (or fourth among Top Tier lessors, excluding mega-lessors ILFC and GECAS). CAO doesn’t include BCC in rankings because it serves strictly as a “house” lessor for The Boeing Co. rather than a proactive, “market” lessor actively seeking new business.

BCC’s largest exposure, nearly $2.4bn, is for 717s, mostly at AirTran Airways and Midwest Airlines. An orphan airplane with a limited production run, the 717 found disfavor with the financial community and BCC had to step up to fund the aircraft.

Ageing 757s represent the second largest asset; MD-80s also are on the list. US carriers represent the top five airlines with which BCC has the greatest risk.

BCC at a Glance

Debt Ratings

Short-Term Debt: A-1

Senior Debt: A+

Source: Standard & Poor’s

Selected Financial Information (30 September)

Aircraft Assets: $6,063bn

Financing Commitments:

4Q08: $ 550m

2009: $1,800bn

2010: $1,900bn

2011: $ 450m

2012: $ 700m

Thereafter: $4,100bn

Total: $9,500bn

Debt: $3,749bn

Earnings, 9 mos to 30 September: $535m

Portfolio Concentration

AirTran $1,462bn 24.1%

American $ 575m 9.5%

Midwest $ 478m 7.9%

Hawaiian $ 428m 7.1%

Continental $ 381m 6.3%

Aircraft Concentration

717 $2,392bn

Profile: Airbus Financial Services

Airbus Financial Services (AFS) is the counter-part to Boeing Capital Corp. (BCC). Unlike BCC, AFS does not publish separate financial statements and details are much harder to come by.

Airbus’ approach to customer financing that in many ways is more conservative than that of The Boeing Co. and BCC, which belies the perception of Airbus detractors that money is of little concern to the European company.

While BCC in the years immediately following 9/11 had a portfolio with an asset value of $12bn, AFS’ peak exposure during the same time was just under $5bn, says Nigel Taylor, senior vice president of project and structured finance. Taylor tells CAO that the portfolio value today is about $1.2bn, compared with more than $3bn on the portfolio at BCC. AFS is prepared and expects to add another $1bn to that between now and the end of next year, he says. BCC anticipates offering up $1bn in new financing next year, but is trying mightily to avoid doing so.

“It’s clearly [Airbus] policy to give limited and reluctant financing support,” says Taylor.

Airbus has long been aggressive in selling off paper. For example, in the post-9/11 period, financing was provided to United Airlines, one of the carriers that was a victim in the attacks; two of its planes were hijacked and crashed. United had an outstanding order for A319s/A320s that AFS stepped up to fund. All this paper was sold off by the end of 2002, according to a person familiar with the events at the time.

While BCC has a portfolio of more than 250 airplanes, the number of planes registered to AFS is a mere 11, according to FlightGlobal’s ACAS database. These 11 are all A310-300s, nearly all operated by high credit risk carriers.

Taylor says Airbus has exposure to a total of 50 aircraft via a joint venture company, Avion Capital Ltd., and several special purpose companies. Most are A340s with a “handful” of A330s. There are a few A320 members but no A380s. Taylor declined to name the airlines with which Airbus has the greatest exposure (BCC names its concentration in its federal financial filings), but he says that geographically they are in the US and Europe. This is because export credit financing is unavailable to these home countries. The USA’s Frontier Airlines, now in bankruptcy, had financed at least one A319 through AFS.

Examples of AFS selling off aircraft: there were six A340s sold in 2006 to Republic Financial, now called GMT Global; Deucalion Fund, a unit of DVB Bank, purchased an A330 in 2005. AFS created Avion Capital in 2003 as a joint venture with CIT Group, Credit Agricole Indosuez and KfW Bank. In 2007, an entity called Project Blue was created which now controls 25 aircraft to which AFS is a funding participant.

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