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Boeing Sees Capital Market Expansion in $112 Billion Jet Funding

Boeing Co. (BA), the world’s largest aircraft maker, said capital markets will provide increasing levels of financing to airlines around the world as they look to fund an anticipated $112 billion in jet deliveries next year.

Capital markets this year will provide 14 percent of the $104 billion in required financing, increasing to about 22 percent in 2014, Kostya Zolotusky, managing director of Boeing Capital Corp., said in London. They’ll join bank debt and cash as the primary vehicle, replacing state-backed export credit.

U.S. airlines have long benefited from bankruptcy rules that have made it easier for them to tap capital markets through the issue of asset-backed bonds. International rules guaranteeing such investments have increased their popularity, with Dubai-based Emirates -- via lessor Doric -- and British Airways among carriers opting to utilize them.

“We have had a number of deals by non-U.S. airlines in the capital markets to finance new deliveries,” Zolotusky said. “The leasing companies have also started very actively tapping capital markets.”

British Airways in June funded a pool of aircraft, including Boeing 787 Dreamliners, with a $927 million asset-back bond in a what Enrique Dupuy, chief financial officer at BA parent IAG SA (IAG), called “a strategic milestone.”

It was the U.K. carrier’s first use of so-called enhanced equipment trust certificates.

Financial Crisis

Next year, an equal mix of U.S. and other carriers will employ asset-backed bonds, Zolotusky said, with the financing market balanced between different sources. He added: “We have more diversity today than we have ever had.”

The rise of capital markets will help offset declines in government export credit agency backing, which will shrink to funding 18 percent of handovers next year from almost one-third during the financial crisis, when other lending dried up.

U.S. political opposition and concern among American and European carriers that can’t tap export credit agency backing have trimmed lending, Zolotusky said.

New rules on export credit have also increased pricing, driving borrowers to other funding sources. Air Canada (AC/A) saved $10 million per jet on 777-300ER long-range aircraft by using asset-backed bonds rather than export credit, he said.

Airlines that can’t package deals large enough to issue an asset-backed bond are starting to work on private placements with investors that are unable to satisfy their demand for such transactions with current transaction volumes.

Those deals are being arranged with investors such as hedge funds, private equity and pension funds, Zolotusky said.

With Boeing and Airbus SAS, the No. 2 planemaker, boosting output, the scale of annual financing is expected to continue to grow in the coming years and reach $139 billion in 2018.

To contact the reporter on this story: Robert Wall in London at rwall6@bloomberg.net

To contact the editor responsible for this story: Benedikt Kammel at bkammel@bloomberg.net

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