Ex-Im Banks Spurs Bond Rush as Emirates Finances Planes
Airlines from Europe to Asia to South America, boosted by help from the U.S. government, are turning to the bond market and away from loans to finance Boeing Co. jets as borrowing costs plunge.
Emirates, based in Dubai, and Ireland’s Ryanair Holdings Plc are leading carriers that have issued $2.3 billion of bonds in 2012 backed by the U.S. Export-Import Bank, a jump of more than sixfold from a year earlier, according to data compiled by Bloomberg.
Interest rates at record lows and a new debt-guarantee program from the Ex-Im Bank are making it easier for non-U.S. airlines to access capital markets even as private-sector lending becomes more expensive and difficult to obtain. Boeing, the biggest U.S. exporter, stands to benefit while working through a jet backlog valued at $302 billion.
“We’re using a fraction of the market’s capacity for this type of product,” said Kostya Zolotusky, managing director of leasing and capital markets for Boeing Capital, the Chicago-based planemaker’s finance arm.
Selling the bonds now lets airlines beat a change in international trade rules taking effect in 2013 that will make it costlier to tap financing such as the bonds and loans backed by the Ex-Im Bank, Zolotusky said.
The average interest rate on bond offerings backed by the agency this year is 1.9 percent, the data compiled by Bloomberg show. That compares with 2.7 percent since the program was started in 2009 to help thaw the aircraft finance market in the aftermath of Lehman Brothers Holdings Inc.’s collapse.
Fixed-income investors are snapping up the bonds because they yield more than Treasuries while still carrying U.S. government backing, Zolotusky said.
“When you’re buying a long-lived asset like aircraft and you have the opportunity to lock in a coupon like the last couple of deals at less than 2 percent, you’d sleep a lot better knowing you’d locked that in,” said Robert Morin, vice president of Ex-Im Bank’s transportation division.
The average yield on investment-grade U.S. corporate bonds fell to 3 percent as of Sept. 7 from 3.9 percent at the end of 2011, according to Bank of America Merrill Lynch index data. It touched 2.98 percent on Sept. 3, the lowest since at least 1986, the data show. Yields on 10-year Treasury notes slid to 1.67 percent from 1.88 percent in the same period.
Europe’s debt crisis is spurring banks to trim financing of plane purchases, pushing airlines to seek other options as they buy new jets. Royal Bank of Scotland Group Plc sold its aviation unit to Sumitomo Mitsui Financial Group Inc. in June for $7.3 billion, while BNP Paribas SA and Societe Generale SA have retreated from dollar-linked aircraft financing after U.S. funding evaporated.
Standard & Poor’s cited “possible reduced availability of aircraft financing” as one of the risks for commercial aerospace companies in a July 19 report, a week after the Farnborough air show in England.
Ex-Im has long offered to guarantee bank loans to finance overseas buyers’ purchases of U.S.-made products and services ranging from bulldozers to engineering work to jetliners. After credit markets froze, the Washington-based agency agreed to back bonds issued by airlines to refinance loans.
In May, Ex-Im began a new bond guarantee program so airlines could raise the money for planes directly from the bond market with debt backed by the bank. The notes are called “pre-funded,” because airlines can now sell them before taking delivery of their aircraft.
Latam Airlines Group SA’s Lan Airlines issued the first pre-funded notes in July, selling $299.2 million of debt in an offering managed by JPMorgan Chase & Co. That deal refinanced two Boeing 767 wide-body jets and funded the acquisition of two more, according to Milbank, Tweed, Hadley & McCloy LLP, the law firm that helped structure the sale.
Emirates has raised $1.46 billion under Ex-Im’s bond program, the most of any airline since the program began, data compiled by Bloomberg show. In June, it worked with a lessor to become the first foreign carrier to tap the U.S. market for bonds backed by planes without a government guarantee.
Ryanair has issued $597 million of the debt. On Sept. 5, the carrier sold $194.3 million of 1.741 percent notes due in October 2024, the data show. Messages left yesterday with Ryanair and Emirates weren’t returned, while Latam declined to comment.
Ex-Im guarantees matter to Boeing because 25 percent of its international buyers make use of agency-backed debt to finance planes, according to John Kvasnosky, a Boeing Capital spokesman. About one-third of the bank’s $32.7 billion in financing last year supported overseas purchases of Boeing aircraft.
“It’s very important for them,” Ray Neidl, a Maxim Group LLC aerospace analyst in New York, said in a telephone interview. “If you’re a foreign airline, to take advantage of the very low interest rates, you’re certainly going to look at it.”
Improvement in Boeing customers’ access to funding is a rare bright spot in this year’s aircraft market. Europe’s slump is sapping demand for new jets, as is China’s slowing economic growth. Lessors, not airlines, accounted for most orders and commitments at the Farnborough show, the aerospace industry’s biggest trade event of the year.
“Airlines have responded to slower demand and higher fuel prices by slowing capacity expansion,” the International Air Transport Association trade group said in a Sept. 4 report. Air traffic growth since January has run at an annualized rate of about 3 percent, roughly half the year-earlier pace, IATA said.
Bond sales this year via Ex-Im have expanded to finance purchases beyond jets. Gol Linhas Aereas Inteligentes SA, Brazil’s second-biggest carrier, issued $39.1 million of two-year guaranteed notes in June to help pay for a servicing contract with Delta Air Lines Inc.’s maintenance unit.
While Ex-Im bonds and loans are a boost for Boeing in its sales competition with Europe’s Airbus SAS, the financing is a source of friction with U.S. airlines.
Carriers led by Delta fought congressional reauthorization of the bank this year, arguing that foreign rivals got an unfair advantage in buying jets to compete on lucrative overseas routes. Lawmakers approved a compromise measure in May.
With costs set to rise for Ex-Im borrowing under new trade rules next year, airlines eventually will face pressure to find financing alternatives such as using lessors or debt that lacks government guarantees.
In the meantime, lenders and plane buyers are both benefiting from the bonds through the Ex-Im Bank, said Douglas Tanner, a partner at New York-based Milbank.
“With the changes in the bank regulatory world and everything else, it’s very attractive for them to make fees instead of hold assets,” Tanner said in a telephone interview. “Airlines are thinking, ‘Wouldn’t it be good to avoid the bank part of it and go straight to the capital markets?’”
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