What is in a name? The new credit insurance product for financiers of Airbus aircraft dubbed “Project Balthazar” may be the product of wise minds but in the light of the launch of the credit insurance product for Boeing aircraft is it of sufficient uniqueness or rarity to warrant comparison to Balthazar’s gift of myth? Whatever the judgment there is little doubt that Project Balthazar will be a welcome addition to the stable of financial products open to airlines and lessors alike.
Airbus joined with Marsh and other professional advisors to flesh out a financial product through which airlines, lessors and debt participants can more easily access credit support through the insurance sector. The insurance sector has always been an effective sector capable of appropriately pricing aviation risk and the “Balthazar” product provides them with another avenue in which to participate; just as it allows financing participants the opportunity to tap the deep risk appetites of the insurance sector to lay off risk and manage capital weightings.
The timing for the initiative cannot be divorced from the challenges Airbus has had in re-engaging export credit agency support for its sales and the emergence of an alternative insurance product supporting Boeing aircraft sales (again in the absence – for different reasons – of US export credit agency support). By design, the developers of “Balthazar” have intentionally sought to establish a product that is recognisably similar to existing forms of private sector credit insurance used in other sectors. For this reason, and although template policy precedents have been settled amongst the insurance consortium members, policy wording is expected to remain flexible to permit banks and other financial institutions to tailor cover and policy terms to both satisfy requirements imposed by their respective credit committees and to accommodate legitimate and differing concerns with regards to the underlying transaction risk.
Airbus sees the product as an alternative or complementary to ECA support and likely to be attractive to airlines looking to broaden their sources of secured debt funding.
The quality of the underwriting is a key issue for lenders and although the product is being trialled with a limited number of insurers, there is no intention to maintain this as a closed club. A credit rating of at least A- (S&P or its equivalent) and an underwriting capacity for long tenors are essential eligibility criteria.
If the credit rating of an underwriter falls below an acceptable threshold, the risk ultimately falls on the borrower, but only after certain mechanisms available to mitigate such risk have been exhausted and fail. Those mitigants might include:
- a re-distribution of insurance coverage between existing underwriters;
- a replacement of the affected underwriter; or
- an obligation to provide a cut-through to re-insurance cover.
If, notwithstanding these mitigants, the lenders remain unhappy with the quality of underwriting, the buck will ultimately stop with the borrower who may be required to prepay all or part of the loan or provide top up collateral for the proportion of the underwriting that is affected.
Other issues that may affect insurers include the imposition of sanctions although these are most likely to impact the lenders equally so that the entire transaction will be at risk. To the extent that insurers become subject to regulatory or sanction restrictions which differ from those of the lenders the primary risk is on the ability of the lenders to recover against the affected insurers. Lenders may wish to mitigate this risk by passing it through in the loan documents in the form of expanded sanction/illegality language. In contrast with an officially supported credit those credits supported by private insurance will necessarily need to accommodate lenders concerns with credit and regulatory issues affecting the private insurers.
An airline interested in accessing “Balthazar” can initially and directly approach Airbus who will in turn approach Marsh Europe to test market appetite. Having established appetite an approach will be made to potential bank arrangers. Proposals supported by both the arrangers and the underwriters will be negotiated by the arrangers with the airline. There is currently no standardised set of lending documents. Even though over time different arrangers will no doubt standardise documentation, in contrast with the European ECA documentation, there is no one imposing an overarching “harmonised” standard.
The absence of a tightly monitored set of transaction documents will also facilitate the combination of “Balthazar” supported loans with existing finance structures such as JOLCOs and other tax based leases. Given the insurance based nature of the product we can anticipate that it may not be suitable as a credit support for debt capital market issuances or loans which are sold into the capital markets.
Although the product has been conceived to support airlines’ access to secured asset funding for new Airbus aircraft purchases, that doesn’t exclude it being of interest to lessors; particularly those who might be looking to source non-recourse debt or debt structured through an orphan entity. Policy tenors are flexible all the way out to 12 years but it is perhaps unlikely that the transaction costs will make using the product attractive for shorter tenors. The ability of a lessor to leave a non-recourse loan supported by a “Balthazar” policy in place while also enabling the lessor to trade its leased aircraft assets might be preserved through combining the “Balthazar” supported financing with an ownership trust structure – where it is the beneficial interest in the trust that is sold rather than the aircraft itself and where the lease (and the associated “Balthazar” supported debt) remains undisturbed. The wider use of ownership trust structures to assist lessors and airlines with the transactional burdens of aircraft trading is currently a topic under development and will receive further boost with the publication by the AWG of its template GATs documentation during the course of this year.
Airbus, Marsh Europe and existing participating lenders and underwriters are keeping a low profile in public about the product (little mention in the recent Dublin conference sessions) in anticipation of closing 2 or 3 transactions this year and then being able to speak more openly of its success.
“Balthazar” is a welcome addition to the instruments available to airlines and lessors to tap sources of liquidity and we wish it success in 2019.