The multiplicity of financing sources such as asset-backed security, insurance and leasing companies has been crucial for the sector. In this section, we reveal the origins and sources of expected funding in 2020
The growing diversity of funding sources for aviation finance has been a critical factor in the resilience of the market, even in the face of challenging economic headwinds. In the capital markets, for example, the asset-backed security (ABS) sector continues to play a more important role, with a broad range of investors attracted to this alternative asset class's value proposition of strong cashflow, global diversification and high-quality collateral.
The majority of survey respondents expect ABS issuances to further increase in 2020, with those in APAC particularly bullish about increased availability of funding from this source.
Elsewhere, the insurance market, which provides aircraft non-payment insurance to banks and capital market investors, continues to add to the mix. A relatively new source of financing that complements other funding sources, it has become a growth area for aviation finance, with the Aircraft Finance Insurance Consortium (AFIC) spearheading its expansion. Indeed, aircraft non-payment insurance products have helped in part to compensate for the reduced activity in the export credit agency (ECA) market, which (due to various factors and with some notable exceptions) has not been as prevalent a source of funding in recent years as it was immediately following the financial crisis.
Many respondents to this survey expect the expansion of the insurance market to continue, with those in APAC particularly bullish about the role of insurers in 2020.
Many respondents to this survey expect the expansion of the insurance market to continue, with those in APAC particularly bullish about the role of insurers in 2020. The exception is EMEA, where 47% of respondents expect funding from this source to decline, although a majority still anticipate growth or stability.
As funding diversity has increased, the need for ECA support has diminished, particularly in the most mature financing markets. Notwithstanding these circumstances, 83% of APAC respondents still expect ECA funding for aviation to increase during 2020, while 55% of North American respondents agree. This indicates that the ECAs continue to be viewed as an important source of funding for new aircraft deliveries, particularly given the potential for global economic factors to create liquidity constraints in other financing options.
Many of the respondents in this research are delighted that funding markets look set to expand. "Capital and liquidity in our sector should be higher," says the Managing Director of an APAC-based bank. "Growth in aviation depends on investment, and there have been too many temporary solutions to cover airline loans and consolidate debts."
The Chief Investment Officer of an APAC private equity fund agrees. "More confidence needs to be placed in the industry's return potential," the executive says. "There is not enough capital and liquidity in the sector."
One important part of the funding diversity story of recent years has been geographical expansion.
Once concentrated in North America and Europe, the appetite for funding aircraft is now global, with Asian investors having steadily increased their presence in the sector.
Japan, notably, with its network of more than 100 regional banks, is a significant player in the market. China, too, is now emerging as a leading source of funding for the aviation industry. Almost two-thirds of survey respondents (65%) expect that trend to gather pace during 2020, forecasting increased investment from Chinese leasing companies and lenders. Still, the geographical split of views suggests Chinese investors are more likely to focus on APAC and North America; far fewer respondents in EMEA anticipate additional Chinese funding.
Growth in Chinese funding will be especially important if the US market—still the dominant player in aviation finance—contracts, as investors become more cautious about the economic and commercial outlook. Our survey evidences this as an increasing possibility: Nearly a third of respondents (31%) expect funding from US capital markets to decline during 2020.
While a majority of respondents still anticipate US funding expansion, some regions are pessimistic about what they can expect from North American capital markets. EMEA shows significant concern, with 53% of its respondents expecting US capital availability to decline.
Even with increased funding from China, declining US capital availability could require the airline sector to look elsewhere for investment capital. If that were to happen, then our survey responses indicate an increase in sale and leaseback finance transactions would be likely. In addition, in APAC the sector would expect to increase its borrowing from other financial institutions, while those in EMEA would be more likely to fall back on ECA funding.
There may also be scope for an increase in Japanese Operating Leases with Call Option (JOLCO) transactions, with every region pointing to this area as a potential Plan B, should the US markets narrow.
Another possibility is unsecured finance, a source of funding that demonstrates growing importance in the sector. Significant numbers of respondents expect to seek unsecured sources of funding during the next 12 to 18 months, particularly in APAC.
In any case, as appetite continues to grow from a broad range of institutional investors, including pension funds, insurance companies and new geographies such as China, financing will likely remain easy to obtain.