Aircraft Financing Ginies

Anatomy of Aircraft Financing
Benoit Debains
SVP Finance
Airbus
Emmanuel Feld
Global Head of Aerospace
and Shipping Finance
Credit Agricole Indosuez
Jean-francois Ginies
Partner
Ernst & Young
Global Investors Forum Munich 28th/29th April 2003
Agenda
I.
II.
III.
IV.
V.
VI.
Sales Financing Environment

Principles of Aircraft Financing
Avion Capital
Contract Terms and Conditions
Airbus Customer Financing Policy
Impact on Financial Statements
2
Global Investor Forum 2003

Annual commercial deliveries demand from Airbus, Boeing, Embraer, and
Bombardier estimated approximatley at 45 50 bn USD.
Global Secured
Financing
Operating
Lessors
Export Credit
Agencies
Secured
Bonds
Approx
25%
Approx
20 - 30%
Approx
50%
Self financed by
airline cash flows
Aircraft/Engine
Manufacturers
Commercial
Banks
3

Global aircraft financing funds about one half of all new
deliveries. Major sources are:
Export Credit Agencies: Govt backed institution which provide credit

garantees in support of exports, i.e. Hermes, Coface, ECGD, EXIM
Bank; this represents about 5 Bio $ bn USD per annum.
Commercial Banks: Providing secured/unsecured loans.
Secured Bonds: Market debt instruments, freely traded and liquid,

benefiting from the underlying asset as collateral.
Aircraft / Engine manufacturers: Atypical. In 2002, from a total of

20 bn Airbus aircraft revenues, only 600 mio net additions of finance
exposure.
4

Market trends...
Operating Leases:
EETC & Aircraft Portfolio

Securitization:
Market emerged in last 15 years.
Liquidity reduces cost
Major players: ILFC, GECAS, CIT, ...
Benefits of risk tranching
allow:
Benefits to the customer include:
100% Financing
Smaller security deposits
Off-Balance sheet treatment
and mostly fleet flexibility
Access to large investor base

Long maturities
5
Principles of aircraft financing

Asset value is important as
A source of protection for

the lender: Secured
Financing
A source of upside to the

operating lessor / owner
The economic life of an

asset is from 20 30
years.
100
High Value
Low Value
10
15
20
25
Age
6
Principles of aircraft financing

In a secured loan
The borrower is the economic owner, while the asset serves as

security
Examples of secured financing
Senior: first claim on the asset

Mezzanine/junior : intermediary / last claim on the asset
EETC & Aircraft Portfolio Securitization: Tranches of debt with
different rights to claims (US bond market)
Finance lease : Lessee acquires title at the end of the lease through
exercise of bargain Purchase Option.
Allows better & cheaper financing conditions than airline credit rating
would otherwise permit - Collateral security enhances credit
worthiness.
7
Loan to value : senior loan
100
85
+ Risk
most probable
asset value
loan
amortisation
profile
ECA
10
12
15
20
25
Age
8
Loan to value : senior & junior loans
100
Junior
95
85
Senior
10
12
15
20
25
Age
9
100
95
Balloon
85
30
10
12
15
20
25
Age
10
100
85
65
10
12
15
20
25
Age
11
Loan to value : extended terms for senior &

junior loans
100
85
65
50
10
15
20
25
Age
12
Loan to value : rated tranches
100
85
65
BB
50
A
AA
10
15
20
25
Age
13
Principles of aircraft leasing

In an operating lease
The lessor retains risks and rewards of ownership of the aircraft.

The lessee receives usage of the aircraft over a finite period.
The purchase option at the end of the lease is at market value
Tax leases allow the lessor
To accelerate the depreciation of the asset for tax deduction purposes
Leveraged leases allow the lessor
To finance part of the acquisition price with non-recourse debt.
14
Lease
100
95
Purchase Option
50
10
12
15
20
25
Age
15
Lease and value guarantee
100
95
value guarantee
50
10
12
15
20
25
Age
16
Operating Lease
Lease Rentals
100
Lessors
Book Value
10
15
20
25
Age
17
Avion Capital
A new source of available financing and services to Airbus customers
Airbus
25 %
CAI
25 %
CIT
25 %
SPC 1
a/c 1&2
Lessee 1
SPC 2
a/c 3
Lessee 2
Avion
Capital
25 %
KFW
Syndicate 1
Syndicate 2
18
Avion Capital
CEO: Colin Thaine
30 years aviation experience

Former head of aircraft finance of Denton Wilde Sapte
Beyond its underwriting ability, Avion Capital pools diverse resources
Portfolio Management
Syndication
Paying Agency
Security Trust
Back Office
Remarketing
Negotiation
19

Prerequisite analysis:
Airline creditworthiness, track record and competitive position,

& state of market for financed aircraft!
Loan to value ratio - the lower, the safer: Depending on the credit
worthiness of the airline, senior lenders finance 70% to 90% of

price. Junior lenders trade higher yield for lesser claim against the
asset.
Maturity: - the shorter, the safer: Aircraft with an economic life
span of 20 or more years command 10 to 15 years of financing.

Payout: Full payout - amortization to zero required for the
longer maturities. However, a balloon payment is permissible for

shorter maturities.
20
10

Security package: Ownership title of the aircraft is best security
widely enforceable packaged with assignement of insurance

proceeds, pledged deposits, etc.; mortgage acceptable
alternative in certain jurisdictions.
Assignment of revenues? Impractical - Because revenue for a
specific aircraft within a fleet hard to isolate.

Maintenance: Aircraft maintenance key to safety, asset value, etc.
Lenders require proper maintenance on a regular schedule, and

may levy monthly maintenance reserves for upcoming costs.
Installments - the more frequent, the safer: Semi-annual or
quarterly. Monthly installments allow monitoring of weaker credits.

21

Payment denomination: USD, in line with second hand aircraft
market. Only most creditworthy airlines where collateral asset

value is less important may finance in other currencies matching
their revenues.
Fixed or floating rates: Unless underwriten by export credit
agencies, fixed rate financing for 10 to 15 years available only to

most creditworthy airlines, due to potential funding breakage costs.
Risks: All operating risks and costs associated with Aircraft
(operation, maintenance, insurance, etc.) to be borne by airline.

Yield: Depending on airline rating; senior secured loan ~0.75% to
1.75%; junior secured loans may range from 3% to 6%

22
11
Airbus Customer Financing principles
Customer financing issues are critical for the manufacturer,

they require close involvement
But
they cannot be pursued as a business
23
Ability to offer financing is critical

when few third parties can provide solutions
To win business : Customers want
guaranteed availability of financing
guaranteed structure/maturity
lowest monthly cash cost
To deliver aircraft : crisis management tool

Asian crisis 1998
9/11
To protect customer base

NWA LBO
US Airways chap.11
Because financing is arranged at delivery not at contract signature:
commitment period too long.
When temporary market shortage needs to be bridged.

24
12
Customer financing cannot be a business

Financing compounds manufacturers exposure to
market cycle
Financing raises conflicts of interest
Internal goals: finance vs. commercial
With other customers (leasing companies)
With economic targets (sales recognition)
25
Customer financing cannot be a business

Airbuss attitude:
Customer financing in support of core activity if, when, and
only as long as necessary
Provision policy:
Internal model, external benchmarking

Factored in contract profitabilty analysis
Priority is liquidity of exposure: Hold and sell policy
No specific funding attached, only corporate funding

Agreed contractual rights
Sell down whenever possible
26
13
Risk management
Matching sales to production is a key process to
identify and manage pre-delivery risks

Management of exposure follows specific internal
approval process with shareholders
27
Airbus Risk Pricing Model (ARPM)

Used for :
Decision making on issue of Sales Finance, buy back, operating lease or

guarantees are envisaged.
Provisions and impact on Margin calculations (impact of Sales financing)
Validated by experience, reality, benchmarks :
Contract Review
Sell-Downs
Appraiser Data (RV model)
In line with financial industry practice and EADS requirements :
ARPM regularly checked against other models (banks, engine

manufacturers, )
ARPM validated against 2001 accounts through audit.
28
14
ARPM Risk assesment and valuation
Size: Airbus exposure is equal to the maximum cost on the

transaction (outstanding principal of a financing, aircraft value
guaranteed, amount paid for a buyback,)
Event: If a customer stops paying (probability of default) or

exercises an AVG (asset risk)
Calculation: Comparing the Gross Exposure at different

points in time with the assumed Realisable Value.
The Airbus Risk Pricing Model is based on a probabilistic approach.
29
ARPM Finance lease application

140.0
The average risk is the difference between

Exposure and Realisable Value multiplied by
the probability of default.
120.0
100.0
US$m
Average Risk if airline defaults in Jan-2001

80.0
Area of Risk in Jan-2001

60.0
40.0
Gross Exposure covered by

average Realisable Value
20.0
0.0
Gross Exposure
= Principal Outstanding
Realisable Value Average

30
15
ARPM Operating Lease application

30.0
24.73
Cumulative lease rentals

20.0
Aircraft
Residual Value
(Lease target)
M$
9 months downtime
10.0
TV today
Remarketing Costs
TV at end of lease (AOG)
Jan-12
Jan-11
Jan-10
Jan-09
Jan-08
Jan-07
Jan-06
Jan-05
Jan-04
Jan-03
Jan-02
0.0
Date
31
ARPM Asset Value Guarantee (AVG)

application
100.0
Average assumed aircraft

Residual Value
1 standard deviation
60.0
40.0
AVG slice (0 to 41M$)
20.0
Jan-16
Jan-15
Jan-14
Jan-13
Jan-12
Jan-11
Jan-10
Jan-09
Jan-08
Jan-07
Jan-06
Jan-05
Jan-04
Jan-03
Jan-02
0.0
Jan-01
US$m
80.0
Date
32
16
The law of averages : the confidence level
Taking the average is not safe enough, you need

to know how much you can be wrong
33
Gross Exposure definition

+ Amounts due by customers post-delivery
Used aircraft (operating leases and AOG)
Finance leases
Loans (senior/ junior)
+ Guarantees issued
US tax leases (NPV of headleases)
Others (DG, LOC)
Counter guarantees (deposits /LoC) are not subtracted from our

definition of exposure.
34
17

Core principal:
When, pursuant to a financing transaction, the risks and
rewards of ownership of the related aircraft reside with the
customer, the transaction is characterised as a sale giving
rise on the balance sheet to either a loan or a financial lease
receivable (financial assets).
By contrast, where the risks and rewards of ownership
remain with EADS, the transaction is not characterised as a
sale and accounted for as an operating lease (fixed asset
stated at production cost, less accumulated depreciation, the
operating margin being deferred over time).
35

How does finance exposure impact the financial statements
Financing exposure as of 31/12/02
Total exposure unadjusted
Exposure
31.12.2002
(Mio $)
Exposure
31.12.2002
(MioEuro)
4.094
3.904
mitigating factors
(323)
Gross Finance Exposure
3.581
adjustm.
Provisions
31.12.2002
(Mio Euro)
balance sheet
31.12.2002
(Mio Euro)
notes
(11) / (24)
(1.520)
Aircraft on Balance sheet
990
578
(459)
1.109
Finance lease
787
(148)
639
(12) / (24)
Loans
822
76
(265)
633
(12) / (24)
91
(60)
(31)
On Balance sheet financing exposure
Others
2.690
594
(903)
2.381
Head lease financing commitments
864
Guarantees and others
27
(20)
891
(617)
Off Balance sheet exposure (net of mitigating factors)

Estimated transaction value
Net exposure
Provisions
Residual exposure
(597)
(18c) / (24)
(2.061)
1.520
(1.520)
-
36
18

Mitigating Factors:
Mitigating factors are related to US Tax leases, where EADS is
technically exposed to Stipulated losses if the lease is voluntarily
ended before its original maturity. As long as EADS is the only
decision maker in that field, Stipulated Losses are not to be
considered as a component of the gross financial exposure.
Adjustments:
Distinction between sales transactions (sales-type leases) and
transactions without margin recognition (operating leases);
Transactions characterized as operating leases (fixed assets
included at cost on balance sheet and depreciated) where EADS
is only potentially liable for its equity at stake ;
37

Provisions:
When the risk derived from exposure is considered probable,
provisions are accounted
as write-downs of the related assets (PP&E and financial assets)

when the aircraft are accounted for an the balance sheet,
or as aircraft financial risk reserves when it is only captured as an

off-balance sheet commitment.
38
19
Exposure for Airbus and ATR (50%) categorized

in millions, as of year-end 2002
Loans
Nature of exposure
Operating leases
Sub-leases
Financial leases
Recorded as
Financial Statements note ref
Fin. assets
PPE
TOTAL
Off-balance
12
11
on-balance
24
656+749=
1.405
Book Value before write down
1.849
1.717
1.473
of which 100%Airbus
132
322
of which 50% ATR
Net book value reported
1.832
Gross exposure(ii)
of which 100%Airbus
of which 50% ATR
Net exposure (iv)
1.700
132
990
322
444
Net expo. after
1.336
1.795
2.741
3.644
3.190
454
0
1.312
3.144
2.690
454
531
975
Buy-back
TOTAL
excl. AVG
(i)
1.709
1.452
4.193
1.452
5.096
1.296
4.486
156
610
1.047
891
156
4.191
3.581
610
617
1.592
GRAND
TOTAL
AVG
11 and 24
5.096
(iii) 280
526
2.118
-72
-459
-72
-903
-617
-689
-903
-526
-444
-1.215
-903
Provision in accruals
Assets Write-Down (Airbus)
Value guar.
Guarantees
provision & write-down

(i) Represents the transactions for which AVG exceeds 10% of the ac price, and thus that are reclassified as leased ac
(ii) Gross exposure differs from accounting value namely because it represents the net present value of future payments
instead of nominal value (off-balance sheet) and it excludes a transaction non-recourse to EADS (operating leases)
(iii) This amount represents the average gross exposure per year over 2003-2007
(iv) Net expoure is the difference between the gross exposure and the estimated value of aircraft used as collateral
39

With regards to Asset Value Guarantees (AVG), EADS
considers that the related exposure does not relate to customers
credit risk level, but to the future market value at the first window
period.
EADS reviews all transactions giving rise to AVG and assesses
whether such transactions meet all of the criteria of IAS 17 :
Distinction between sales-type leases and operating leases
( 1,709 at cost as of December 31, 2002) ;
Net exposure on AVG is reduced to 0 through a 526 million
aircraft financial risk reserve.
40
20
Anatomy of Aircraft Financing

Back-up
Global Investors Forum Munich 28th/29th April 2003
41
Exposure vs market share (revenues)
6000
45%
5000
4000
35%
3000
2000
25%
1998
1999
2000
market share
2001
2002
exposure
42
21

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Anatomy of Aircraft Financing

Global Investors Forum Munich 28th/29th April 2003

Sales Financing Environment

Sales Financing Environment

Sales Financing Environment

Export Credit Agencies: Govt backed institution which provide credit

Commercial Banks: Providing secured/unsecured loans.

Secured Bonds: Market debt instruments, freely traded and liquid,

Aircraft / Engine manufacturers: Atypical. In 2002, from a total of

Global Investor Forum 2003

Sales Financing Environment

EETC & Aircraft Portfolio

Market emerged in last 15 years.

Liquidity reduces cost

Major players: ILFC, GECAS, CIT, ...

Benefits of risk tranching

Benefits to the customer include:

Smaller security deposits

Off-Balance sheet treatment

and mostly fleet flexibility

Access to large investor base

Principles of aircraft financing

A source of protection for

A source of upside to the

The economic life of an

Principles of aircraft financing

The borrower is the economic owner, while the asset serves as

Examples of secured financing

Senior: first claim on the asset

Loan to value : senior loan

Global Investor Forum 2003

Loan to value : senior & junior loans

Global Investor Forum 2003

Loan to value : senior & junior loans

Global Investor Forum 2003

Loan to value : senior & junior loans

Global Investor Forum 2003

Loan to value : extended terms for senior &

Global Investor Forum 2003

Loan to value : rated tranches

Global Investor Forum 2003

Principles of aircraft leasing

The lessor retains risks and rewards of ownership of the aircraft.

Tax leases allow the lessor

To accelerate the depreciation of the asset for tax deduction purposes

Leveraged leases allow the lessor

To finance part of the acquisition price with non-recourse debt.

Global Investor Forum 2003

Lease and value guarantee

Global Investor Forum 2003

Global Investor Forum 2003

30 years aviation experience

Contract Terms and Conditions

Airline creditworthiness, track record and competitive position,

worthiness of the airline, senior lenders finance 70% to 90% of

span of 20 or more years command 10 to 15 years of financing.

longer maturities. However, a balloon payment is permissible for

Contract Terms and Conditions

widely enforceable packaged with assignement of insurance

specific aircraft within a fleet hard to isolate.

Lenders require proper maintenance on a regular schedule, and

quarterly. Monthly installments allow monitoring of weaker credits.

Contract Terms and Conditions

market. Only most creditworthy airlines where collateral asset